Back to the Retrofuture.

I think I’ve belaboured the efforts of the current President of the United States enough – a thankless task in many ways. (His or mine?) One last comment on that topic – the Ayatollahs have solved one conundrum for him. He now has no need to distance himself quite as far from the religious fanatic Benyamin Netanyahu because the equally unbalanced Ahmedinijad has destroyed his regime’s credibility with every observer and policy wonk who felt Iran deserved a fair shake. Time to put engaging Iran on the back burner.

Did you ever wonder how much a gold sovereign bought in 1700 – or a French Livre, or a Piece of Eight? How much was a doctor’s visit or a lawyer’s fee? Having puzzled over the relative values of currencies through the ages, I have to welcome a new book from the historian Robert Allen, Oxford professor of economic history. Entitled  “The British Industrial Revolution in Global Perspective” it examines the economic underpinnings of the gradual developments in technology that blossomed into the Industrial Revolution.

Those who are familiar with my Iskander series retrofuturist novels will know this is a row I’ve also hoed at times – if in fiction. How do the prices and values of money in history relate to the events? Where Allen points out that strictly commercial factors such as pricing and capitalisation enabled the early inventions to last long enough to prove their worth, I picked my technologists to have knowledge some 400 years ahead of the Gaians of my alternate Earth. Once they had the venture capital to hand they soon demonstrated the superiority of every product they sold.

While Allen apparently credits free trade and imperialism as the factor that provided the necessary store of investment capital (aren’t they one and the same?) I had my Iskanders outright steal it – al la Hawkins, Drake, Henry Morgan and Admiral Vernon – by finding a pretext to attack the ports where Potosi silver was exported. This naturally plunges them into a feud, if not undeclared war, with the Empire who believed their own stealing the silver from the natives was a legitimate theft. Again, the Spaniards in our world considered their murder and conquest of the S. Americans to be more legal than the actions of other Europeans to part them from their ill-gotten gains.

While I haven’t detailed it in any of the novels so far, I do mention in The Wildcat’s Burden (due for release in September) that Iskander is conducting diplomatic discussions with the Empire – now no longer an open enemy – to arrive at a figure for reparations they might pay to wipe the slate clean. I suggest here, that the Iskanders expected the time would arrive that they would be financially secure and able to make peace with the Emperor over this little bit of diplomatic inconvenience. International politics a cynical sham? We calls ‘em as we sees ‘em.

Professor Allen also credits the Black Death of the 14th century with disposing of surplus English population and allowing the survivors to flourish among a more generous division of resources. The result was that the English of the 17th and 18th centuries were not as impoverished as the rest of Europe and had the money and better trained labour force to work with the new inventions. Also, the use of coal to heat London homes was caused by this relative prosperity, and it in turn developed the coal mining industry on a sounder economic footing when its product was needed to fuel the furnaces of the new steam engines.

My European Gaia – approximately equivalent to 1670s England – similarly has a developed coal trade from the north of Lingdon to the city, which is extended to the Iskander installations. Sweden (aka Tarnland) is deficient in metallurgical and steam coal – which was why its good magnetite ores are shipped to Germany etc, where the local coal is used to turn them into steel.

At least one reader has complained that the Iskander developments of steel and steam are starting the inevitable progression to pollution, carbon dioxide overload, and global climate change. There is one big difference between Iskander’s developments within a world population of about 500 millions and our circumstances. The Iskanders already understand the technologies beyond the fossil fuel age and once they have created the infrastructure – the trained people and the plant – they will be able to develop out of the carbon trap before the world population reaches its first billion. There is really nothing bad about burning fossil fuels – only by doing it inefficiently and by six billion people. Henrik Matah intends to develop cheap and clean public transportation based on fusion generated electricity before that monster – the automobile – can establish itself.

Why Will it be a Tragedy?

Our protagonist of the Great Crash novel, Follow the Money, Barack Obama, has tied his star to a very weak and unreliable vessel. While he is making noble efforts to build a new way of running a GM kind of country, he has taken on too much for any one person to achieve. The compromised individuals he has gathered around him and appointed to his cabinet may well be the best he can find – but they are not adequate. I watch, breathless, for signs of his success in such a noble venture, but I cannot possibly be optimistic.

