Let It Die: Rushkoff on the economy

http://www.arthurmag.com/2009/03/16/let-it-die-rushkoff-on-the-economy/

by dangoldin • 17 years ago

43 49 17 years ago

Rod3• 17 years ago

I get the impression that Rushkoff does not know much about Economics, nor Finance. I do agree that Wall Street was making way too much money and that this new gilded age had to end sooner or later. However, I do NOT agree that the collapse of the financial services industry would benefit the United States.

The truth is that the U.S. needs the financial services industry to serve as the economy's lubricant. Ultimately, an efficient marketplace benefits us all.

kiba5• 17 years ago

You can't have profit without loss. It is the twin engine of capitalism that make the economy run.

When these companies failed, their asset get liquatated. Those assets that got liquatated will hopefully end up in companies that were sound, financially and bottom line wise. That is the purpose of the bust, to clean out unprofitable activity and correct the misallocation of resource.

If you subscribe to the Austrian business cycle theory, than you also realize that these booms and bust are not natural, and are largely due to the nature of the federal reserve. For example, if you lower the interest, you're signalling lot of resources are availiable because of the high saving rate. But since the feds control the banking system, the interest its mandate are unnatural and not based on real market condition. This cause a chain reaction in the market(as people are tricked that there are more resources availiable) in which a number of factors lined up perfectly to cause a spectuative boom and than a market correction, thus creating a large cluster of entrepeneural errors.

That is not to say that there won't be a boom and bust. It will probably happen in a true free market as entrepeneurs are fooled, but it will happen less. Entrepneurs will make mistakes, but not in such large clusters to cause such a crazy business cycle, which by the way the federal reserves was supposed to protect us against.

For some reason, the federal reserves fails to prevent business cycles from happening.

kiba5• 17 years ago

Ok, people have voted down my comment.

Can people point out why they disagree with my assesement?

jwilliams5• 17 years ago

Do people really buy the "it's because bankers are evil" line? (I'm oversimplifying I know).

If you'd been a highly conservative/prudent investment manager a couple of years ago - well - you probably wouldn't have had many customers. People were happy to throw money at people that promised these huge returns. That's how they got to the position they were in.

Not to say there isn't something to answer for - some things went very wrong, and some people crossed the line in a very significant way - but if you don't look at the root causes, you're not really addressing the problem.

I've worked in financial services for a decade. There are a lot of dubious people in the industry, and a lot that are purely driven from self-interest (this was colloquially thought to be good as their self-interest usually meant bigger returns).

... But, I've also met people that are in finance because they love it. These people are really an inspiration. They really want to build genuine wealth - to enable people to do great things. It turned me onto the power of the market and economics.

All you need is the right intent, and it's up to everyone to drive that.

menloparkbum• 17 years ago

Do people really buy the "it's because bankers are evil" line?

Yes, I think that's actually a common sentiment.

Rod3• 17 years ago

It's funny that just 2 or 3 years ago, bankers were rock stars. I lost the count of how many friends and acquaintances left Science & Engineering to try a career as investment bankers... and failed miserably.

Bankers deserve neither admiration (their job is not particularly noble), nor everyone's hatred (the economic crisis is not entirely their fault).

mechanical_fish2• 17 years ago

Read this article, which I just found:

http://www.villagevoice.com/2009-01-28/news/what-cooked-the-...

An excerpt:

About $2 trillion in credit derivatives in 1989 jumped to $8 trillion in 1994 and skyrocketed to $100 trillion in 2002. Last year, the Bank for International Settlements, a consortium of the world's central banks based in Basel (the Fed chair, Ben Bernanke, sits on its board), reported the gross value of these commitments at $596 trillion. Some are due, and some will mature soon. Typically, they involve contracts of five years or less...

Warren Buffett branded derivatives the "financial weapons of mass destruction." Felix Rohatyn, the investment banker who organized the bailout of New York a generation ago, called them "financial hydrogen bombs."

If, in an old issue of Superman, Lex Luthor had plotted to issue six hundred trillion dollars worth of baseless assets -- an amount approximately equal to the economic output of the entire world for an entire decade [1] -- and stir them together with the world's actual assets, everyone would have agreed that it was over the top. Who could believe that the planet would fall for an outrageous plot like that, even in a comic book?

