Firefighter Arson And Our Macroeconomic Policymakers

Firefighter arson is a serious problem.  The U.S. Fire Administration, part of Homeland Security, concluded in 2003, “A very small percentage of otherwise trustworthy firefighters cause the very flames they are dispatched to put out” (p.1). Illustrative and shocking anecdotes are on pp. 9-15 of that report, as well as here and here.

Macroeconomic policy making now has a similar issue to confront.

As the economy begins to stabilize and the financial system shows signs of recovery, accolades start to shower down on various officials, including most recently Ben Bernanke, who was rewarded this week with renomination – and almost certain confirmation – to a second term as chairman of the Federal Reserve Board of Governors.

Bernanke is widely seen as our financial firefighter in chief (BusinessWeek; USA Today)  Similar terms are used to describe Treasury Secretary Tim Geithner and the entire gigantic financial rescue effort.  Larry Summers, head of the White House National Economic Council and administration economic guru-at-large, is applauded as an “experienced crisis manager”, which amounts to the same thing in this context.

If any of this sounds familiar, you’re probably remembering the famous cover of Time magazine from November 1999, which depicted Alan Greenspan, Robert Rubin, and Summers as “The Committee To Save The World.”  The idea then was that crises in Asia, Latin America, and Russia had spilled over to US financial markets, most notably in the near failure of Long Term Capital Management, but disaster had been averted by – essentially – the financial firefighting abilities of this troika.

But what if the financial crises in recent decades – you can add the dotcom bubble, the S&Ls fiasco, and various emerging market debt crises to our recent housing and banking disaster – is not a sequence of random unfortunate events, but rather the product of a dangerous financial system?  Given that today’s firefighters also previously held responsibility for overseeing this system, both recently and as long ago as the early 1990s, this question is relevant – particularly as the very same team, in various combinations, repeatedly pronounced on the system’s fundamental soundness. 

Some of today’s firefighters pushed hard for deregulation of derivatives markets in the 1990s, and this now proves to have been an important cause of the crisis (Summers and others).  Others had responsibility for the solvency of Wall Street over the past half decade, yet disguised all potential warnings in layers of impenetrable opaqueness (e.g., Geithner; see p.91 in David Wessel’s bestselling In Fed We Trust, Crown Business, 2009).  Still others pronounced that there was no housing bubble exactly as things spiraled out of control and the potential costs to taxpayers rose (Bernanke and his colleagues at the Fed; again, pick up Wessel’s book, p.93 is among the most damaging).

No one is suggesting that our illustrious financial firefighters deliberately triggered a crisis.  But, for over two decades, they and their close mentors oversaw the operation and development of a banking and securities system with profound instability hard wired into its DNA.  Don’t take my word for it; review this speech by Summers in April 2009, or – in the light of what we know now – look at his talk on crises to the American Economic Association in 2000.

Perhaps that was all a legitimate mistake on their parts and they have now learned the right lessons.  But how then do you explain their amazing reluctance to reform the financial system today?

President Obama said on Tuesday that Ben Bernanke helped avert a second Great Depression.  That is a considerable achievement, but why then are this administration and the Federal Reserve proposing only minor adjustments in oversight and governance for the financial system that ran amok – producing “financial innovation” that harms consumers and destabilizes everything?

It makes no sense at all.  Unless, of course, they are not afraid of future financial fires – despite the enormous fiscal cost (likely 40% of GDP from this round alone), the unemployment (heading to and lingering at 10%, by the administration’s own revised estimates), and the millions of people hammered hard by lender abuse, house price collapse, and job losses.

You may not like the implications, but keep in mind this advice: “To ignore the problem or suggest that it does not exist will only increase the damage caused by the arson firefighters involved, as well as destroy the morale of the other firefighters in their departments” (Minnesota Fire Chief, March/April 1995 issue, quoted on p.1 of above cited report).

By Simon Johnson

A slightly edited version of this post originally appeared on’s Economix, and from that version you can link directly to the referenced pages in David Wessel’s book. 

This post is reproduced here with permission.  If you would like to use the entire post, please contact the New York Times.  The usual fair use rules apply to short quotations.

84 thoughts on “Firefighter Arson And Our Macroeconomic Policymakers

  1. I read Wessels book and would recommend it to everyone. My thought was: If Bernanke was a student of the Depression, why did he not recognize that with the repeal of Glass Seagle, we were in trouble. He had about a year of inacction where he could have head off a lot of this nonsense

  2. Simon;

    I’m finishing a lecture on the financial crisis and I’m curious about your estimate of the fiscal cost of the (latest) crisis. Looking at the recent CBO update, I get a fiscal cost in the ballpark of $1 trillion in fiscal 2009. What assumptions do we need to get to 40% of GDP? Is this based on someone else’s estimate?

  3. The Japanese have a phrase for this: Kaji-ba dora-bo. Literally thief at the scene of a fire: someone who turns the misfortune of others into his or her own benefit.

  4. No one is suggesting that our illustrious financial firefighters deliberately triggered a crisis.

    Actually, lots of people think exactly that, and although that’s perhaps a conspiracy theory, it’s not without evidence.

