Sunday, March 23, 2008

Creative destruction.

When I think of the subprime debacle I think of "creative destruction". That sort of puts a positive spin on it.

The economist Joseph Schumpeter popularized the phrase. He attributed it to capitalism, about its capacity to cause economic ruin but then invent something new from the aftermath and rubble. In other words, capitalism is a rejuvenator and a restorer. So from the destruction left in the wake of the subprime debacle and the housing bubble it spawned we can expect an economic revival, like grew out of other past economic quakes.

The subprime debacle has certainly wrought economic upheaval and destruction. Subprime loans helped enable the housing bubble that subsequently burst, forcing many people to give up their homes, builders to go bankrupt, financial institutions to quake and communities to suffer financially. The ripple effect has staggered many sectors of the economy in America and abroad. Prior to the housing bubble there was the dot-com/technology bubble of the 90’s, which collapsed in 2000, ushering in the longest bear stock market in 60 year. It is hard to imagine how those collapses could be viewed as creative destruction. Nevertheless, past economic disasters heralded new technologies, management skills and resources to sustain economic activity in the future.

Capitalism's creative destruction is rooted in nature where nothing remains static and is constantly changing. Capitalism is a social construct designed to manage it better, the effects of the natural, cyclical deterioration and renewal of material on society. Capitalism's creative destructive style is also seen in the creative but some times destructive manner it replenishes and restores the resources we consume.

Let's examine another example of creative destruction in the mode of nature and capitalism. Some may consider it a sick example of creative destruction. Nevertheless it is. The event was 9/11. After 9/11 there was a rebirth and renewal. Some economists and intellectuals saw 9/11 as the harbinger of things to come, as the end of how things once were, the end of capitalism and globalization. However, what transpired after that horrendous event was the opposite. The world proceeded to continue on the same trajectory as before, of globalization and interdependence, only to a greater extent, as though validating what transpired before 9/11. Moreover, New York City, where 9/11 occurred, continues to grow and prosper, as did the rest of the world, and not go down hill as many had predicted. And 9/11 did not bring about the ‘clash of civilizations’ as some had anticipated but instead reinforced the globalization that was already happening throughout the world.

Creative destruction is a paradoxical phenomenon. In a brutal way it reinforces that which is essential and legitimate. I have a theory as to why it occurs, because societies and governing systems sometimes grow inadequate, become complacent and stale, and need disrupting. Societies periodically have to be awakened from their complacency and staleness, hence the need for the imposition and agitation of creative destruction. In the past nations used war as a form of creative destruction, to overcome the slumber and decay they fell into. Today, though, for obvious reasons, wars have become less of an acceptable way to achieve the creative destruction needed to keep a society from atrophying. Wars tended to throw the baby out with the bath water, so it was essential the civilization find an alternative form of creative destruction. Today that mantle has passed on to the discipline of economics because wars have become far too destructive and now not very creative. The world can no longer endure or afford the 'creativeness' of wars, hence the creative destruction of economics and capitalism. The creative destruction that wars once brought about, and now economics does, was also an historic meant to transcend many of the obstacles that humankind had erected, like those of isolation, racism, inequality and complacency.

Systems of governance have collapsed because they ignored or thwarted the cycle of economic creative destruction. Communism is the last such system to collapse because it did. Inherently, creative destruction is incompatible with communism, because it is a closed system that doesn't allow for such flexibility. It forbad any creative destruction through stringent controls and the manipulation of markets. In capitalism creative destruction emanates from individuals, individuals who ‘rock the boat’. Communism, to its determent, didn’t recognize the individual, just the collective. Creative destruction also occurs naturally. Capitalism has acknowledged and incorporated this fact when it harnesses and cultivates its forces, allowing individuals to take the lead. Communism thwarted and denying this organic order of things. Because communism didn’t acknowledge its existence it was domed and unable to renew itself, collapsing in favor of capitalism. Without creative destruction and its agitating forces communism didn’t develop the necessary technologies, resources and management skills to keep going.

To many it doesn’t seem right that we should have to endure these cycles of capitalism’s creative destruction. Why do we need so much creative destruction? The creative destruction capitalism foments does seem exaggerated at time, what with its disruptive ways of out-sourcing jobs, plant closures, market sector collapses and constant socioeconomic upheavals. One reason economic creative destruction seems so have intensified lately is because, as mentioned above, there aren’t the wars like before to change things. Also, the pace of the world has intensified, therefore increasing the need for renewal and the need for other alternatives and additional ways of doing things. The pressure has intensified to keep civilization humming, so it can and will combat its natural tendency to grow complacent and static.