So, yeah. It seems reasonable to suggest that this behavior is, to first order, essentially evil. [2]

---

[1] Global GDP in 2008: $70.65 trillion US dollars. (http://en.wikipedia.org/wiki/World_economy)

[2] This phrase is one of my favorites. I've borrowed it from a colloquium speaker at the Cornell physics department, who used it to refer to Edward Teller. I don't remember if Hans Bethe (Teller's former colleague on the Manhattan Project, later turned arms-control advocate) was in the audience at the time, or whether he laughed. My seat wasn't that good.

russell2• 17 years ago

Where are you guys getting these idiots. Yesterday it was comparing the US today with the Weimar Republic. Today it's some idiot who says it was better 500 years ago than today because they had local currencies based on grain. What utter bullshit. The great cathedrals were built as tourist attractions. The great cathedrals were built 800-900 years ago in a competition to glorify God. There weren't any tourist then. Tourism is a pretty recent invention. All our woes are a legacy of the British East India Corporation. The guy doesn't even understand what a limited liabiity corporation is.

Apologies for the impolite put down, but apply some critical thinking before you submit this stuff.

dangoldin4• 17 years ago

Oh I don't agree with the article at all. I personally don't think the author understands the way economies work but still thought it was an entertaining read that can hopefully get some debate going.

davidw3• 17 years ago

So ... submit it to reddit, or somewhere else appropriate for these kinds of discussions?

jhancock• 17 years ago

The article has good thoughts and I do not dismiss them so quickly. It is important to ask "how much value do banks and other investment vehicles create?". It is clear they are (or have become) highly inefficient and corrupt and some aspects either need to be eliminated or reinvented (possibly two sides of the same coin).

I hear many people talk about today's current economy issues without going back to basics. More so, without requiring proof that the current economic theory is correct. If you believe this man's thoughts are patently incorrect, can you at all prove (and I'm talking mathematical proof) the current system is? Where is the "critical thinking" that proves the current system should be supported?

russell2• 17 years ago

(Edit so to speak :-)

This guy is so wrong that it is hard to know where to begin. He is arguing from a false premise to a false conclusion. It's like a creationist argument. He says that things were great in the late middle ages. Wages were the highest ever. Well that is true for a few hundred years either side of the fourteenth century. But the real reason is not the superiority of economic system, but because everyone else was dead. Sure wages were high. but that was because the hundred years war, the black plagues, and the little ice age had killed off 2-thirds of the population. As soon as the good times were over, it was misery all over again. Contrast that with now. Half the world's population is middle class. Three billion vs a few 10's of thousands in the late 14th century. And middle class today is a lot better than well-to-do of 600 years ago.

Then he conflates a whole bunch of things, government monopoly with corporations, the British East India with American trade. Government monopolies have a history as long as history. The medieval guilds are an example. The American patent system is another. Before the invention of corporations, investors were partners in an enterprise and all were liable far beyond their investments in the event of the enterprise's default. Over the long run the two are independent concepts. If he made the argument that large corporations tend towards monopoly, he made it in an exceedingly roundabout way. As far as I know the British East India Company had nothing to do with the Americas. There was a lot of tension because of a British law that all trade to and from British ports had to be on British ships. The Americans sent their cotton to England because we did not have the manufacturing capacity to produce fine woven cloth. (IP restrictions also.)

He also argues against government monopoly of currency. You get things like grain based currency when there is no stable currency. Early in US history currency was privately issued by banks. That proved to be a pretty lousy system. If the bank went under, not only did you loose any deposits, the value of the currency went to zero. Yeah, I would really like to be holding AIG currency right now. It's bad enough they have my life insurance. I live in California and we damned near had California currency, because Republicans refused to allow a budget. Nobody here was looking forward to it.

I personally think we have a huge problems with monopolies: the banks, the energy companies, the information infrastructure, the drug companies. And the recovery financing is making it worse. Good stuff for HN discussion. It's just that this guy is so wrong in so many places that he pollutes the discussion.

anamax• 17 years ago

> I live in California and we damned near had California currency, because Republicans refused to allow a budget.

