[Reader-list] Michael Moore: The Rich Are Staging a Coup This Morning

[Madhumita Lahiri]

I found the Michael Moore piece baffling -- I'm all for universal health insurance, but that will not immediately fix the credit markets. I've pasted a recent wapo article that I feel does a better job of  explaining the situation. Hope this is interesting to list members. Best, Madhumita

Everybody Calm Down. A Government Hand In the Economy Is as Old as the Republic.

By Robert J. Shiller
Sunday, September 28, 2008; B01

It has become fashionable to fret that the current crisis on Wall Street marks the end of American capitalism as we know it. "This massive bailout is not the solution," Sen. Jim Bunning (R-Ky.) warned Tuesday. "It is financial socialism, and it is un-American." It is neither. The near-collapse of the U.S. financial system and Washington's sudden and massive intervention to try to shore it up certainly mark a major turning point, but a bailout would represent a thoroughly American next step for our economic system -- and one that will probably lead to better times.

Americans may assume that the basics of capitalism have been firmly established here since time immemorial, but historical cataclysms such as the Great Depression strongly suggest otherwise. Simply put, capitalism evolves. And we need to understand its trajectory if we are to bring our economic system into greater accord with the other great source of American strength: the best principles of our democracy.

No, our economy is not a shining example of pure unfettered market forces. It never has been. In his farewell address back in 1796, 20 years after the publication of Adam Smith's "The Wealth of Nations," George Washington defined the new republic's own distinctive national economic sensibility: "Our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing." From the outset, Washington envisioned some government involvement in the commercial system, even as he recognized that commerce should belong to the people.

Capitalism is not really the best word to describe this arrangement. (The term was coined in the late 19th century as a way to describe the ideological opposite of communism.) Some decades later, people began to use a better term, "the American system," in which the government involved itself in the economy primarily to develop what we would now call infrastructure -- highways, canals, railroads -- but otherwise let economic liberty prevail. I prefer to call this spectacularly successful arrangement "financial democracy" -- a largely free system in which the U.S. government's role is to help citizens achieve their best potential, using all the economic weapons that our financial arsenal can provide.

So is the government's bailout a major departure? Hardly. Today's federal involvement offers bailouts as a strictly temporary measure to prevent a system-wide financial calamity. This is entirely in keeping with our basic principles -- as long as the bailout promotes, rather than hinders, financial democracy.

Which, so far, it seems to. Congressional critics may be right to demand more help for homeowners and more accountability for Wall Street blunders, but the core idea of the plan is sound: to protect the financial infrastructure. Remember, Fannie Mae used to be a government entity, and by taking it over, the federal government is merely returning to the status quo ante. The measures to take toxic debts off the hands of financial and insurance firms are intended only to deal with a crisis, not to transform our financial system. The proposals do not represent any landmark change in the American way of prosperity. Everyone should take a deep breath. Changing our thinking about finance does not mean abolishing capitalism, but it does raise questions about what the changes mean.

Whenever the public endures a crisis, ordinary citizens start to wonder how -- and whether -- our institutions really work. We no longer take things for granted. It is only then that real change becomes possible.

So the current crisis got me thinking back to 1990, the year before the collapse of the Soviet Union, when I worked with two Soviet economists, Maxim Boycko and Vladimir Korobov, to try to understand the different belief systems in their country and mine. We carried out identical surveys in Moscow and New York, comparing answers about fundamental notions of capitalism, and published our results in the American Economic Review. We expected to find that the Muscovites possessed scant understanding of how capitalism really works. But we found that they actually understood free-market dynamics better than the New Yorkers. We concluded that the Muscovites had proved more savvy precisely because their system was in crisis -- something that encouraged them to rethink their most fundamental notions.

We Americans are going through a similar change right now. We no longer think that our financial future will be determined by securities brokers or inhumanly large investment banks. The most important question is not, "What form should these temporary bailouts take?" It is, "What are we really learning from all this?"

We should be learning a great deal. The current crisis offers us a singular opportunity to reevaluate fundamentally the safety and permanence of the master financial institutions that we have come to take for granted as part of the national economic landscape. Over these past few turbulent weeks, we have learned that the monolithic investment banks are mortal: They are mostly gone, or absorbed by other banks. We have learned that what we called "cash" and considered perfectly safe is not necessarily so secure.

So we are groping around for something else to trust. We should be open to thinking about a new set of financial arrangements -- a better financial democracy -- that can restore the public's faith in the economic principles espoused by Washington more than two centuries ago. Here are some key features:

1. Handle moral hazard better. The term "moral hazard" refers to the pernicious tendency some people have of failing deliberately if they think it's advantageous to do so. Moral hazard is used to justify teaching people a lesson for their failures -- the same logic that once justified "debtors' prisons." (Yes, we really did have them.) But over the course ofthe 19th century, Americans grew more realistic about laying blame for economic catastrophes and started eyeing other parties besides the hapless and the bankrupt. The demise of the debtors' prisons reflected Americans' changing ideas about the meaning of a contract.