    Didn’t John Williamson openly say that sometimes crisies should be “deliberately provoked” in order to open up opportunities for disaster capitalism? I imagine the idea goes back as far as Chicago in the 50s.

    My personal view is that they know that exponential debt and growth can from here (“here” being since the 80s at least) on be propped up only through bubbles, while disaster tactics can still reap profit from the inevitable crashes.

    So this, named the “Great Moderation” in classic Orwell fashion, is the new economic model, for as long as globalization and financialization can be propped up:

    1. Blow bubbles, sucking in as much rent as possible along the way.

    2. Capitalize opportunistically during the crashes.

    So they hardly have to commit arson when we’re already always either in the flames or about to topple back into them.

    Their kind of warmth demands permanently playing with fire, which is why they certainly won’t willingly regulate for the next bubble.

    If they can’t blow another bubble, that’ll be the end of corporatist growth right there. Game over for mass industrial “capitalism”.

    Obviously, keeping this game going as long and as profitably as they can is their only priority.

  5. If one looks at the definition of “great depression” according to median income averaged over 20 years, it looks worse now than in the 1930s. Moreover the present crisis threatens the very core of the USA’s supremacy, and that, the crisis of the 1930s never did.

    One cannot have a superior nation if all that it consumes originates somewhere else.

    BTW, the firefighter arsonist problem also occurs in France…

  6. It has been argued that the 1930s depression was the a signal crisis that led to the final collapse of British global dominance, and the consequent rise of U.S. hegemony. Of course the industrial and financial groundwork had already been laid, and of course WWII was a big part of this, but the 1930s economic crisis was certainly a watershed event that helped usher in this shift in global power relations. I don’t think it is much of a stretch to see a similar thing happening in this financial crisis, with the decline of U.S. global dominance and we can all guess which power is rising to replace it. In retrospect, this crisis may well be seen in these terms.

    BTW, you’re absolutely right that it occurs in France and if I’m not mistaken, French firefighters used to get “primes” or bonuses when they fought fires, which actually gave them an incentive to start them. Ideally they would be small and easy to put out, of course, but occasionally they ran out of control. I’ll let others follow up on that analogy.

  7. When you write that the behavior seems to be wired into the DNA you are saying the it is unavoidable in the current system. It fits the patterns of totalitarian governments, which use crises to legitimize their power. I shudder at the terms recover, reform, and re-regulate because none of these involve major changes to the system, changes that would indicate substantial cultural evolution (and thus changes in the DNA, to extend the metaphor).

    I believe we are in a pre-revolutionary situation in this country. The respondants to these posts are highly educated and equally disaffected. We have lost confidence in the government to address the basic needs and concerns of the majority of the population. Obama, like many transitional administrations, seeks to please everyone by its moderate positions. Such an approach eventually fails because it fails to make radical enough changes to resolve the underlying grievances.

    Simon, your comments reflect this disilluionment and cynicism that characterizes many intellectuals today. You write them as if you fail to realize how damning they really are.

    I was struck by the respondant who wrote of U.S. Supremacy. We were cast in a role after WWII that may have done us more harm than good; I suggest leadership in any sphere comes from the qualities of courage, justice, and compassion. U.S. supremacy has been built on a very different foundation. If we want a strong national and global economy we learn how play fair and share the playground.

  8. When you write that the behavior seems to be wired into the DNA you are saying the it is unavoidable in the current system. It fits the patterns of totalitarian governments, which use crises to legitimize their power. I shudder at the terms recover, reform, and re-regulate because none of these involve major changes to the system, changes that would indicate substantial cultural evolution (and thus changes in the DNA, to extend the metaphor).

    I believe we are in a pre-revolutionary situation in this country. The respondants to these posts are highly educated and equally disaffected. We have lost confidence in the government to address the basic needs and concerns of the majority of the population. Obama, like many transitional administrations, seeks to please everyone by its moderate positions. Such an approach eventually fails because it fails to make radical enough changes to resolve the underlying grievances.

    Simon, your comments reflect this disilluionment and cynicism that characterizes many intellectuals today. You write them as if you fail to realize how damning they really are.

    I was struck by the respondant who wrote of U.S. Supremacy. We were cast in a role after WWII that may have done us more harm than good; I suggest leadership in any sphere comes from the qualities of courage, justice, and compassion. U.S. supremacy has been built on a very different foundation. If we want a strong national and global economy we learn how play fair and share the playground.
    BTW I love your blog!

  9. I don’t think the firefighter arsonist metaphor is a good one. The firefighter arsonist is intentionally causing an evil in order to participate in the form of a good.

    Bernanke’s situation is much closer to that of The Magician’s Apprentice. He’s playing with a system far more complicated, chaotic and reflexive than he can possibly hope to understand, model or control. And, in that sense, his failure is mixed up with the core failure of our broader academic class: a lack of humility in the face of the unspeakable complexity of the world coupled with a quasi-platonic messianism.


  10. Many years ago, when my son was in second grade, he entered a ‘video’ he’d made in a competition for students run by the Boston Computer Society. He won first place in his division, simply because there had never been another second-grader produced video.

    A few months later he was happily planning his project when he got an email; there would be no next year. The society had held its annual meeting, and compared its accomplishments to its mission, and decided the mission accomplished. Instead of creating new goals — or lighting more fires — to justify continued activity, it disbanded.