"we"? No. The only people who were going to get IOUs were disfavored people owned money by the California govt. The folks who it liked were going to continue to get US dollars.

That's what happens when California has a cash crunch.

If you were going to be inconvenienced by receiving scrip instead of dollars, think of it as California government's way of telling you how important you are to it.

CWuestefeld2• 17 years ago

I'm all with you for the first two paragraphs.

In the third, I think you're making the potential problem seem worse by failing to acknowledge that there would be many currencies, so a failure would be contained.

In the fourth, you're showing the reasons for your own error: "huge problems with monopolies: the banks": each of the "monopolies" you cite, you do so in the plural. "Banks" clearly can not be a monopoly, as there are many of them. I think what you're getting at is the "too big to fail" rhetoric?

Spyckie• 17 years ago

I think you're being close-minded. There's an underlying thought process that leads to these conclusions that you're missing out on. You're applying your view of the world to his conclusions and thinking them ridiculous.

This essay is based on a top down view of economics. A top down view runs a game theory thought experiment based on the properties of money, trading, and investing, and ends up with the conclusion that bankers end up with all the wealth as time approaches infinity.

Watch money as debt for an introduction to this kind of thinking: http://video.google.com/videoplay?docid=-9050474362583451279

vlisivka• 17 years ago

> Yesterday it was comparing the US today with the Weimar Republic.

He comparing two economic systems. What wrong?

> The great cathedrals were built as tourist attractions.

Yes, that is right. ( s/tourist/believer/ ) Attractive church gathered tons of gold.

darkhorse• 17 years ago

i think this fellow is right on the money.

our economy borrows against future real growth to finance itself, and that will never work in the long term - that real growth is physically constrained, but the debt is not.

just look at our national debt - our economy will never grow fast enough in real wealth terms to be able to pay back the debt that is accumulating much faster. debt is just a number on paper, without bound. growth has to contend with the real world.

jwilliams5• 17 years ago

So - What's the alternative to debt to fund growth?

Or are you saying we should contract?

jibiki2• 17 years ago

The author's suggestion seems to be that local governments should pay people directly for creating resources (like his example of receipts for grain.) I'm a little skeptical about how well that model works in the real world.

It's worth noting the parallels though, between the weird socialism he seems to be proposing and our current system. In our system, the fed creates money and lends it to the banks, at interest, so that they can lend that money to productive people. In his world, local governments would just give money directly to productive people. Frankly, I think that's bound to be less inefficient, even though it's more direct.

asciilifeform• 17 years ago

> we should contract

Why is this off the table?

"Growth for the sake of growth is the philosophy of the cancer cell."

Xichekolas2• 17 years ago

Why must we pay off the national debt?

It's not like the US Government is going to get old and lose it's income (like a person that retires would). Provided the economy grows (and tax receipts grow along with it) the government has an ever-increasing ability to service its debt.

Just look at the ratio of tax receipts to interest on the debt. The recent financial crisis has obviously made it dive a bit, but in general it's been quite steady or increasing over the last half century or so. In the corporate world, this figure is known as Times Interest Earned, and is a generally accepted measure of credit quality of a company.

Paying back the principal is less of a concern, because when it comes due, there is always a willing buyer of another t-bill to roll it over.

With some pretty charts: http://www.optimist123.com/optimist/2008/12/the-usas-debt-bu...

bprater• 17 years ago

Why pay off debt? First, it seems like the honorable thing to do. Honor? Right thing to do? In the US? I guess we lost that a long time ago.

If money that is servicing debt were freed up, wouldn't it be logical that it could flow to other useful places?

3pt14159• 17 years ago

There will not always be a buyer of another t-bill. What do you think is going to happen when the baby boomers start retiring? Social Security, Medicare, Medicaid all trying to support a glut of population that did not build up a pile of savings, but rather a pile of debt. The Net Present Value (value of future payments deducted for the interest amount) of the US future payments is over 50 Trillion dollars, before the bailouts. That means you would have to have that amount saved, today, earning interest to be able to afford all those programs.

Some governments actually do this. Canada, for example, can "pull out the key" of its CPP (Social Security equiv.) and everyone will get out at least what they put in. Not only that but Canada has been paying off its debt for the past 14 years. To prepare for the influx of medical patients Canada is building hospitals all across the country so that when patients actually start coming they can stop building hospitals and start fully running them, without having to find too much extra capital.