By rescuing Wall Street tycoons who succumbed to the lure of an irrationally exuberant housing bubble, the bailouts today do pose something of a moral-hazard problem. But we can more than repair it by defining a new generation of financial contracts, with a continuation of our evolving thinking about moral hazard, reflecting greater enlightenment, greater understanding of human psychology and the means to deal with financial failure. For example, I have proposed replacing the conventional mortgage with what I call the "continuous-workout mortgage" -- one that would spell out in advance the conditions under which borrowers would see their debt reduced in a rocky economy. These conditions would be designed to minimize moral hazard: The borrowers would not be able to make the debt reduction happen deliberately.

2. To limit risks to the system, build better derivatives. Some of today's derivatives -- the complex bundles of toxic real estate loans that helped drag Lehman Brothers down -- turned out to be "financial weapons of mass destruction," as the legendary investor Warren E. Buffett warned back in 2003. The problem isn't derivatives per se but a certain kind -- derivatives that spun a massive web of over-the-counter contracts, relying on the solvency of countless banks and other institutions, and ultimately endangered the entire financial system when they fell apart. Some kinds of derivatives, such as those maintained by futures exchanges using procedures that effectively eliminate the risk that the other party in the agreement will default, are more useful -- and far safer -- than others. It is high time to redesign derivatives to avoid what Buffett called "mega-catastrophic" risks.

3. Trust markets, not Wall Street titans. If institutions can be said to have charisma, such giants as Lehman Brothers and Merrill Lynch certainly had it in spades. But these firms proved not to be the sole source of financial intelligence. They were merely meeting places for smart, financially savvy people -- and for some reckless folks besides. We need to learn to trust people and markets rather than institutions. This means developing better markets that will allow us to hedge against the kinds of risks that dragged us into this crisis, such as real estate gambles.

4. Ideas matter. Maybe next time, we will listen more closely to financial theorists who think in abstract, general terms. Consider the Long-Term Capital Management debacle in 1998, when the Federal Reserve leaned on financial titans to rescue a massive hedge fund and stave off global fallout. Lots of people hold that the moral of the LCTM story was the failed thinking of two of the firm's founders, Robert Merton and Myron Scholes, both of whom were Nobel Prize-winning financial theorists. In fact, the collapse of LTCM was largely due to the overconfidence of bond trader John Meriwether and some of his other LTCM colleagues, who were gambling in the markets. The disgraced Merton has been working for the last decade trying to build better risk-management systems, mostly to little avail. Maybe he will be heard now. People still seem to want to trust businessmen who have made bundles and have a huge investment bank behind them, rather than listen to experts who are thinking about the fundamentals of risk management. We would have been better off this month if we'd been ignoring the former and listening to the latter.

These and other improvements in the contemporary economy -- a better financial information infrastructure (so that people can gauge risks better), broader markets (so that people can manage big risks, such as real estate loans) and better retail products (such as continuous-workout mortgages) -- will need to be discussed, debated and delivered in the days ahead. If we move smartly, Americans can have a better, more robust financial democracy along the lines of the system envisioned by our first president. The current crisis does not mean the end of American capitalism. But if we are lucky, it will mean an important step in its evolution.

robert.shiller at yale.edu

Robert J. Shiller is a professor of economics at Yale and chief economist of MacroMarkets LLC. His books include "Irrational Exuberance" and, most recently, "The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do About It."

-----Original Message-----
From: reader-list-bounces at sarai.net [mailto:reader-list-bounces at sarai.net] On Behalf Of Naeem Mohaiemen
Sent: Monday, September 29, 2008 6:30 AM
To: reader-list at sarai.net
Subject: [Reader-list] Michael Moore: The Rich Are Staging a Coup This Morning

From: Michael Moore

Friends,

Let me cut to the chase. The biggest robbery in the history of this
country is taking place as you read this. Though no guns are being
used, 300 million hostages are being taken. Make no mistake about it:
After stealing a half trillion dollars to line the pockets of their
war-profiteering backers for the past five years, after lining the
pockets of their fellow oilmen to the tune of over a hundred billion
dollars in just the last two years, Bush and his cronies -- who must
soon vacate the White House -- are looting the U.S. Treasury of every
dollar they can grab. They are swiping as much of the silverware as
they can on their way out the door.

No matter what they say, no matter how many scare words they use, they
are up to their old tricks of creating fear and confusion in order to
make and keep themselves and the upper one percent filthy rich. Just
read the first four paragraphs of the lead story in last Monday's New
York Times and you can see what the real deal is:

"Even as policy makers worked on details of a $700 billion bailout of
the financial industry, Wall Street began looking for ways to profit
from it.

"Financial firms were lobbying to have all manner of troubled
investments covered, not just those related to mortgages.

"At the same time, investment firms were jockeying to oversee all the
assets that Treasury plans to take off the books of financial
institutions, a role that could earn them hundreds of millions of
dollars a year in fees.