    (In contrast, at the same time, the Mass. Turnpike Authority met, said it’s mission of paying for the Mass. Turnpike was accomplished, and invented a new, never-ending mission.)

    The Boston Computer Society’s action still stuns me; it’s an incredibly rare thing. Most groups follow the example of the Turnpike Authority, and expand their mission, lighting new fires to put out instead of taking credit for a job well done and stepping down or stepping back.

    No, I’m not libertarian and think the Federal Reserve should retire because the “recession” is over. But I do think mission creep you describe would lead to fewer fires if all public agencies had more of the “mission accomplished, let it go” mentality.

  11. Zic: The same thing goes for private corporations, they mutate through time to justify their continued existence – their original products become obsolete, so they invent new ones. They gobble up small companies to eliminate competition etc. ‘Mission creep’ is a universal characteristic of human activity. It’s up to others – voters or shareholders- to question the reason for the continuation of any organization.

  12. It makes no sense at all. Unless, of course, they are not afraid of future financial fires – despite the enormous fiscal cost (likely 40% of GDP from this round alone), the unemployment (heading to and lingering at 10%, by the administration’s own revised estimates), and the millions of people hammered hard by lender abuse, house price collapse, and job losses.

    I think you missed this mark just slightly. Precisely because they view themselves as the saviors in all the other crises, they believe that no reform is really needed BECAUSE they know they can save us when the relaaly big bubble bursts. Its a combination of pride, inflated egos, exagerated sense of control, and blindness to their own contributions to the problem.

    Of course, it doesn’t hurt that they are also mostly ex-financial sector folks who are routinely lobbied for by many in the industry. Foxes and hen houses, after all.

  13. With all do anger to Bernanke and Greespand and the rest of the individuals who helped perpetuate bubble economics. In the end, where is the anger on the part of the populace? Ultimatley people get the governments they deserve, and while I shudder to say it, the US people deserve this governement and the other inevitable consquences of inaction, laziness and ignorance.

    As many posters have noted, all segements of society have lost their believe that government can do anything of value or improve their lives, yet their vote in the very same people year after year. Why on earth would the Bernacke’s of the world change, they can do what they please and face little to know consequence, except the possiblity of a promotion. Why would the Dem ever champion true reform when they know faking it will ensure their re-election? Until the average American gets more interested in economic policy then Michael Vicks personal activities, the state is doomed. The people have been lulled to sleep, and they seem to love it. I have to agree with Bill Maher, the US is a dumb country, or perhaps a better way to put it is selective stupidity. While the average gun totting protester can probably name the entire staring line up of the his local college football team, who probably can’t name his representative or whom the Federal Reserve Chairman is, or define interest rate. But he could probably unload and reload a rifle before you could say “screwed up priorities”.

    The US ridicules the UK for its monarchy, yet watch as Senators who preside in ignorance for 40 years only to retire and appoint their children to their seats. Biden and Dodd have already indicated this will be the case. They rage against healthcare yet see no connection between treating their bodies horribly. At the same time we are debating deductibles, public options, ect, KFC recently came out with a sandwich with fried chicken as bread. You can have all the public options you want, if that is what you eat, you will be unhealty.

    Finally, while I love to come to these sites and read the posts, this small group of uber-interested policy wonks are in the minority. After reading some of the comments from congressmen and the media, I am firmly convinced that we are better informed and more interested in public policy then they are. That is scary. When random internet readers can better discuss the details of banking regulation then elected public officials, your state is sunk.

  14. Simon: Is this a personal failure by folks like Bernanke, Geithner etc. Or is it systemic? Yes some people ‘saw’ the bubble ahead of time, but were they mavericks? Mostly, it seems. This implies that orthodoxy failed, not just the purveyors of orthodoxy. So those firefighters cannot be blamed because they didn’t realize that they were playing with matches – who knew matches start fires?
    Clearly orthodox economists had no clue about the economy they were overseeing. That much we know. If they did then they are morally culpable. If they didn’t they are ignorant. Either way we shouldn’t trust them now.
    But what choice do we have? Where is the new theory?
    Yakkis mocks ‘complexity’ – I agree it is too often a crutch when we don’t understand something – but it seems economists have simplified their models to the point, not just of irrelevancy, but of starting fires.
    Is that what you are saying?

  15. What is interesting about the euphoria over Bernanke is that it has arisen before the development of ANY real recovery. What Bernanke saved was the power of the financial elite who have begun renewed mischief in the stock and currency markets, blowing another bubble because there is no current use for credit apart from fueling speculation. What, no productive lending? Why is this surprising when new construction is comatose and industry operates at 60% of capacity? No mortage lending? Who can afford one of these still overvalued houses, particularly now that he is expected to pony up a hefty down payment and perhaps even required to prove his claimed income? It would appear the Administration is counting on reviving consumer spending by creating CONFIDENCE, but what is the basis for confidence? We have phony statistics and inflated stock prices and artificially stimulated vehicle sales (whose primary beneficiary seems to have been Toyota), and chump change tax credits to stimulate new home purchases by anyone who somehow can still afford one. Meanwhile, banks continue to rachet up the terms on consumer credit, and the whole fiasco continues hostage to the Treasury bond market which is expected, I suppose, to continue bubbling forever because, because why? Because lending to our federal government for ten years at less than four percent, and for thirty years at less than five, makes economic sense? To whom? Are the Chinese as gullible as Japanese real estate investors? If what we have these days is not another house of cards I will have spent forty years studying finance and economics for nothing. But the ominous question remains: what comes next?