Where do you think a smart hacker will locate once the baby boomers start to age? In a country that saved and prepared that can keep taxes medium or a country that needs to ratchet them up to pay for their old people?

triplefox• 17 years ago

While I'd like to believe the article, it doesn't entirely jibe with my B.A. degree's understanding of good economic policy, of which the fundamental tenet is to ensure a marketplace that is both fair and stable. Eliminating corporations would destabilize many sectors of the economy(particularly infrastructure-oriented ones), and it wouldn't make those sectors more fair than before.

The point made for human health in the Middle Ages can be interpreted as a factor of the lower number of people around at that time. The difference is that we now support a large population via improved disease treatment and engineered methods of increasing calorie count. We probably still don't get the same kind of nutrition per person as the people in the Middle Ages.

Alternative currencies are worth considering(for example, the scrip used in Germany and Austria historically.) in isolation as a means of balancing local economies with national ones.

kingkongrevenge• 17 years ago

> ensure a marketplace that is ... stable.

Punctuated equilibrium is a feature of markets. Creative destruction and all that. Stability is bad. You want upheaval and reformation. Unfortunately, things are playing out exactly as Schumpeter warned: the wealthy players are using political power to achieve "stability" and keep themselves dominant.

cturner• 17 years ago

    Eliminating corporations would destabilize many
    sectors of the economy(particularly infrastructure-
    oriented ones), and it wouldn't make those sectors more
    fair than before.

Instability needn't be a bad thing. Newspapers are destabilised by the internet. This doesn't indicate that the internet is a bad thing.

I knew a guy who ripped the guts out of a regional beef market cartel with a simple program on an Apple II. There was lots of instability there and it was definitely a good thing.

It's interesting that you identify stability and low risk as being a strength of corporations - the only strong argument I've ever heard in favour of the idea of creating a structure with an individual's rights but without its responsibilities is that the limited liability of a corporation gives people the opportunity to take risks they otherwise wouldn't, and that the net effect on the system is positive. I'm dubious about this too.

    We probably still don't get the same kind
    of nutrition per person as the people in
    the Middle Ages.

The improvement to quality of life, health, friends, freedom, and opportunity for self-actualisation in general is profound. We support a large population and anyone in regular employment has an opportunity to access education, food and resources that are so luxurious to people of the middle ages that many would be incomprehensible to the people of that setting.

tjic• 17 years ago

> In a perfect world, the stock market would decline another 70 or 80 percent

"The economy" is a measure of the value being created and enjoyed.

Anyone who says that they want "the economy" to decline 80% is saying that they want EVERYONE'S standards of living to decline 80%. You, your brother's, your retired parents - they should lose 80% of their housing, 80% of their nights out, 80% of the books they'd like to buy, 80% of the movies they'd like to watch, 80% of the vacations they hope to go on.

Except for the dead bodies piled on the sidewalks, he's basically hoping for a genocide.

"I feel alienated and I feel like a failure and I hate everyone and therefore I want it all to burn" is a fine sentiment for a high school heavy metal band or an idiot 14 year old goth, but it's an absolutely shameful thing for an adult to say.

kiba5• 17 years ago

When a stock market declines, it just mean that the investors think the companies are doing unprofitable activities and that they need to change their activities to more profitable one. Hopefully they will switch to production of goods that people actually want and the stock market will rise up again.

mechanical_fish2• 17 years ago

Without getting into the rest of Rushkoff's argument, he said the stock market, not the economy. Though the media tend to confuse these things, they are not the same. At all.

The S&P 500 is down nearly 50% since last year. Obviously, this has not produced a 50% drop in the standard of living.

Here's a calculation of the historical total-market P/E ratio from 1871 to 2003:

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B236...

The historical average is 11 to 14, depending on how it is calculated. The same source reports that the S&P 500 P/E ratio on February 12 was 29.1:

http://www.marketwatch.com/news/story/how-current-pe-ratios-...

That implies that, in mid-February, the market needed to drop another 52% to 62% to get back to the average P/E ratio of the market over the last century. Obviously, an average P/E of 11 implies that the market has historically spent quite a bit of time at an even lower P/E.