Leaving aside all the foreign policy disasters that threaten to drown him – the legacy of more than thirty years of cynical imperialist meddling – one has only to focus on the economic problems to recognise what a hopeless task he has taken on. As the excesses of credit for the last twenty years have turned the western economies into bubble economies, so the great leveler – debt – has punctured them. His administration officials are busy trying to cure a debt problem by creating huge new debts – they cannot possibly succeed.

The supposed signs of recovery in the stock markets are beginning to fray around the edges –as those observers who identified it as a bear rally forecast. That is not the tragedy. The gyrations of stock markets are no reliable indicator of the future or of the health of the real economy. As they have recently been too optimistic they will soon tumble headlong in fear and become too pessimistic. The US can recover but not by going farther into debt – the bubble economy has been built on credit and as I quoted here a couple of weeks ago – the Chinese have cancelled the US’s credit card.

Who will suffer from this? No doubt we all will if the Benanke-Geithner plan continues and builds up a huge inflationary overload. Welcome to the Weimar Dollar and hyperinflation when the monetarist policies get away from them. Monetarism needs to be buried deep – with a stake through its heart, and Keynsianism will likely prove incapable of correcting the problems that it created.

But let us say the policy of printing dollars works. Since it is already impossible for the US to repay its current debts it has only one way out of the jam – printing almost worthless dollars to pay off the creditors with. So – who suffers most? The creditors, of course, as well as all the generations who will follow the current profilgate scoundrels into a severely compromised future. That means your kids and grandkids – and their kids.

The only source of value in human society is people. Not dollars, not oil, not capital, not gold – only well educated, well adjusted, healthy and wise people. And lord knows – the present generations have proved themselves incapable of raising them. Maybe I should repeat that for those who are so quick to dismiss the idea and prefer to cling to their current idols. People are the only renewable resource we have, and are the only measure of value in human society. Bankrupting them – before most are even born – is a crime commited against posterity.

That’s why Obama cannot possibly be any more than a hero of tragedy – another Othello – because if he succeeds, he fails.

Dream Realm Awards

Hi All:                                                                    

Just a quick note — my retrofuturist novel “Arrival” has been selected as a finalist in the 2009 Dream Realm awards for 2009.

I will be able to add the logo to this site and be able to continue regular posts here when I leave the city this week.

Now for the Good News.

In fiction, and especially in tragedy, the plot cannot be unidirectional – the protagonist must have a fighting chance to win, so the reader roots for him/her right up to the last line. The nemesis also is not certain of victory. So for this look at the plot of our novel “Follow the Money” about the great crash of 2009, we want to suppose our hero, Barack Obama (an Othello of tragedy if ever there was one) comes out smelling like a rose. At least until the final act.

You may wonder how, after I have posted two months worth of naysaying on this blog, I can possible point to the possibility of an ending that promises hope for the future. The simplest way is to pinpoint the hopes and manipulations of the worst of the antagonists and have our protagonist set them up for a fall. The Cairo speech (even though it was only words, and means nothing without the appropriate actions) has hinted that our man has the moxie to strand his opponents out on a limb – and hopefully to cut it off from under them. (This last has yet to be done, but I wait expectantly.)

So we might believe the financial speculators and creators of all the toxic inventions in the derivatives box will want to see the financial rules and markets left untouched to build up into a bubble once more (or twice, thrice, or a hundred times more). Their only interest being to use the market to get rich without actually working for it. They must be foiled and completely destroyed. Since it is unlikely that spineless Democrats in Congress and the Senate will ever have the integrity to pass legislation that accomplishes this plainly and in full public view, our protagonist will have to be really devious in creating an outcome where this happens as a result of the market’s own operation.

The rich – and I mean the super rich, not you hopeful fools who still hope to make your first million – have been allowed to grow immensely richer since the last stock market crash and depression from 1929 into the 30s. You may well believe that the billionaires at the top 2% of our economic tree who own 50% of the wealth will want to ensure that their interests will be protected and their tax shelters and non-existent wealth taxes will remain as active for them in the future, as they have been through all of the last 10 administrations. For society to recover on a new and more positive track – they must be totally disappointed. As the world learned when Revolutionary France sent all the super rich to the guillotine – society can bumble along without them no less efficiently than it did with. (The French Revolution was the precursor to most of our Western freedoms.)

