October 11, 2018

No higher finance gods left to be deus ex machina for neoliberal bubble: Full pantheon of central banks already divinely intervening

As we near the end of the neoliberal bubble that began nearly 40 years ago, it's worth reflecting on the escalating scale of interventions that have been needed to resuscitate the economy (for the elites, anyway) after each successive near-death catastrophe. By the 2010s, we have reached the peak of that scale, as an entire global network of central banks has teamed together to prop up the "everything bubble".

The basic logic is that when an institution is about to go bust, a relatively bigger institution must intervene to save it. Bigger in scale, in wealth and resources, in social status, in influence, etc. A peer institution would not suffice, since whatever is causing the first institution to suffer near-death collapse could just as easily affect institutions at the same level of complexity. And certainly lesser institutions can not rescue greater ones.

"Big" can only be rescued by "bigger", and once there is no bigger, further rescues become impossible, and they sink or swim on their own.

Almost right out of the gate, the deregulation agenda of the Reaganites nearly blew up one of the largest banks in the nation -- Continental Illinois, in 1982. In the first clear case of "too big to fail," it was rescued by the FDIC, a federal government agency. That was a fairly small-scale rescuer needed to jump on the grenade.

By the end of Reaganism's first decade, deregulation mania had wiped out an even larger swath of the economy -- not just one bank, but an entire group within the finance sector, the savings & loan industry. Now it was no longer possible for just one puny federal agency to bail them out -- the full national government had to pass legislation, sign it into law, and survive judicial scrutiny. That was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

As the Reaganite trend continued toward pointless financial speculation, in place of productive investment, the rescuers would bail out hedge funds, not just lowly regional banks or thrifts. In 1998, Long Term Capital Management imploded and posed such a risk to the Wall Street banks that not even the federal government could serve as the rescuer. They had to go higher to the big banks on Wall Street themselves, along with the central bank (the Fed) serving as a mediator, giving its stamp of approval and trustworthiness.

That was before the New Deal-era Glass-Steagall Act was repealed in 1999 (by the Gramm-Leach-Bliley Act), so the Wall Street banks had not been able to scale up to the behemoths they would become in the 21st century, after the barriers were removed between commercial banking, investment banking, and insurance. Any individual one of them was not so much greater than a hedge fund, or group of hedge funds. One of them bailing out LTCM would have been closer to a peer trying to bail out a peer -- not good enough, and the full network of big banks was needed, plus the central bank coordinating the rescue without, however, supplying funds itself.

When the Tech Bubble 1.0 popped in the early 2000s, it was not bailed out and re-inflated, since the tech sector controls the Democrats -- who had pumped up the Dot-Com Bubble under Clinton -- and the Republicans had just taken office under George W. Bush. So even though the central bank slashed interest rates to cope with the popping of a bubble, there were no "too big to fail" cases that got massive rescuing. Rather, with the military party now back in full control of the government, it would be pointless military speculation that would misallocate trillions of dollars -- the wars in Iraq and Afghanistan -- and receive "too big to fail" protection by the federal government and by the senior member of the governing coalition (the Pentagon).

At the end of the Bush years in 2008, the finance sector would again face a collapse -- not of an individual bank, a sub-industry within finance, or a hedge fund. Now it was the entire finance sector that was about to get wiped out, and nearly 10 long years after the repeal of Glass-Steagall, these Wall Street banks were much higher on the complexity scale than their Clinton-era dinosaur ancestors. In a quantum leap from LTCM, the central bank itself had to directly intervene to bail out these "too big to fail" mega-banks, except for Lehman Brothers.

But even as the big banks survived near extinction, the broader economy was still moribund. And simply slashing interest rates to 0 was not enough of an intervention. Now the central bank would purchase assets directly by the trillions of dollars (quantitative easing). And even then, it needed the other central banks of the major economies to do so as well!