Obviously, this is a facile analysis. The Marketwatch guy himself hedges it quite a bit (e.g. he points out that during a big recession P/E can surge temporarily due to the relative timing of economic events). But it does go to show that, when Rushkoff suggests that the market might drop another 70% or 80%, he's not talking about something unprecedented -- he's merely talking about a market-average P/E of 6. Nor is he suggesting a drop of 80% in a real economic measure, like employment, or GDP.

kamidev• 17 years ago

Well... I have no idea what Rushkoff really knows about economy. But I see nothing wrong with the kind of questions he asks: is the current crisis just another unavoidable cycle? Should we just hope for the economy to "get back to normal or seriously think about something better? Who benefits if most of us think there is no alterative?

Perhaps this really is the best of all possible worlds. Perhaps we already know everything we need to know about economy and politics. But personally, I don't think so. And I enjoy when hackers speculate about these things.

jwhitlark• 17 years ago

Rushkoff seems to subscribe to the daddy model of wealth. http://www.paulgraham.com/gap.html http://www.paulgraham.com/wealth.html

Seriously, there is an optimum level of debt for countries as well as people, and it's NOT zero.

kiba5• 17 years ago

I thought the opposite. He didn't subscribe to the daddy model of wealth but rather he understood that what those bankers are doing are not creating real wealth.

stavrianos• 17 years ago

I may well not be getting something here. It seems to me that money, at the core, isn't a true representation of wealth. Obviously economics is not zero-sum in terms of wealth, but isn't it supposed to be zero-sum in terms of money? Certainly businesses aren't expected to manufacture the cash to represent the wealth they create.

At the same time, I understand that banks much prefer that a loan be repaid in money, rather than raw wealth. When you fail to repay a loan and they repossess your house, that's sort of like payment in terms of raw wealth, I guess...

Obviously I've got something wrong, because if the total money supply is constant but the total wealth is increasing, then money should become MORE valuable over time, not less. So, either the actual supply of money is increasing faster than the actual amount of wealth (for whatever reason) or else money doesn't actually represent wealth like it's supposed to. And if wealth and money aren't properly correlated, the daddy model of money may be very appropriate even if the daddy model of wealth is obviously wrong.

CWuestefeld2• 17 years ago

Rushkoff's conclusions don't follow from his argument (such as it is, setting aside such silliness as middle-ages tourism).

He seems to be arguing against mercantilism and fiat money. Luckily, we've progressed past mercantilism in many ways, and fiat money could be easily replaced without destroying the economy.

His conclusions about the banking system seems a hopeless confusion between central banking and a market for capital. He indicts the former, yet wants to tear down the latter.

While he seems to be aiming at corporatism (or corporate fascism), he only takes an unsupported swipe at corporations in general, placing all blame on their shoulders without acknowledging any blame that might fall on the government and democracy.

Saying "For one business to pay back what it owes, another must go bankrupt", he reveals a childish idea that all business must be zero-sum, so that there must always be a winner and a loser. But it can plainly be seen, when two parties freely enter into a transaction, that both feel that they are coming out ahead.

He seems never to have considered that business can actually create wealth. And apparently dismisses the idea that new markets are being created at a furious pace, ignoring the giant strides in communications, healthcare, computing, transportation, etc, that have been made in the last half a century.

jibiki2• 17 years ago

> Saying "For one business to pay back what it owes, another must go bankrupt", he reveals a childish idea that all business must be zero-sum, so that there must always be a winner and a loser.

I think he's making a comment about the fact that fiat money bears interest. So if there's $1000 of fiat money in the system, then there's a total of (say) $1200 owed to the central bank. So we have 2 corporations, each of which has borrowed $500 from the central bank, and owes $600 to it. If the bank were unwilling to increase the money supply through further loans, then one of those corporations would necessarily default (assuming that they have to pay it back in the currency they borrowed.) But fiat money doesn't really work this way, so it's a very moot point.

chasingsparks• 17 years ago

This feels a bit too much like the Zed Shaw "Two Flaws of Libertarianism" submission.

Let It Die: Rushkoff on the economy

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