To expand on that – it is axiomatic that capitalist society depends upon its ‘consumers’ (how I hate that word) to not only produce the goods and services that bump up GDP, but they must be wealthy enough to be the purchasers of those goods and services. This no longer happens in the US and other economies where the top few on the economic pyramid grasp the bulk of the wealth for themselves. The result is an unstable economy where consumption has to be financed by credit – read debt – and huge unemployment and hardship is caused when the equity dries up. As it has done with the collapse of the US and UK house price bubbles. It would be wildly utopian to imagine Washington would strike out on a new path to increase the wages and lower the taxes of citizens (now there’s the inclusive word that has dignity) who work, save, invest, and produce the wealth of society, but somehow the dead wood within the Beltway must be tricked into agreeing to exactly that.

I’ll end this post with a little homily. In Britain, towards the end of the Second World War, the people who had endured the hardships and the sacrifices of six years as cogs in the huge war machine were invited to vote in a General Election. To the immense surprise of almost everyone, including that of those kicked out of government, the war leader who everyone presumed was a sure winner, Winston Churchill and his Conservatives, lost to the Labour Party under the completely uncharismatic Clement Atlee.

To those who had served under the British system of privilege and the old-boy network for those years it was no surprise. The vestiges of that parody of democracy were still evident fifteen years later when I did my stint in the army, but it had been cut off at the knees and was merely taking time to die. (Until Thatcher gave it artificial resuscitation.) The biggest millstones that the socialist government took from around the necks of the British were three, and they were all undercut by one measure. Pre-war Britain was still a fief of the wealthy land owning class – the lords and ladies – who had been weakened by the First World War but not knocked out for the count. They owned a huge percentage of the land and of the infrastructure that people – and the new capitalists – needed to control in order to build new industries.

This archaic hold-over was hewn down by the huge death duties passed into legislation by the Labour dominated Parliament. In order to pay these assessments upon the deaths of Lord Soandso, and the Earl of Somewherelse, these holdings that sometimes stretched back to Norman times had to be liquidated. I saw the changes in my own life as I grew up. The first noticeable effect was the transformation of the drab villages around us – where everyone used to be a tenant of the local aristocrat – when the tenants were given the opportunity to buy and improve their dwellings. The second was an expansion of the freedom to trade land as freehold property instead of leasehold (buying land before 1945 was a case of buying a lease term of some years on the land, which remained the property of the aristocratic estate). This freed up more real estate for development. The third was the Butler Education Act which opened all higher education to low income students who were bright enough to win scholarships. I owe my own education to this act – as do almost all those educated there in the past sixty years – the Stephen Hawkings and the  Francis Cricks, as well as a significant number of the engineers who flooded into US industry after 1955..

Death duties are the godsend of society. Set at the appropriate level they are the rejuvenator of a moribund economy and the resuscitator of a moribund establishment. Everything in nature dies to make room for the new and the healthy – societies need this too.

Double Dragon Authors do it Again

I Share in an Award.

The authors with Double Dragon Publishing have produced four – so far – anthologies of their short stories. These collections have all won awards or recognitions of excellence. I was privileged to have short stories in Twisted Tales II (Time on Our Hands) and Twisted Tales III (Pure Fear). This last named was recently given an Honorable Mention as a finalist in the ForeWord Magazine Book of the Year Awards.

I certainly cannot claim more credit than any of the other contributors, but I feel that I held up my end – particularly as I don’t consider myself a short story writer. The other authors in Pure Fear are Kim McDougall, Marilyn Peake, John Klawitter, Geoff Nelder, J Richard Jacobs (also Ed.), Ann Dulhanty, Ginny Davis, Biff Mitchell, K L Nappier, Brandon Berntson, and A J Chaboya.

Usually, I cannot satisfy my fictional images with less than 90,000 words, so writing something around 2500 requires an extra effort for me. Although both anthologies I had stories in won recognition – Time on our Hands won the Eppie for anthology last year – I decided not to contribute to the latest edition. My stories worked to a degree, but I feel I’d need to go back to the writing school in order to produce something a cut above, and I’m more at home with novels.

Anyway – congratulations to us – especially the other authors represented.

Misallocation of Everything

Following our supposed novel of the 2007-8 great crash as an epic tragedy with Barack Obama as Othello we go next to the underlying causes of what happened and compare his administration’s policies to rectify things with what should be done. So before we proceed with the plot – what he does once he gets all the secret memos that first day in the White House and acts – we need to look at some neutral person’s explanation to bring ourselves up to speed.