The (re-)inflation of Tech Bubble 2.0, not to mention all the rest of the "everything bubble," could not have been orchestrated by just one central bank alone. That scale of intervention had already been taken out with the rescue of the mega-banks in 2008, just a few years earlier. A bigger rescue requires a bigger rescuer, meaning now a single-minded team of central banks. It was as though they had formed a single central bank for all of Planet Earth, with the Fed, ECB, BoJ, etc., serving as mere district banks within it, akin to the member banks of the Federal Reserve system, albeit with some members ranking above others, in the same way the New York Fed ranks highest in the Fed network.

So, after this everything bubble of globally synchronized growth got popped earlier in the year, who is there left to rescue it? No one -- that's who. There is no central bank of the solar system, no central bank of the Milky Way, no intergalactic central bank, and no central bank of the universe or parallel dimensions. We have reached the maximum on the scale of complexity -- globally synchronized growth, propped up by globally synchronized central banks. That's as big as big gets, leaving no one bigger to bail it out.

This history suggests that it's not so much about the scale of financial resources that could be deployed -- with fiat currencies everywhere, there is an infinite amount of cheap money that could be pumped into the failing system.

But everyone would look at that and say, "Sorry, I don't believe it." Their gut intuition is that big requires bigger to rescue it. So it's more about the social standing of each layer in the institutional pyramid. It's not so much a central bank coming to the rescue by providing money to a cash-starved bank -- it's more about the qualitative stamp of approval from a higher-ranking institution, not the quantitative amount of resources that stem from that approval.

"Credit" comes from the word for believing, in the sense of trusting -- you extend someone a loan if you believe they're good for it, and you don't if you don't believe they're good for it. When in doubt, the borrower needs someone or something to vouch for their credit-worthiness. When a bigger institution rescues a big one, it's like they're vouching for the dying one -- we think they're good for it, so we'll extend them a lifeline. That approval from a higher-up assuages the doubts of the spectators who are witnessing the crash victim.

The rescue is not "supplying liquidity to an insolvent institution," or "reducing uncertainty in a chaotic atmosphere," but reassuring the doubtful who fear the institution is worthless, as well as those who fear that one sick institution may by symptomatic of a broader underlying sickness. Nope, nothing to worry about, we higher-ranking layers of the pyramid give it our stamp of quality approval.

Following the lead of higher-ranking authorities, everyone else stops panicking about the sick institution, and extends it their own credit-worthiness. If these spectators are within the finance sector, that means being open to giving them actual funding. But if they are not financial actors, they will still extend their subjective approval, believing that health has been restored to the system, and acting accordingly.

Crucially, it is not taking it on blind "faith" -- there's an infinite supply of that, too. It may look delusional to a clear-minded observer who still sees that the patient is deathly ill, but it does have a rational basis, namely following the lead of higher-ranking authorities. In a world where value is socially constructed, an individual, a firm, an entire sector has value if the higher-ranking layers of their pyramid say it does. They are credit-worthy if their higher-ups are willing to extend them credit -- however misguided or hopeless some observer may think that extension of credit to the moribund patient to be.

As the global growth continues to melt down, it will reveal the uselessness of funds and faith. Unlike these unlimited resources, "order-of-magnitude higher-ups who can vouch for your worthiness" does have an upper limit, and it has already been reached with the global central bank network of the post-2008 era.

The popping of this bubble is not just the end of yet another business cycle, on the order of years, but the end of an entire period or regime, namely the neoliberal era, that has lasted on the order of decades. It heralds the transition in political periods that we are about to see, out of the Reagan / Thatcher / Mitterand / Craxi period, and into one dominated by populist figures akin to Bernie, Corbyn, Le Pen, and Salvini.

Just as in the last turning point of the 1970s, stagflation has returned for everyone but the 1% -- and suddenly, even their costs of living and doing business are going up, while their assets are collapsing in value. This will cause a crisis of belief in the entire neoliberal model, as shown by the rise in democratic socialism and conservative populism among the post-Boomer generations -- and not just among the masses, but among the elites themselves. Or at least, the would-be aspiring elites whom the neoliberal model has entirely failed.

Ocasio-Cortez won her shocking victory in a district full of downwardly mobile elites and frustrated aspiring elites, who live next door to the closeted Alt-Right Trump voters who also feel failed by the entire system -- and who may in fact work within the same industry as the socialists, namely tech, finance, and media.