  16. You see the common practice of talking down to the children.

    If you want to see Dodd and Biden and the political elite change, let them put themselves in the health care system the rest of us deal with.

    I strongly empathize with you.

  17. Don’t blame the voters; they only give us a choice of two, and half of us haven’t voted for years and years. They skunked us at the first Constitutional Convention. Only a parlememtary system can save us. Perhaps, there is a Kennedy or a Bush willing to serve as monarch? In fact, maybe we should merge with England? Replace the Supreme Court with a House of Lords? Sell titles of nobility to retired corporate poobahs and pay down the deficit? How does the Bank of England work? Is it more to be trusted than the Fed? After the South Sea Bubble exploded (1720) the leading finaglers were stripped of ALL their property. Makes you believe in ex post facto laws!

  18. Accepting that financial elites (banking) transit to government and then back again – perhaps akin to setting the fox to watch the chickens, we might want a broader historical perspective on the behavior of American financial elites both in and out of government. Over the same period, there has been widening income inequality (v. Saez’ work) and manufacturing has declined. The U.S. exports armaments, primary agricultural products, and sovereign debt. Over the same period, the terms of political discourse have been defined by the Reagan-ite ‘government is the problem/enemy and so we have dis-invested in infra-structure, education (more broadly social capital) pensions were shifted from defined benefit to define contribution, shifting risk onto those least able to bear it.
    To note that these co-occur is not to prove that they are by design linked. But it may be useful to think about why capitalist elites have felt that there needed to be a new wave of accumulation, and that the traditional bases of U.S. strength – a very well endowed, big continent,the absence of industrial competition for 30 years after WWII, and a huge national market – were diminished and ‘we’ were no longer internationally as competitive – except in as much as an imperial power can always exact compliance or at least deference.
    Think about the boosterism of Summers, Rubin, Greenspan, etc in that light.

  19. No one is suggesting that our illustrious financial firefighters deliberately triggered a crisis.

    Exactly. Who knew that if you poured gasoline on the economy making it overheat and then lit a match that the whole thing could go up in flames?

  20. Anyone who understood the dynamic relationship between credit and collateral could see the crisis coming, but economists focus only on published statistics and there are no statistics for collateral values.

    Mainstream economists can neither explain nor predict anything, but they provide useful justification for existing power relations. They tell us GDP is up three percent. Who knows how they count it? For all they care it was buoyed by a boom in child pornography sales. When aggregates are inconvenient they stop counting, as for example with unemployment.
    They define inflation out of existence by excluding things people buy out of necessity and focusing on the price of computing power. JK Galbraith said it best: economics is the only profession in which it is possible to rise to eminence without ever once being right.

  21. I will have to kindly disagree with you on the two choices part. Ross Perot came up, Nader has run forever, but no one votes for them. While neither of these men would be my personal choice, a viable third or fourth party would do wonders. But because no one believes that a third party is viable, progressives must join the democratic party.

    Perhaps another option for certain parts of the US. Seriously, let the South secede. I continue to hear there is no blue america, no red america rhetoric, but believe me there is. People in Seattle have far more in common with Canadians then with people from Texas. Part of the US want to be a progressive, democratic country based on secular values, the embrace of science, and a more moderated version of capitalism. The other wants to turn back the clocks, teach creationism as science, burn any book other then the bible and let the chips fall where they may. Why not let them?

    As a Canadian, I invite all interested American States to join Canada. I think we all know which states would want to join, and which ones would join the sovereign Texan Republic and start a war with Mexico. Its a little cold, and you would have to embarce the metric system, but I think most would enjoy it.

  22. that’s perhaps a conspiracy theory

    Russ, here is my proof that there are no conspiracies in the U.S.

    1.) For there to be a conspiracy, people have to talk to each other, and people don’t do that.
    2.) For there to be a conspiracy, people have to agree on a plan, and people just don’t do that either.
    3.) For there to be a conspiracy, people have to plan about the future, but people never even think about the future.

    Therefore, anyone who suggests that there can be a conspiracy in the U.S. is clearly completely crazy.

  23. sorry I forgot the most important part of the proof

    4.) For there to be a conspiracy something harmful must be planned, but no one in the U.S. is capable of having even an unwholesome thought.

  24. Our financial system is under the control of a group of pseudo-intellectuals who’ve convinced themselves & everybody else that they’re really smart.

    They talk like they’re smart, they look like they’re smart, they sound like they’re smart, they act like they’re smart. But they’re all really, really stupid.

  25. It is WWI that caused the decline of Britain (and France). WWII was more of the same.

    The crisis of 1929-1933 was caused by the bubble economy of 1920s, itself a result of an attempt to reflate the British economy. At least such is my understanding from my very long term memory (I bought, but did not read yet more recent books on the subject, with the exception of Niall Ferguson, who are full of unacceptable “explanations”, similar to the “explanations” of that preceding historian of the Ferguson’s sort, who was elected in January 1933).