Why are investment communities around the world reducing their purchases of US Treasury bonds – do they fear something the administration is doing? In order to structure the plot of our possible novel “Follow the Money” we need to find out.

First we might ask Doug Noland, a market strategist for the Prudent Bear Funds.
“It is more certain, however, that the great benefits commanded to our economy and markets over the decades from governing the world’s reserve currency are drawing to an end. Our policymakers still believe they can inflate credit and manipulate interest rates – and not have to pay a price for it. But the new global reality may be that currency markets will protest against massive US fiscal deficits and activist monetary policy, while global markets come to dictate US market yields. Over the past two weeks, we have seen the dollar and US Treasuries/MBS come under significant pressure. Is this the beginning of global markets disciplining Washington?”

The following comes from another article in Asia Times Online. This one by W Joseph Stroupe, a strategic forecasting expert and editor of Global Events Magazine.

“Bigger trouble looms, regardless of this Wall Street rally and other “green shoots”. Geithner’s toxic asset removal plan hasn’t worked yet, and it and other government plans face huge obstacles. Fears over the size of US debt are swiftly mounting, while China has “cancelled our credit card”, according to US Senator Mark Kirk, referring to the fact that China’s investors have radically slowed their purchase of US Treasury bonds in the past three months.”

“Income-based model versus asset-based model
At fundamental issue here is the new asset-based economic/financial model (as contrasted with a traditional income-based model) which the US and Britain in particular have progressively adopted over the past couple of decades, and whether that new model is really workable and revivable in the light of its massive collapse that began with the emergence of the subprime crisis in late July of 2007.

The US economy has rapidly converted from a traditional, income-generating machine to a so-called “new economy”, an asset-inflating one. An income-generating machine derives wealth from the production and sale of goods and services, while an asset-inflating one derives wealth from accelerated asset appreciation, or targeted inflation of assets – in other words, by the creation of serial asset bubbles. In this new model, traditional wealth generation takes a back seat to “paper” wealth generation via serial asset bubble creation.

In the traditional income-based economic model, the financial sector serves to support the real economy, where the vast bulk of real income is generated, by providing credit and other traditional financing services aimed at sustaining existing and fostering new income-generating business ventures, and supporting consumer spending via traditional credit services. The income generated in the financial sector is not of major proportions, but is a distant second to that generated in the real economy.

The asset-based model is radically different. In this new model, innovative and grandiose opportunities arise for the generation of gigantic sums of “paper” wealth from within the financial sector itself, thanks to what can only be called the fostering of an incestuous relationship between government and Big Finance.”

In the pre-Reagan/Thatcher/Mulroney days the Western economic model was one where we made things if we needed them. We saved up for them (at least in part) if we wanted to buy them, and we cautiously built up our nest-eggs for a possible rainy day. That all went by the board when the three irresponsible idiots named above went to work.

We no longer needed to dig coal, or smelt iron, or build things in factories – we sent all that overseas for others to do the dirty work. We wouldn’t want to soil our manicured hands or wrinkle our Armani suits, would we? If we wanted to become rich we merely found enough suckers to buy our invented derivatives and lived off the proceeds. It worked for awhile, but now the suckers and the poor devils in the dirt, working for peanuts, are wising up.

What have we done with our greatest resource –  the manpower, woman power, and brain power of our recent generations? We have misallocated it all.

A couple of examples. European and Japanese autos have become technologically far superior to those built in North America and there is one prime reason for that. While the others employed their most brilliant and creative technology graduates in automobile engineering, the US shunted them into another industry that produces nothing of social value – the military-industrial complex. Instead of producing super-reliable energy efficient autos they are creating computer game military hardware that can murder around the world remotely from the safety of Langley, Virginia. Today, the bright and ambitious never even study in disciplines where work is done and things made – all they know is how to code computer games, to dream up even more exotic ‘investment’ schemes, and to produce ever more complex and fragile IT systems.

Why hasn’t the Obama administration taken steps to put our society back on the rails – employing our graduates to build, to create, to save? Because the people he has appointed wouldn’t know what to do with such graduates – even if such appropriately trained ones existed. If we, the public, are looking for some bright and creative brains to pull our societies out of this mess – we might have to look to someone else.