This phenomenon was absent during previous collapses within the neoliberal era, and the fact that it has surged from seemingly out of nowhere is a clear signal that this era is ripe for realignment. And with no higher institutions left to bail out the global neoliberal order, the realigners will not have to contend with reformists and rescuers, and can get on with the business of building a whole new system in place of the collapsed old one.


  1. Inflation is still low, and the economy is actually doing relatively well (not just for the 1%, unemployment keeps going lower than members of the Fed previously declared to be "full employment"). So it's the opposite of stagflation.

    I could give Scott Sumner's spiel on bubbles, but it hardly seems necessary with you calling it a "40 year bubble" in "everything". If a bubble lasted forever, what would be the point of calling it a bubble? Or if the economy was usually in a "bubble", shouldn't we instead distinguish the rare periods outside of one as a sort of "anti-bubble"? But that would bring us to the "plucking model", which is a discussion for another day.

  2. Jesus, the Matt Yglesias-tier glib ignorance of basic economic reality.

    Real-life inflation is already high single, double, or triple digits -- housing, healthcare, education / student loans, food, etc.

    Necessities, cannot be substituted, cannot be postponed or delayed, cannot be bought used, largest items in the monthly budget.

    Even generic inflation is at 3%, while wage growth is under 3%, meaning real wages continue to decline -- again, especially compared to the cost of living, not the cost of TV sets.

    Labor-force participation keeps plummeting, meaning low unemployment is just people dropping out altogether. Don't hand-wave about Boomers retiring because 1) Boomers never retire, and 2) Check out the post-Boomer stats.

    Now you're counted "employed" even if it's just a shitty part-time job.

    Reality check -- would a population that was *not* subject to stagflation have voted for Donald Trump's platform in 2016? Or did a population enjoying the greatest economy ever, greatest standard of living ever, vote for Trump's platform of radical change?

  3. Bubbles can't last 40 years? Higher ed, genius, and anything linked to it -- like student loans. That's not controversial as a misallocation, malinvestment, providing nothing of value (indeed, lower value over time) while the price takes out one order of magnitude after another.

    How about falling interest rates, and therefore the bond market? They've been falling for about 35 years -- and once the realignment hits, they could start rising again. Long-term interest rates go in one direction for decades (they rose from roughly the mid-1940s through the early '80s).

    Without a bull market in bonds (falling yields / interest rates), there would be no bull market in stocks, also therefore a bubble since the same time period (Reaganism).

    Fun fact: the NASDAQ wiped out all its Dot-Com gains during the crash. The bottom in Oct 2002 set it back to the pre-melt-up level of Sep 1996. It did not get re-inflated under W. Bush, since the Dems no longer controlled the govt, and it hit another bottom in Feb 2009.

    Between those two bottoms, there was only a 2% annualized growth rate -- after essentially 0% at the end of the Dot-Com burst.

    Who in the hell would keep investing so much into a worthless sector like Tech -- super-high risk, uncertain future of the field, basically no ROI after each crash? It's only because the safer investments like bonds, say Treasuries, had been brought down so low for so long.

    And not due to exogenous natural economic laws -- but because the heads of the central bank during the Reaganite era have engineered lower and lower interest rates by setting their own Fed funds rate increasingly lower.

    If interest rates had been high single digits, or even double digits, like they used to be during the New Deal, then that would've been a far more attractive way to invest. But as the Reaganites have crushed interest rates for the better part of 40 years, that strategy does not pay off. It has artificially engineered a flight from bonds and into stocks, over those 40 years -- one great big long stock market bubble.

    Now, you can talk about bubbles at varying scales -- some lasting just years, some lasting decades. No different from a trend and fluctuations around it -- a bubble trend, and shorter-term bubbles within that.

    What makes something a bubble or not is the qualitative stuff -- misallocation, malinvestment, no / little / declining value with rising valuations, herd behavior, euphoria, etc. It's not the time-scale or complexity of the time series (monotonic trend, trend with cycles, etc.).