"Nobody wants to be left out of Treasury's proposal to buy up bad
assets of financial institutions."

Unbelievable. Wall Street and its backers created this mess and now
they are going to clean up like bandits. Even Rudy Giuliani is
lobbying for his firm to be hired (and paid) to "consult" in the
bailout.

The problem is, nobody truly knows what this "collapse" is all about.
Even Treasury Secretary Paulson admitted he doesn't know the exact
amount that is needed (he just picked the $700 billion number out of
his head!). The head of the congressional budget office said he can't
figure it out nor can he explain it to anyone.

And yet, they are screeching about how the end is near! Panic!
Recession! The Great Depression! Y2K! Bird flu! Killer bees! We must
pass the bailout bill today!! The sky is falling! The sky is falling!

Falling for whom? NOTHING in this "bailout" package will lower the
price of the gas you have to put in your car to get to work. NOTHING
in this bill will protect you from losing your home. NOTHING in this
bill will give you health insurance.

Health insurance? Mike, why are you bringing this up? What's this got
to do with the Wall Street collapse?

It has everything to do with it. This so-called "collapse" was
triggered by the massive defaulting and foreclosures going on with
people's home mortgages. Do you know why so many Americans are losing
their homes? To hear the Republicans describe it, it's because too
many working class idiots were given mortgages that they really
couldn't afford. Here's the truth: The number one cause of people
declaring bankruptcy is because of medical bills. Let me state this
simply: If we had had universal health coverage, this mortgage
"crisis" may never have happened.

This bailout's mission is to protect the obscene amount of wealth that
has been accumulated in the last eight years. It's to protect the top
shareholders who own and control corporate America. It's to make sure
their yachts and mansions and "way of life" go uninterrupted while the
rest of America suffers and struggles to pay the bills. Let the rich
suffer for once. Let them pay for the bailout. We are spending 400
million dollars a day on the war in Iraq. Let them end the war
immediately and save us all another half-trillion dollars!

I have to stop writing this and you have to stop reading it. They are
staging a financial coup this morning in our country. They are hoping
Congress will act fast before they stop to think, before we have a
chance to stop them ourselves. So stop reading this and do something
-- NOW! Here's what you can do immediately:

1. Call or e-mail Senator Obama. Tell him he does not need to be
sitting there trying to help prop up Bush and Cheney and the mess
they've made. Tell him we know he has the smarts to slow this thing
down and figure out what's the best route to take. Tell him the rich
have to pay for whatever help is offered. Use the leverage we have now
to insist on a moratorium on home foreclosures, to insist on a move to
universal health coverage, and tell him that we the people need to be
in charge of the economic decisions that affect our lives, not the
barons of Wall Street.

2. Take to the streets. Participate in one of the hundreds of
quickly-called demonstrations that are taking place all over the
country (especially those near Wall Street and DC).

3. Call your Representative in Congress and your Senators. (click here
to find their phone numbers). Tell them what you told Senator Obama.

When you screw up in life, there is hell to pay. Each and every one of
you reading this knows that basic lesson and has paid the consequences
of your actions at some point. In this great democracy, we cannot let
there be one set of rules for the vast majority of hard-working
citizens, and another set of rules for the elite, who, when they screw
up, are handed one more gift on a silver platter. No more! Not again!

Yours,
Michael Moore
MMFlint at aol.com
MichaelMoore.com

P.S. Having read further the details of this bailout bill, you need to
know you are being lied to. They talk about how they will prevent
golden parachutes. It says NOTHING about what these executives and fat
cats will make in SALARY. According to Rep. Brad Sherman of
California, these top managers will continue to receive
million-dollar-a-month paychecks under this new bill. There is no
direct ownership given to the American people for the money being
handed over. Foreign banks and investors will be allowed to receive
billion-dollar handouts. A large chunk of this $700 billion is going
to be given directly to Chinese and Middle Eastern banks. There is NO
guarantee of ever seeing that money again.

P.P.S. From talking to people I know in DC, they say the reason so
many Dems are behind this is because Wall Street this weekend put a
gun to their heads and said either turn over the $700 billion or the
first thing we'll start blowing up are the pension funds and 401(k)s
of your middle class constituents. The Dems are scared they may make
good on their threat. But this is not the time to back down or act
like the typical Democrat we have witnessed for the last eight years.
The Dems handed a stolen election over to Bush. The Dems gave Bush the
votes he needed to invade a sovereign country. Once they took over
Congress in 2007, they refused to pull the plug on the war. And now
they have been cowered into being accomplices in the crime of the
century. You have to call them now and say "NO!" If we let them do
this, just imagine how hard it will be to get anything good done when
President Obama is in the White House. THESE DEMOCRATS ARE ONLY AS
STRONG AS THE BACKBONE WE GIVE THEM. CALL CONGRESS NOW.

http://www.visi.com/juan/congress/
http://my.barackobama.com/page/s/contact2
http://truemajority.wiredforchange.com/event/distributedEventCalendar.jsp
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