So, while Othello is spending his effort at shoring up the last gasp of the asset model with every phoney dollar he can print, the underlying rot is getting worse. What likely time-scale will this work out over? Everyone whose forecasts seem credible admit that this is almost impossible to predict. The current bear rally may last until the end of 2009 and everyone credit the US administration with saving the ‘world’, but down in the basement the termites are still munching away. If, under the worst possible scenario, Othello manages to create a new phony dollar bubble so that asset prices once again attain completely unrealistic heights – the whole shebang may not crash again for five years or more. But that crash will be an even bigger disaster than this. That’s great for a novel – a humdinger of an ending – but not so good for the people left to pick up the pieces.

Can’t Win for Losing

I had planned to start the Obama version of our projected great crash novel, “Follow the Money” – the tragedy –  with a look at the new president’s first moves to correct the problem, but a far better analyst than myself has posted a detailed list of the administration’s initial failures. It can be found on Tom Dispatch at http://www.tomdispatch.com/post/175075/andy_kroll_six_ways_the_financial_bailout_scams_taxpayers and on Salon.com at http://www.salon.com/opinion/feature/2009/05/27/kroll/index.html?source=newsletter.

That leaves me with the option of either repeating what Andy Kroll says or taking a slightly different tack. I’ll choose the latter.

Most media sources recently have become cheering sections for bailout plans and have taken the present upward swings of stock markets (a bear rally, remember) as a sign that the disaster is at an end. For those of us who have noticed that all the millions thrown out of work are still unemployed, that a great many debts in residential and commercial real estate have not yet come up for rate re-setting, that many people are borrowing off their credit cards to pay their rent and buy their groceries, that companies and banks are still declaring bankruptcy, and that many of the most qualified economists are warning that the worst is yet to come, I think it may be in order to look at the administration’s actions in terms of popular but mistaken beliefs.

Firstly, the stock market is not a good indicator of the health of society. It is not filled with the best and brightest of an educated society – these are the idiots that bid up the credit bubble that just crashed and caused the oncoming depression. They also bid up all the bubbles before this – the dot com, the speculative excesses of 1987, and all the rest – and have now piled on the government bail-out bubble of printing trillions of phantom dollars to rescue the so-called investors whose wealth is imperiled by the asset price deflation. The “Wisdom of the Market” is the biggest snake oil pitch since the Devil handed Eve the apple. The market is the abode of the largest collection of fools and swindlers the world has ever known.

President Obama, the bit between his teeth and eager to leap into the role of tragedian has lavished trillions of taxpayer dollars on the bleeding hearts and squeaky wheels on Wall Street. He devotes great attention to the 19 biggest banks that serve the investment community while ignoring the thousands of smaller banks where ordinary Americans keep their savings. He has allowed his administration to underwrite the investments (speculations) of any petty crook who owns a bank, a hedge fund, insurance or financial company – and every sharp eyed market operator out in the bushes – in distressed assets that guarantees them the lion’s share of any profits and uses taxpayer money to backstop any losses. This guy really must have his heart set on the Othello role.

“I pray you, in your letters,
When you shall these unlucky deeds relate,
Speak of me as I am; nothing extenuate,
Nor set down aught in malice: then, must you speak
Of one that lov’d not wisely but too well; …”

It’s quite clear that Americans love free-market capitalism far too well, and blind themselves to the faults and weaknesses that wise oversight and direction could ameliorate. That said, I have to acknowledge the Austrian school and admit that wise oversight and regulation has been conspicuously absent ever since the first cave man took out a loan to buy a flint-knapping site. I state categorically that the greatest problem has been the investment community’s selfish interest in blocking adult supervision until their failures have caused it to land on their necks. The plans for regulating market excesses may work wonderfully well, but the time to institute them and have them operate is before disaster strikes, not afterwards.

I cannot leave this without offering a preview of the next plot element of Obama’s tragedy we must look at next time. The British government has printed so many treasury bonds that no one wants – and bought them itself with phantom pounds – that the UK is expected to lose its triple A credit rating. I have to look at our protagonist’s supervision of the US Treasury bond market, that is actually in no better shape, for the first downward turning point of the novel.

Follow the Money … the Tragedy.

Continuing our examination of the plot and cast of our proposed novel on the current financial crisis, we move from last week’s structure of comedy (in the ancient Greek classification) to tragedy. I had a couple of reasons for excluding Barack Obama from consideration as the hero of our Great Crash novel, “Follow the Money”, but now we turn to a consideration of the novel as a classic tragedy, he seems the most appropriate candidate for protagonist. The Greek term tragedy comes from ‘goat-song’ (when goats were used for sacrifice) and one has to admit the man who stumbled into the biggest disaster of the century and inherited it, lock stock and barrel, is the ultimate fall guy. If he’s the goat, he’s at least taking some of the big steps slowly and carefully, so he could yet wind up the hero – even if a tragic one.