    Both WWI and WWII caused the ascent of the USA, and the so called “American Century” [1945-2001]. The USA profited from the wars without suffering much from them. Whereas the USSR lost more than 26.6 million people killed, and all of the rest of Europe was devastated, except for two countries which collaborated with Hitler, namely Sweden and Switzerland. The fact the later two did so well economically afterwards is a testimony to the fact that war can be highly profitable, if one avoids massive destruction while extending one’s economic reach, which is what the USA did on a massive scale.

    For example as International Business Machine was given the monopoly for computing in Hitler’s Reich, it extended its reach in (occupied) Europe. By what some insinuate was not a miracle, none of the 35 factories of IBM in Germany was damaged enough to stop operations during the war. As Europe was liberated, Hitler’s IBM (“Dehomag”), the Nazi octopus, became American IBM, the liberator octopus. And so on with many American enterprises which had collaborated with Hitler.

    As Europe imploded, the European empire collapsed and were replaced by American influence, business and value system. That, too, was highly profitable.

    Thus the ascent of the USA is closely related to German becoming fascist crazy (1914-1945). Russia becoming crazy with Soviet fascism did help the USA too. As Europe is rebuilding, one can suspect that the USA, left to its own instruments, will shrink back because its imperial mentality is not adapted to the loss of the artificial reason that made it so big.

    The Europeans now know that materialism, imperialism, nationalism and hubris excess can lead to the destruction of civilization. But America’s main stream ideology has not integrated that lesson, and thus the elite of the USA keeps running away with the worst errors, in blitheful impunity. Excess never last forever.

    Patrice Ayme

  26. I dont’ believe in conspiracies but I firmly believe in ruthless competition on who’s best at screwing the “great unwashed” or at best completely disregarding their well-being. Any protest against exploitation (Ausbeutung) is nowadays successfully denounced as a longing for Soviet-style socialism
    … and those who have a good chance to win the race to the top always find willing sucker-ups aspiring to the title of eminence grise, and lots of Mitläufer (along-runners, me also-s)

  27. I once had a neighbour who was a devoted voluntary fire-fighter and paramedical to boot considered by the whole village after careful and reluctant assessment to have started quite some “good” fires, fortunately without loss of human life, albeit killing in his greatest “success” a number of cattle and pigs
    it seems that in the rural areas of Germany this is not uncommon at all

  28. “we can all guess which power is rising to replace it”
    To me that sounds like a much too orderly sequence of events.

    if the American hegemon should really go into decline my bet is on an extended period of chaos during which everybody is trying to grab a piece of the cake
    whether the current candidate for “succession” will eventually come out on top is a totally open gamble
    – who would have thought at the time that some Arab desert sheiks would suddenly appear on the scene and manage to grab huge chunks of the former Roman empire as well as eventually East-Rome (Byzantium) also

  29. “It is WWI that caused the decline of Britain (and France).”
    plus Germany, the Hapsburg Monarchy and last but not least the Ottomans.

    BTW I find your reading of history totally unconvincing
    – in my reading the US has behaved better by multitudes than any big power before it that had won a major war.

  30. Chas: That is why the Greek discovered the concept of hubris: superiority pushed to the point of completely idiotic madness. The Greeks discovered it the very hard way: their civilization never came back…

  31. “After the South Sea Bubble exploded (1720) the leading finaglers were stripped of ALL their property.”

    is it known how many of them made it back to positions of eminence?

  32. Churchill said:
    “Statistics are like a drunk with a lamppost: used more for support than illumination.”
    “the only statistics you can trust are those you falsified yourself”

  33. Perhaps a better analogy would have been a fire chief who fights to prevent the national electrical code from adopting rules that reduce fires caused by faulty wiring. The fire chief reasons that electricity has benefits, and so shouldn’t be burdened with rules, and besides, and the fires that result can be handled by his fire department. The debate never seems to include the option that you can have the national electric code without reducing innovation in electrical products.

  34. Silke: These problems are vast. You are right about the declines of other powers. Now as far the USA is concerned, it all depends upon what “USA” means. The GIs on the beaches were heroes, and so were the crews of the carrier Enterprise.

    One has to get away from the national model: inside most countries, some people behaved well, and others, terribly. No doubt most Americans behaved very well in WWI and WWII, as they do now. Most Americans did not support Hitler anymore than most Americans worked at Goldman Sachs.

    It may be more profitable to criticize specific ideas rather than people.

    For IBM, please read “IBM and the Holocaust” (Erwin Black). I have written more than 2,000 pages on my various sites on the general subject of the factors that led to WWI and WWII, and my convictions are numerous, to the point of looking sometimes contradictory to the untrained mind.

    Patrice Ayme

  35. Greek hubris is also supposed to make the Gods jealous
    wonder who will turn out to be the Gods this time

    Greek civilization came never back?
    their culture survived not only in Rome but in Byzantium also and clad as an ideal to this day

  36. …where the firechief has been appointed by the local arsonists who need for the fire department not to put out the fires until there has been a total loss.