The subprime debacle is not the best example of creative destruction. Perhaps it’s been too destructive and its creative abilities are still questionable. The subprime debacle really shouldn’t have happened in this age of economic savvy and sophistication. People knew better. However, one reason it happened is because the economic lessons learned in the past were taken for granted or ignored. Some people thought they had discovered a new economic nirvana, a new paradigm, or that the laws of economics had been repealed. People weren’t using common sense and forgot that what goes up must come down and that there are limits to borrowing and spending and borrowing and spending. So if there is a creative aspect to this latest economic crisis it is its bringing attention to the fact that the economic principles learned in past still stand and should be relearned. What also must be relearned is the fact that the free market is not the be-all and end-all as some believe it is. For another, the free market shouldn’t be completely left unfettered, but at times needs selective regulation so that it acts less destructive and more mutually beneficial.

Sunday, March 16, 2008

Spitzer, sex and subprime.

I think that Eliot Spitzer's downfall was politically motivated. If it wasn't it sure looks suspiciously like it was.

For those who don't know, Eliot Spitzer resigned as the governor of New York because it was revealed that he had sex with a prostitute. He was found out through a supposedly suspicious money transaction. He had transferred something like $15,000 from one bank account to another in order that he could make secret payments to an escort agency. This movement of money looked suspicious to the banks, so they reported it to the US Treasury. The reason it was reported is because after 9/11 it became mandatory to report such movement of money, because such transfers might be for financing terrorism. It was also thought that Spitzer might be laundering money or that he was being blackmailed. (I think that last explanation was a cover, to legitimize the government's monitoring of him, as though it was trying to protect him.)

Spitzer met the prostitute in a Washington hotel on Feb. 13th. By coincidence an article by him appeared in the editorial pages of the Washington Post on Feb. 14th entitled "Predatory Lenders' Partner in Crime" It outlined how the Bush administration had enabled the "subprime" debacle. Perhaps the excuse he used to go to Washington was to submit his article to the Post.

His article stated that Bush and his administration were partially and criminally responsible for the financial mess that the US was finding itself in due to subprime leading and the housing bubble that followed. He also charged that the Bush administration looked the other way when it was known that lenders and bankers were making predatory mortgage loans to unsuspecting borrower. The loans that were been made were called teaser loans where a loan would be made at a ridiculous low interest rate and then jacked-up to unaffordable level at renewal time. Spitzer, as New York's attorney general, along with other state attorney generals, tried to implement laws that would protect consumers from this blatant, fraudulent practice. However, the Bush administration used its federal powers to block the enactment of suchlaws that would stop this predatory lending.

The reason why Bush&Co blocked the passage of legislation to stop such questionable loans was because it might stop the realization of one of its pet projects. That project was the expansion of America’s "ownership society". Cheap loans would enable the poorest of people to afford a home and buy into the American dream. If Spitzer and his colleges had their way, of stopping such loans, he could ruin the chances of Bush realizing his dream. Spitzer actions could also endanger the unfettered ways of the market place that Bush&Co. worshipped so much.

My feeling is that someone in the administration wanted to pin something on Spitzer because of his efforts to derail the administration dream of expanding America’s ownership society through cheap loans. Stopping such a practice would also affect the banking industry that was aligned with Bush. The banking industry profited handsomely from these types of loans. No, I think that someone deliberately wanted to pin something on Spitzer because of the trouble he had been causing Bush&Co and its associates on Wall Street who had profited so much from these loans. Spitzer was viewed as a pest and had to be stamped out.

When one thinks about it the money transferred by Spitzer from one bank to another wasn't that large and may have otherwise gone unnoticed. As Alan Dershowitz, the Harvard law professor and one time teacher of Spitzer, pointed out to The Times of London, "The movement of the amounts of cash required to pay prostitutes, even high-priced prostitutes over a long period of time, does not commonly generate a full-scale investigation.” The Times added, "Others on Wall Street were wondering whether Spitzer’s financial dealings had been singled out for scrutiny as revenge for his past prosecutions." Spitzer over the years had prosecuted and won against a number of Wall Street financiers.

There are several theories as to why Spitzer got himself into the sexual mess he did. One is that he got so involved in the prostitute business when he prosecuted it as New York's attorney general that he got ensnared in it. He got caught in its vortex. Another explanation is that his arrogance got the better of him, believing that he, as a 'captain of the universe’, was above the law and couldn’t be caught. Spitzer was also a powerful politician. It has been theorized that some powerful men feel so guilty about wielding so much power that they feel the need to be subservient and dominated. With a prostitute they could fulfill that need.

Another theory is about Spitzer being an 'alpha male'. I tend to agree more with this one. The theory goes that alpha males are so work and career oriented that that they are incapable of intimacy. This lack of intimacy hinders and damages their sexual relation with their partner because they avoid and shun closeness. Nevertheless, sex in such a person is still desirable, but with a prostitute it can be had without being intimate.

At first blush the crime committed by Spitzer, if it was a crime, is quite off-putting and serious. But in comparison, his crime is no match to the crimes Bush has perpetrated against the American people, from lying to them about Iraq, to administrative corruption, to his allowing and enabling the fleecing of America.