As before we look at a simple plot diagram, for tragedy the inverted W. Since I cannot turn this one upside down, I have to ask you to squint at it a bit and imagine it the other way up. The opening of the novel is a deep low point of disaster that waits for our protagonist to begin clawing his way out of the mess. President Obama reaches the White House after the swearing in ceremonies, and before he can kick off his shoes and loosen his tie one of his new staff escorts him to the Oval Office and hands him the Domesday Book – the straight scoop on everything that the Bush administration has done and has kept under wraps. Hoo boy! Talk about ruining your day. Opening page one is the inciting incident.

The name Domesday comes from the book where William the Bastard, King of England in1066, had  complete inventory of his newly acquired kingdom written down. A thousand years later we don’t know how accurate or complete its information was but I doubt its evasions, omissions, and outright lies (bought as bribes to the inspectors) were any worse than a similar record of 2009 State of the USA would be if the incoming president had one to read. Just look at one segment of the US body politic – the movers and shakers inside the Beltway.

The US Congress, where at least 75% of the members have been bought by lobbyists for various public and private interests (as evidenced by the number of Congress men and women who attended the AIPAC convention at the beginning of May) has to vote on every measure the President puts forward. AIPAC is the American Israel Public Affairs Committee, a body founded and operating to advance the interests of a foreign country by manipulating the lawmaking and legislation of another – the US. There’s a Trojan Horse if ever there was one. However, since we are concerned about financial and economic matters instead of foreign policy here let’s just take a quick scan of the pork barreling in what is euphemistically called defence spending, where every multi-million dollar contract is split between a multitude of cities and states to increase the political pressure on any honest lawmaker who might want to curtain wasteful spending. What about the earmarks, where extraneous expenditures are tacked on to congress bills to provide enough pork barrel funds to buy sufficient house votes for the measure to pass? Need I go on?

I don’t have any equivalent Senate estimates but note that the cost of campaigning for election to the Senate rose from about $437,000 in 1974 to $5,300,000 in 2000 – and increase of 1200%. (“Parties and Elections in America” by Louis Sandy Maisel.) This kind of money does not grow on trees, and many political commentators have expressed concern that the financial contributors to these Senators have, at least, bought preferential access to the official. The same pork barreling and earmarking as mentioned for Congress apply similarly to the Senate.

When it comes to picking officials for cabinet and other administration positions, the majority of candidates come through a revolving door of top bureaucrats and experts who divide their time between running companies dependent on government largess and overseeing those same companies as members of a government. An example: Treasury Secretary, Henry Paulson had to decide upon bailing out the top financial institutions in trouble and gave money to Goldman Sachs, who he had previously headed, and denied it to Lehman Brothers who he hadn’t. Without even suggesting wrongdoing it’s clear the expectation that unbiased decisions are impossible jumps out at any observer.

With these considerations, we haven’t even reached as far as the first action of the President after his jaw has bounced back off the floor. Everything he considers a necessary action needs first to be discussed with an army of advisers – most of them insiders of previous administrations or dependent corporations. Not much leeway for change when the only opinions garnered are those grounded firmly in the way things have always been done. Let’s just note that the first hundred days saw a continuation of the Bush administration’s financial remedies – with a few bits of fine tuning. That the failing and unnecessary war in Afghanistan – a vested interest of both the Pentagon and CIA – has expanded to Pakistan and is now a vital Overseas Contingency Operation. The necessary cleansing of the American soul by holding an investigation into the previous administration’s record on torture has to be set aside as ‘divisive’. Guantanamo still doesn’t have its marching orders. And pulling the troops out of Iraq within 18 months has become the renaming of combat units as support troops so they can remain forever.

I’ll need to continue the plot of the novel further next time – we need to give the President a chance to impose more of his promises onto an unwilling Washington – but it’s sure looking a lot like a tragedy to me.

Looking for a Plot…….

Like every other novel, our proposed fictional account of the present economic crisis “Follow the Money” should have a logical and concise structure. Since we haven’t yet identified our hero of the novel, last week I suggested looking at the structure of the unfolding plot to hopefully define who that person should be. Yes, I know, it’s backwards from the way I and every other novelist works.