  37. Don’t count me in on the firefighter theory. The reason for our serial bubble economy is simple: Our credit driven banking regime, and our culture’s unwillingness to sacrifice short-term advantages for long-term properity.
    Our financial system generates money on the basis of the promissory notes accepted by the banking system. At some point in the growth of the money supply, debt will exceed the income available to service it. At that point, two options are possible:
    1. Deleverage – Write-down those debts that can not be serviced and properly value assets that decline in price. (Take your medicine)
    2. Re-Inflate – Pump-up different assets’ market value with new banking loans that will briefly compensate for the old loans in default. (Hair of the dog)

    I think that the Fire Insurance analogy is more apt. Allowing the financial industry to issue Credit Default Swaps in excess of the value of the assets being insured created the perverse incentive to bankrupt the securities.

  38. There is this wonderful type of stupidity where you accidentally become rich beyond anyone’s wildest dreams.

  39. I am rather proud of my untrained mind.

    I am aware of the IBM-book, it created quite a ruckus at the time in Germany.
    there are stories galore like that

    and last but not least
    I meant the USA as an occupying power in Germany – it gave little me a prosperous and really good life to date

    and to make the the probably most contentious point clear:
    I am convinced that the bombing of German cities during WW2 was the right strategy. It made my Herrenmenschen-ancestors tired enough to not resist occupation. And I take into account that it made my first 3 years quite unpleasant – though it was mostly the British who bombed Nuremberg where I lived at the time, I am glad the US did not stop them doing it

  40. I assume you’re referring to economists, especially financial economists. Peer reviewed journals helped them self-select themselves into oblivion. The trouble is: they took us with them.
    They need to be held accountable. Maybe we should ‘deregulate’ economics: abandon tenure, open up the market for ideas, eliminate the oligopolists running the journals.
    Could be fun to do to them what they did to us.

  41. Yep
    because why should people who are so notoriously bad at planning and predicting be good at it when they happen to be villains – stupidity and ruthlessness/recklessness go very well together
    If I hadn’t seen so many utterly stupid people succeed beyond any measure of imagination I would agree with you – but so personal experience makes me wary of atrributing the power of planning this to them
    nevertheless they are of course they are wholly accountable for what they did – if they claim they are not the place for them to be is the lunatic asylum (not the modern kind though- hopefully)

  42. Silke: Elements of Greek culture survived in the Greco-Roman empire. Constantinople was all the opposite of Antique Greece: the demos spoke Greek, true, but had no mind.

    Greek civilization is fully born again today, true, and even in Athens. But it had gone extinct, at least in Greece, for 22 centuries (from Alexander to the flight of the Ottomans).

  43. And, as far as jealousy is concerned (good question), the whole world has long been jealous of the USA… Yesterday’s rest of the world, tomorrow’s gods?

  44. Silke: Happy you loved the bombing of Hitler’s Germany. I agree, all the way to Hiroshima (I have some doubts about Nagasaki). I have no problem with these Anglo-Saxon heroics. Interestingly the son of ambassador Kennedy, a fascist sympathizer, died in a quasi suicidal bombing mission against the Nazis. Raffiniert ist der Herr Gott…

    Aerial bombing, however atrocious, was the only way to defeat Hitler, it turned out (very long subject).

    Right about the breaking of hubris, but it is not restrcited to Herrenmenschen, which is the subject at hand.

  45. “the demos spoke Greek, true, but had no mind.”
    isn’t it funny then that they happened to be the most literate society of the Western World?

  46. The thing I think is, you need someone who generally cares for other people, and the citizens of America–the “smallguy”. Everything in Lawrence Summers’ demeanor, tone, and body language says he doesn’t. His whole attitude is one that can’t understand why other people can’t just be born in a family of wealth and privilege like he was. His facial expression screams “Why can’t everyone just draw squiggly lines on a supply and demand graph and make millions like me?” He’s not only arrogant, he is PROUD of his arrogance.
    We have other people like Alan Blinder and Joseph Stiglitz who can draw lines on a supply and demand graph who genuinely show more concern for the “small fry”. Why do they always get lost in the mix???

  47. “No one is suggesting that our illustrious financial firefighters deliberately triggered a crisis.”

    Are you saying that Nemo is suggesting this?

    You are wrong. There are plenty who are suggesting this, just not many who have any solid evidence. The fact that they might not have a PR machine that gives them a platform does not mean they are “no one.”

    Refer again to Jamie Dimon’s smirking comment to Charlie Rose. Something like: “Buying a house is not the same thing as buying a house on fire.”

    Refer again to this paper from 2002 called “Home is where the equity is” (Univ. of Chicago academic, btw) It offered a suggestion for policy — let people suck the equity out of their houses. Doesn’t the title remind you of Willy Sutton’s famous quip? “That’s where the money is”? Willy Sutton, the bank robber? Are there lots more clever titles on papers out there that helped us blow our bubbles?

    Click to access equity_resubmission_jmcb_final_aug2002.pdf

    Silke, there is far more stupidity and chaos out there than conspiracy. This is not, I believe a reason to discount the possibility that our crisis(es) were engineered systematically.