  4. Tech has only invented things of real value before the bubble in stocks (in a way caused by the bubble in bonds).

    Almost nothing during the entire Reaganite period. Maybe touch-screens in the '80s. Cell phones were invented in the '70s, internet and computers even earlier.

    All the really worthwhile stuff was not developed by firms struggling to increase shareholder value -- they came from places protected from the market. First, the Pentagon. Second, federal government research grants to universities. And third, R&D labs from monopolies, primarily Bell Labs -- before its patron monopoly, AT&T, was broken up in 1984.

    Transistors, semiconductors, integrated circuits, analog and digital computers, the internet, lasers, airplanes, programming languages, cell phones, charge-coupled devices (digital photography) -- you name it, it was not developed in a market setting, let alone one subject to heavy speculation by stock investors.

    As the tech world has had its fortress walls against market forces torn down, it has been forced to "develop" short-term sugar rush garbage to placate their new patrons -- ravenous short-term-oriented investors -- during one speculative bubble after another, within a longer-term over-arching bubble, since Reaganism replaced the New Deal.

    The New Deal as a whole produced *no* bubbles. There may have been business cycles, but no identifiable asset bubbles that hit specific sectors -- the way there has been a savings-and-loan bubble, tech bubble, housing bubble, student loan bubble, etc. during Reaganism.

    Hence, no large-scale malinvestment or misallocation of resources. Real, honest, useful, valuable, worthwhile stuff -- that's what they invested in during the New Deal. And it paid off immensely in their inventions and accomplishments (set aside the increase in standard of living).

    Only a New Deal society could "put a man on the moon" -- a project that, during the Reaganite era, has degenerated into some dork with enough connections to the central banks of the world securing the funding to shoot a car into space.

    At least they've learned their lessons from the Challenger explosion about the prospects of *manned* space exploration under neoliberal constraints.

  5. Housing, healthcare & higher education have had higher rates of inflation than the rest of the economy. Food is another story. Per the Bureau of Labor Statistics, the rate of inflation for food between 2016 and 2017 was 0.86%.
    Between 2017 and 2018 they estimate 1.19%. Both are below the general rate of inflation which was slightly over 2% (not nearly at 3%) for both years.

    There has been a long term secular decline in labor force participation since 2000, but in recent years there has been a rebound (not back up to 2000, but nearly at the 2008 level):

    We were not having the "greatest economy ever" when Trump was elected, and if we had he might not have been. It's unusual for one party to win the presidency three times in a row, but not unheard of, as it happened from Reagan to Bush Sr. In practice, Trump has not really been that radical.

    I agree that this spending on higher education is socially wasteful (largely signalling with some consumption of amenities for students). But there isn't some "greater fool" theory where you purchase the asset because you can sell it to someone else (who thinks they can sell it to someone else, etc). Higher education & healthcare are both dominated by non-profit institutions receiving government subsidy because they are seen as good things. They don't make a good comparison to Beanie Babies or Bitcoin.

    Interest rates have been low (although Powell recently moved to increase them). While many associate low rates with higher inflation, periods of higher inflation tend to result in higher interest rates. Inflation has been low since Volker & Reagan "broke the back" of it. These low interest rates meant that the rate of interest the Fed started paying out for "excess reserves" held there had a large disinflationary effect, discouraging banks from lending out said reserves.

  6. Food inflation is around 3% annualized since 1996:


    Forget comparisons to 1956 or 1966.

    A recent bump in labor force participation does not mean that the long slide is over, especially counting full-time rather than part-time as "employed".

    At any rate, the real concern is not employment but standard of living -- prosperity vs. immiseration. If you have part-time rather than full-time work, which pays falling wages in real terms -- especially looking at the necessities rather than TV sets -- then it doesn't matter what the employment figures are.

    Trump's victory was not unusual due to breaking a two-term streak for the other party -- if Bush or Cruz had won, they would've snapped it as well. But who did GOP primary voters choose far and away? Doesn't sound like they thought we're living in the same world described by obfuscating technocrat statistics.

    Remember, Trump's opening slogan was "The American dream is dead (but we're going to make it stronger than ever before)". Stagflation.