Let’s start by looking at the simple W novel plot structure. Imagine each corner of the letter, where the lines change direction, represents a turning point in our story. The letter also has a starting and an ending point. The relative height of the turning points define whether they are ‘up’ points (high points) or ‘down’ points (disasters) – three ups and two downs.

For a comedy – using the ancient Greek definition of literature –  we need the upright W so it ends at a high point (happy ending). Following this diagram, we need to begin our comedy with the situation as good as it gets, only to be struck by some disaster – the inciting incident. Things go downhill and later it gets better … and so on. For a tragedy we must turn the W upside down so that it ends at a disastrous low point. An M is the nearest I can get to showing an inverted W with this typeset. A tragedy has to start where the situation is dire, but some manna from heaven arrives to carry the situation upwards to another turn for the worse.

Let’s look at our comedy that starts at the high point on the W – the stock markets are booming, no one’s mortgage has been foreclosed – everything is coming up roses. Ben Bernanke as protagonist surveys his world on March 17th 2007 as he prepares to make a speech at the Federal Reserve Bank of Chicago’s 43rd Annual Conference. What does he say?

“… given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”

(Thanks to Henry C K Liu in Asia Times Online for the quote.) Wow! How could anyone be so wrong? The proverbial sh*t hits the fan three months later. That is our inciting incident – in spades.

The first turning point for the comedy comes after a steady decline into disaster, when the hero seizes control of the situation and, bit between his teeth, and drags it forward to a high point. Ben and his buddy Henry Paulson begin their disaster control control by making borrowing even cheaper, having treasury bonds pay little or no interest, and throwing the taxpayers’ money at the bankrupt banks, rescuing some of their buddies and letting others crash. This is continued after Henry sails off into the sunset with George W Bush and is replaced by Tim Geithner. Tim needs help to throw even more money down the well, because the water of hope hasn’t made an appearance yet, so Ben begins buying Treasury notes with money that doesn’t exist and pretending they both know what they’re doing. Eventually a glimmer of light appears as the water in the well swallows up all the free money. The rate of mortgage foreclosures decreases – wow, that must be good news. Not everyone in the States has lost their job – more good news. People begin buying stocks again and the Dow begins to fly. Whoopee! The crisis is going away – that’s where we sit today.

This is where, when all seems fine and the problem is solved, disaster strikes again and shoots the whole shebang into the basement. The housing bubble hands over to the credit card bubble and the banks are in trouble again because no one can pay their monthly minimums – then the bear market in stocks (which is what my experts all say it is – a false rally) collapses. Now the stock market really hits the skids as Mr Market crushes all the surviving investors and speculators under his heel. You thought your 401(k) looked bad before. You ain’t seen nothin’ yet.

This is where Hero has to make a new decision and find new courage and strength to claw back to the final high point where we find …  Triumph! What’s he going to do to reach this Nirvana? Your guess is as good as mine. What if Ben cannot pull any more strings? They’ve all been pulled. Pay magic money to people so they buy Treasury bills with phantom dollars? Uncover a huge gold mine in Nevada that can pay off all the overseas creditors who expect to have their Treasuries redeemed on schedule? Apply to the World Bank for a loan … oh, sorry, the World Bank operates on real money and it hasn’t been paid either.

I don’t think I’m going to follow Ben Bernanke as hero beyond this point. This novel may have trouble reaching the planned happy ending. Next time we will explore the tragedy, to see if it turns out any better.

Looking for a Hero.

Continuing the search for a protagonist of our Great Crash novel, “Follow the Money” I’m going to look at three competing economic philosophies and their proponents. Finding names is not easy, but a few candidates for our hero are bound to be mentioned here. Pity that most of them are dead.

There are three economics schools in conflict here, and in order to avoid falling too deeply into their convoluted depths, I’ll give a simplistic description of their basis. Keynesianism, named after John Maynard Keynes, is the school advocating the employment of government oversight to manipulate the levers of economic activity and create stability in employment and markets. The so-called Austrian school of Ludwig von Mises disputes Keynes entirely and holds that intervention in the market, rather than the market economy itself, is the driving factor behind economic instability. The Chicago School of Milton Friedman holds that the free market is always right and that monetarist measures by the central bank can perpetuate the boom phase of the business cycle indefinitely, banishing the bust phase from finance capitalism altogether. (Thanks to Henry C K Liu in Asia Times Online for this last info.)