  48. Precisely.

    And why can’t we find some political candidates SOMEWHERE, to run for Congress or the Presidency, with some genuine empathy for Main Street Americans? For the skilled workers & unskilled laborers who work hard all day every work day to produce the stuff consumed by the parasites in Congress, the Administration, at the Fed & big bank management.

  49. “We have the best government money can buy”. Edward Kennedy. Why would we expect them to look out for the public interest? I can’t imagine why. Until we change that, the government won’t be any help in loosening the stranglehold that entrenched interests have in preserving their entrenched interest.

    This is true in every important area of society: Energy, Health, Education, Finance and Banking…..

    For me that is the crux of the matter.

  50. See also Naomi Klein’s The Shock Doctrine-The Rise Of Disaster Capitalism which takes this theory to the next level and exposes the manufacture of crisis to facilitate financial reward.

  51. The first thing we do is kill all the economists (figuratively speaking).

    In my view there are two types, both of which have proven to have very limited utility (to coin an economic term):

    1) The academic/research wonks that analyze data that by definition must be historical and apply historical questions and assumptions to it to attempt to make future prognostications. These folks fail because they lack the ability to ask the right questions because we haven’t been there yet-tomorrow isn’t yesterday until two days from now.

    2) The tinkerers that operate with the inate belief that lifting here, tucking there, adding a little botox here, triming over there, will result in a a super model. Veritable masters of the universe. Unfortunately, all too often they end up with Michael Jackson’s face.

    Both perpetuate the system. The academics crunch the numbers for the tinkerers. The tinkerers in turn attempt to create tomorrow’s tomorrow numbers for the academics to crunch three days from now.

    But the whole charade is based on linear as opposed to dynamic thinking, and is premised on the faulty logic that one can linearly influence a dynamic system that one doesn’t understand, can’t understand, and can’t possibly ask the right questions to predict.

    There is too much meddling in my view to begin with.

  52. “This is not, I believe a reason to discount the possibility that our crisis(es) were engineered systematically.”

    I never ever discount any possibility … ooops – I discount the possibility that there are visitors from other stars amongst us

    – but if it is done systematically then there is not only the question of cui bono but also the question what is the DREAM behind it that fuels the effort?

    and it would have to be one that gives very very visible power all around the world … not just being able to commandeer Air Force One
    maybe an extra-territorial artificial island guys from Silicon Valley have talked about would qualify where you can live the life of an overlord unencumbered by labout laws

    groups/coalitions have been notoriously bad at acquiring absolute power so who is competing against whom in getting the ultimate word on how to proceed

    unless I get a vague shimmer of anyone dreaming the dream of absolute power I do not believe that a goal was pursued systematically instead of mass-hystery in believing in an economic theory
    – but wait is there somebody who wants to be the one in possession of the Weltformel (theory of everything) for finance – but to date I know about mad scientists only via fiction … on the other hand fiction has quite often become true

    and BTW stupidity and being brillantly deviously clever in certain fields are not mutually exclusive … or to say it the other way around intelligence doesn’t count for much without wisdom (can’t find an adequate translation for “klug”)

  53. “And why can’t we find some political candidates SOMEWHERE”

    from afar it looks like by now only Saints qualify and to get a saint who has the shrewdness of getting deals made, being devious, threatening and upright honest all at the same time, as gifted negiotators have always been, seems very improbable to me.

    in some way the current job description for politicians in democracies have to be rewritten – maybe regularly confessing past and current sins with the promise of not repeating them would do

  54. forgot:
    as those who engineered the steps towards the abyss got paid for their “expertise” they have forfeited their right to that money just as any car salesman would forfeit his if the car deviated in a major let alone catastrophic way from the sales pamphlet.

    make them bankrupt and put them on food-stamps or whatever your American equivalent of Hartz IV is and do it not only to the bonus collectors among them do it also to the professors who promoted the theory/dogma. Whether assistant professors and clerks, journalists and TV-persons need to be included has to be evaluated.

    All those who claim to have been duped, to have been unable to foresee it failed and/or cheated on the job and should make amends that amount to more than confessions.

    what happens instead? Ackermann had a birthday dinner at Merkel’s chancellory – Ackermann is head of Deutsche Bank who carried away 12 bn of US-bail-out money refusing at the same time German bail-out – that needs to be rewarded? doesn’t it?
    (I doubt that the dinner was lavish though – presently lavish is not in fashion over here -

  55. “Any protest against exploitation (Ausbeutung) is nowadays successfully denounced as a longing for Soviet-style socialism”

    You rang?