    Bubbles do not require a "greater fool" mechanism for fueling their growth. How about a continual flow of cheap money, cheap debt, and a destruction of alternative investments? Such as central banks setting interest rates at 0% and buying over $10 trillion in bonds, to make stocks relatively more attractive?

    You're looking at bubbles as endogenous to the grassroots behavior, rather than fueled by policy decisions at the top, which are exogenous to mass psychology. Cheap debt -> asset bubbles. When debt becomes more expensive, the bubbles pop, e.g. when interest rates rise and make the interest payments alone more expensive.

  7. We're not talking about falling interest rates as a signal of inflation vs. deflation. We're talking about them as a bubble unto themselves -- a Reaganite-era bubble in the bond market, which has had a knock-on effect of blowing a bubble in the stock market.

    You make a common mistake in referring to "Volcker and Reagan" jacking up interest rates and causing the early '80s recession. Volcker was *Carter's* Fed chair, acting on behalf of the finance sector that controlled the Democrat party, who didn't want their financial assets vaporized by inflation. And who also wanted to pin the blame for a recession on their rival party.

    Reagan *replaced* Volcker -- and not with a similar guy, but with Alan Greenspan! The original Mad Doctor of crushed interest rates, cheap debt, and asset bubbles. And who also pre-figured Gramm-Leach-Bliley by allowing Wall Street banks to mix commercial and investment banking, only at a restricted level, rather than the total removal of those barriers that would happen later in 1999.

  8. Higher ed is not non-profit -- they are all major investing institutions, basically a hedge fund / private equity firm / sovereign wealth fund, that uses some of its profits to fund the educational and spectacle services that it provides (classes, sports, libraries, etc.).

    Neither is healthcare -- they make massive profits, and are privately owned cartels, both healthcare providers and drug-makers.

    You're trying to label them non-bubbles based on their wealth flowing from govt subsidy, rather than purely market forces. But that's begging the question -- assuming at the outset that the govt cannot create bubbles with its policies, because only grassroots mass psychology can create bubbles ("greater fools").

    Higher ed and healthcare are bubbles, tech is a bubble, the military is a bubble -- all bubbles, all stemming from top-down decisions, not bottom-up herding. The masses would rather drain the swamp of university hedge funds, pharma cartels, and the endless occupation of Germany, Italy, South Korea, Japan, not to mention Iraq, Afghanistan, Syria, etc.

  9. To reiterate, bubbles are about whether it's a malinvestment, misallocation, etc., not the source of this malinvestment. It's something that cannot live on its own, and will die when its bubble-makers no longer shield it from reality.

    This shield could be provided by grassroots mass psychology, like Beanie Babies and Bitcoin, but it could also be provided by central banks setting interest rates so low, or vouching for lower-ranking institutions' credit-worthiness and investment worthiness, or buying up trillions worth of toxic assets and holding rather than selling them, etc.

    Or the military party controlling the govt and appropriating more and more funds for a war / occupation that is more and more futile, or that is providing less and less ROI (spoils, etc.).

    The mass hysteria bubbles are relatively benign -- what was the total market capitalization devoted to Beanie Babies at their peak, or Bitcoin today? A tiny sliver compared to the NASDAQ during the former or current tech bubble, real estate in major metro areas globally, healthcare spending in the only rich nation without collective single-payer bargaining against the providers, the wars in Iraq or Afghanistan, and so on and so forth.

    Those are massive-scale malinvestments stemming from the plans of our technocratic elites, not from hysterical lowly individuals looking to get rich quick.

    That's not to say that all top-down elite plans will produce malinvestment -- we had planning during the New Deal, and indeed during every period of human history. There is no such thing as a society at the scale of agriculture and above that is not planned by an elite class.

    What does change is their allegiance to the people, or their competitiveness against one another. When the mood is social harmony, they plan productively and invest wisely (New Deal). When the mood is social strife, they abdicate their role as stewards and try to suck up as much stuff for themselves, fucking over not just the common people but their intra-elite rivals as well (Reaganism).


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