Keynes seems to be the winner of the economics arguments at the moment, because all governments have become converts to Keynsianism almost overnight (except Angela Merkel, the Chancellor of Germany). Taxpayer money is being poured into stimulation schemes to make up for the loss in real wealth and real spending by the great mass of the population (the productivity and savings of prudent people being the root source of all wealth). Time will tell whether Keynes, whose ideas and proposals could well have prevented the crash, will be as effective in correcting it. Keynes would have made a protagonist for a novel, he wasn’t afraid to go out on a limb, nor to fight for his side – as when the US attempted to crush Britain with debt after 1945. Pity that he died in 1946, his health failing from overwork – he would have been a good hero for today. (With input from Prof. Robert Skidelsky’s biography of Keynes.)

A brief description of the other two economics schools follows –
The Chicago School has just been kicked into the garborator for its handling of boom economies since Nixon and Reagan, where a succession of crashes have culminated in this latest greatest one. One must also mention the unfettered Chicago economics pursued in Chile from 1973 to 1989 that resulted in financial failures the very opposite of the economic promises made – as well as having to be kept in operation by a dictator (Pinochet) and his death squads. (This part adapted from Wikipedia)

For the Austrians – F.A. Hayek won the Nobel Prize for his work showing how the central bank’s intervention into the economy gives rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayek’s theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the quacks who blame the market for problems caused by the manipulation of money and credit. The artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end “in a crisis and a slump, and…worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism’.” (The Libertarian view from Thomas E. Woods Jnr.) It was Keynes who arranged for Hayek to take refuge in Britain during WWII and sponsored his election to the British Academy – the great pity was that Keynes died before the two could square off as advocates for their different economics views.

I must admit to an attempt to blend the thinking of the Keynsians and the Austrians to understand what will develop – a systems theory view – the philosophy where one has to accept that all inputs are important factors contributing to the operation of the overall complex system, and that the highest goal is to balance them. Although I do not subscribe to the views of the Libertarians,  their Austrian economics teachers do have a very useful perception of this Great Crash, what caused it, and what will prolong and deepen it. To wit –

Everything our governments are doing to conquer the crash are actually mistaken and are only policies that will worsen the world’s economies for the future. They point out the Brits and Washington are trying to print enough money to buy back the boom economy that was lost in 2007-8 – and that amount of money just does not exist. Their extreme Keynsianism within the financial circumstances of excess debt, caused by the Chicago school, has created a scenario where the measures cannot possibly work. Plenty of conflict here. Perhaps one could introduce a supernatural element into the novel and have the ghosts of Hayek, Friedman, and Keynes fighting to influence their present day successors – a somewhat Kurt Vonnegut novel structure.

The drama and skullduggery at the heart of the present crisis could hardly be improved by adding any fiction to the tale. The financial markets and the banks went out on an insupportable limb with the credit boom, and now the market reverse has destroyed a couple of trillion imaginary dollars the chips should be allowed to fall as they may. Rampant speculation and bad decisions must lead to bankruptcies to free the remaining resources for a recovery, and printing money in such huge quantities is only going to put our children and grandchildren into debt (to pay our bills) for the rest of their lives. Only the incompetents and crooks who profited from the boom speculation are going to profit from the bail-outs.

I have to hold off looking for our living hero in the Obama administration until they scale back their destructive interference in sovereign countries (like Pakistan). Meanwhile I’m leaning quite strongly toward non-American candidates –  Angela Merkel, the German Chancellor, or Peer Steinbrück, the Finance Minister, as the hero of our bust novel. Both seem show enough pragmatism to blend the doctrines of both the Austrians and Keynes – a very difficult feat – that some might think impossible. As for finding a candidate who warned us of the coming crash and was ignored, I have to nominate Henry C K Liu who runs his own NY private investment group and who said in the March 17th 2007 issue of Asia Time Online –
“On the pages of Asia Times Online over the past two years, I have tried to put forth the rationale for the inevitability of a US housing bubble burst, pointing out reasons that the resultant financial meltdown will be much more widespread and severe than has been generally acknowledged.”

You can’t find a plainer warning than that. So far we have gathered material and character possibilities – next time I had better begin to put something of a plot outline together.