  56. what do you mean by “you rang?”
    I know rang only like in ringing a bell but that doesn’t seem to make sense in the context

  57. It means here “you called me on the telephone”, “rang” is a metonymy for a phone call (sound of old telephones).

  58. In “social classes” Schumpeter noted that members of a class behave towards eachother differently than to those outside the social group boundaries. Certainly the upper echelons of the banking/finance community in NYC-London do so. They socialize together, live proximate to eachother, vacation in the Hamptons, send their kids to the same schools, and marry amongst eachother with greater frequency than with marriage partners drawn from other groups. They purchase university educations from status good schools (e.g. Oxbridge, the Ivys)to build and maintain social networks.
    They certainly plan for the future in as much as they effectively lobby national governments for policies favourable to their interest (e.g. no regulation of derivatives, repeal of Glass-Steagel). So the assertion that ‘people’ don’t plan isn’t tenable.
    While their are probably not formal agreements, the assumption there must be formal cabals misunderstands the nature of informal social networks in the construction and maintenance of elites.
    There is at least a half century of empirical research on elite behavior – starting with C.W. Mills that belies your claims.
    Try reading a history of the Warburgs, or the Wendels, or the DuPonts. Or undertake a proserpography of senior management in U.S. investment banks, money center banks, and brokerage houses (plus senior staff in treasury, Fed) and it ought to be an eye-opener. In otherwords, it doesn’t have to look like a price-fixing cabal in an industrial sector to have informal but powerful coodination!

  59. there are classes of course there are
    but no matter how much coordination is generated by membership to the same class when further climbing up the ladder is possible competition will take place

    – all those who are not content with just making their place in life as comfortable as possible will get fired up, coalescing, outrunning eachother, coalescing again in all kinds of different combinations

    of course there are price-fixing cabals when they think the risk is manageable but a cabal to self-destruct in order to be able to rob the state coffers
    – I try hard but I can’t find a motive for that
    – and they better than anybody else must have known that they were about to blow up
    – after all to know such things made them worth their ridiculous salaries – and little me was constantly told that the pure size of those incomes was proof that things were in safe, trustworthy and expert hands

  60. What’s the mob then? What are drug cartels? What about the $200 million conspiracy in San Diego county involving 26 people and 100 properties? No conspiracies……
    Ohhhhhhh R u being facetious?

  61. maybe it’s a question of definition

    – in my book a conspiracy is aimed at damaging or toppling the sovereign which means the GunPowder Plot though it is called Plot qualifies for me as a conspiracy whereupon the Great Train Robbery doesn’t qualify because they were after enriching themselves and not interested in doing something to the sovereign
    of course it is hard to draw a definite line, there always will be debatable cases
    – as to the mob and the drug cartels from the little I think I might know for sure I doubt that it would be really in their interest to damage or topple the sovereign*)
    – dominate yes but that’s something I’d rather call a state within a state

    maybe that sounds like hair-splitting to you, but I just can’t forget the havoc the fake claim of a conspiracy known by the name of “-lders of Z–n” managed to contribute to and probably still is able to do again

    Also any attempt to harm or topple the sovereign will hopefully even today be taken just as seriously as on 9/11 the invasion of a terrorist entity was taken

    if we start calling any backroom get-together of local “nobles” for the purpose of hatching a plot to enrich themselves a conspiracy we will need another word for the really big stuff.

    *) current activities of the Taleban probably contradict that assumption but they are said to have been very successful in preventing poppy growing while in power

  62. thank you
    no German journalist mocking American love of conspiracy theories has ever even hinted that for you it is a word which such broad meaning

    – neither was I alerted to it by anything else from the novel*) to long journalism
    *) maybe I should have mustered the patience to read Dan Brown – might have taught me about it ;-)

    – I’ll try to learn to understand it as it is meant but feel deeply unhappy about the discovery
    – if everything is called the same name as the really big bad stuff then the smaller fry provide a very good smoke screen for the really powerful guys/girls

  63. This is one of the most intelligent posts on this and many blogs. But, I would quibble further with the dig at academics or “quasi-platonic….” dont even know what that means.

    One of the clearest explanations of what has happened, is a system complex beyond our understanding.

  64. “Mainstream economists can neither explain nor predict anything”

    Given the prolofic output of this group of people, easily accessible here on the net, this kind statement speaks volumes.

  65. how would you know? most of this thread, like many others here, contians mostly rants with sweeping generlized statements, with no argumentation whatsover. It’s really lazy. You are a self parody!

    Rather than sources for inspiring debate and the presentation of ideas, most of what is bandied about here is just “pseudo-intellectual” grafitti.

  66. In the face of “unspeakable complexity” there’s no point in trying to understand. That’s what makes Carson’s post so “intelligent.”

  67. it’s not a comspiracy, it is the result of social fraternalism. Bending the curve. We could actually fix the financial abuse opportunities in a weekend – every one of you knows how, but Bernanke walks a line between love and hate. I think he is human so he has a bias towards love. As expenseive as his affairs are for the rest of us.

  68. I guess your quote is here at 2:00 “wo laufen sie denn?”
    the best of it comes at about 2:50

    a pity it’s so much word play and thus untransferrable

  69. This is what I was thinking:

    1. collusion, sedition. 2. Conspiracy, plot, intrigue, cabal all refer to surreptitious or covert schemes to accomplish some end, most often an evil one. A conspiracy usually involves a group entering into a secret agreement to achieve some illicit or harmful objective: a vicious conspiracy to control prices. A plot is a carefully planned secret scheme, usually by a small number of persons, to secure sinister ends: a plot to seize control of a company. An intrigue usually involves duplicity and deceit aimed at achieving either personal advantage or criminal or treasonous objectives: the petty intrigues of civil servants. Cabal refers either to a plan by a small group of highly-placed persons to overthrow or control a government, or to the group of persons themselves: a cabal of powerful lawmakers.

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