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My Head Explodes – Wall Street Steals at the Most Basic Level

This is the mother of all crazy-making stories. If you are prone to high-blood pressure, you should turn away now.

Matt Taibbi strikes again. This time he is pulling at the strings of the ultimate Wall Street theft – institutionalized bid rigging and price fixing as a way to steal every single city, town and state blind.

I just KNEW this would be a scam to get you coming AND going – here are some extra factoids that didn’t make the main article: Not just fixing the the muni-bond markets, but likely the fundamental unit of interest rates (LIBOR!!!) AAHHHHHHHHHHHHHHHHHHHHHHHHHH!

Here is the larger argument in a nutshell: capitalism tends towards monopoly-like structures; often taking the form of a handful of firms that don’t “compete” but rather “collude” to fix prices. The textbook story of widgets and competition is a fiction that only very rarely appears in real life and then disappears as firms consolidate.

So, my question is: How exactly would nationalizing the banking process at key points serve to introduce “inefficiencies” over and above the current system of banking? And as a follow up question: Wouldn’t any inefficiencies (and we’d assume this kind of rapacious theft would be pointless if bankers and middlemen couldn’t capture obscene profits) – to the extent that your mind still believes “markets are magically efficient,” at least these inefficiencies would be captured by government, right? #FFS

Capitalism, once you peel back the mythology, is chock full of “natural monopolies,” rent-seeking by capital (ie moving towards a “tax” rather than wanting to invest and compete) and competition ends in collusion more often than efficiency – often after all out price wars aimed to gut the competition rather than find some magical “natural price floor” or what have you. This makes me angry. Nationalize them. They have outlived their capitalist function. We can still have local banks and credit unions and we can make government policy to increase incentives and end the implicit subsidies to larger TBTF banks. “Innovation” coupled with deregulation and increasing political spending has nearly wrecked us, and oh – by the way – they’ve been flat out stealing from every single town, municipality, school, hospital, city and state in the country for well over a decade.

This is the first truly profound piece of evidence showing just how widespread the Wall Street theft is. If this doesn’t end in a breakup of the banks, mass arrests, and a new organizing set of principles for Wall Street, then it is time for Pitchforks.

Jihad vs McWorld & the Incoherence of Economic Liberty

McWages. The conversion rate of some 60 countries with McDonald’s restaurants and how much their employees get paid – converted to Bic Mac’s Per Hour. Truly a horrifying idea.

“There are three obvious, dramatic conclusions… First, the developed countries, including the US, Canada, Japan, and Western Europe have quite similar wage rates, whether measured in dollars or in BMPH. In these countries a worker earned between 2 and 3 Big Macs per hour of work…  A second conclusion is that the vast majority of workers, including those in India, China, Latin America, and the Middle East earned about 10% as much as the workers in developed countries, although the BMPH comparison increases this ratio to about 15%, as would any purchasing-power-price adjustment. Finally, workers in Russia, Eastern Europe, and South Africa face wage rates about 25 to 35% of those in the developed countries, although again the BMPH comparison increases this ratio somewhat. In sum, the data in Table 3 provide transparent and credible evidence that workers doing the same tasks and producing the same output using identical technologies are paid vastly different wage rates.”

In my head, much of this is less than obvious… But just the idea of converting your wages into Big Mac’s should give you pause.

Reminds me of my first ever course in “political economy,” and this article on Jihad versus McWorld. This is still a pretty good read, even 20 years later:

Just beyond the horizon of current events lie two possible political futures—both bleak, neither democratic. The first is a retribalization of large swaths of humankind by war and bloodshed: a threatened Lebanonization of national states in which culture is pitted against culture, people against people, tribe against tribe—a Jihad in the name of a hundred narrowly conceived faiths against every kind of interdependence, every kind of artificial social cooperation and civic mutuality. The second is being borne in on us by the onrush of economic and ecological forces that demand integration and uniformity and that mesmerize the world with fast music, fast computers, and fast food—with MTV, Macintosh, and McDonald’s, pressing nations into one commercially homogenous global network: one McWorld tied together by technology, ecology, communications, and commerce. The planet is falling precipitantly apart AND coming reluctantly together at the very same moment.

Another way to look at Private Prisons (McWorld). This always makes me sick to my stomach. To take away our fellow citizen’s freedoms, liberty and (sadly) most of their basic human rights, should simply not be done “for profit.” That is a governmental function – one that should be monitored and double checked at every turn, and never ever ever ever should there be perverse economic incentives attached to mass incarceration.

So what’s really behind the drive to privatize prisons, and just about everything else?

One answer is that privatization can serve as a stealth form of government borrowing… We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don’t hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.

Another answer is that privatization is a way of getting rid of public employees, who do have a habit of unionizing and tend to lean Democratic in any case.

But the main answer, surely, is to follow the money. Never mind what privatization does or doesn’t do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. …

Book review.  Same sad tale of Wall Street insiders staffing key government economic positions. Welcome to the High-Finance branch of McWorld.

Scheiber’s book, then, is a dispiriting story both of how Wall Street’s influence on Democrats allowed it to escape paying any appropriate price for the mayhem it inflicted, while escaping effective regulation, and of how Obama failed to confront intransigent Republicans. But what made the Republicans so intransigent? That, in different ways, is the subject of two recent books: Thomas Frank’s Pity the Billionaire and Thomas Edsall’s The Age of Austerity.

Frank focuses on what is, as he says, “something unique in the history of American social movements: a mass conversion to free-market theory as a response to hard times.” It is indeed remarkable. After all, for three decades before the financial crisis American politics and policy had been increasingly dominated by laissez-faire ideology, by the belief that markets—and financial markets in particular—should be allowed to run free. Then came the inevitable crash. But far from demanding a return to stronger regulation, much of the American electorate turned to the view that the crisis was caused by too much government intervention, and rallied around politicians aiming to dive even deeper into the policies that led to crisis in the first place.

How did this happen? Frank’s answer is that it was the bailouts that did it. By doing things Geithner’s way—by bailing out the bankers without strings or blame—the Obama administration left an understandably angry American public with the correct sense that someone was getting away with something. And the right proved adept at exploiting that sense. The famous February 2009 rant by CNBC’s Rick Santelli that started the Tea Party movement was a denunciation of TARP, the big bank bailout passed in the waning days of the Bush administration (although a plurality of voters believe that it was passed under Obama). True, Santelli focused all his ire on a tiny piece of TARP, the planned aid for troubled homeowners (aid that mostly never materialized), not the much bigger aid for banks. But at least he was blaming someone, which the Obama administration was refusing to do.

And by the time Obama began, tentatively, to suggest that some bankers might have misbehaved a bit, it was too late. The entire Republican Party and much of the electorate had settled into a narrative in which the financial crisis of 2008—a crisis that followed fourteen years of hard-right Republican congressional dominance and eight years in which hard-line conservatives controlled all three branches of government—was caused by…too much government intervention to help the poor and, especially, the nonwhite. As Frank writes:

Back to the usual, all-purpose culprit: government…. The feds forced banks to hand out special loans to minority borrowers…and…the entire financial crisis was a consequence of government interference.

So the right has recast itself as the enemy of “Big Business,” not because it’s business but because it’s insufficiently capitalist. No better proof of the currency of that view, Frank points out, than a 2009 Forbes article by Paul Ryan, “Down with Big Business,” where he argues, “It’s up to the American people—innovators and entrepreneurs, small business owners…to take a stand.”

But why did the right do so much better a job than Obama and company of seizing the moment? We’ve already seen part of the answer: Democrats in general, and Obama in particular, were too close to Wall Street to deal effectively with a crisis that Wall Street had created. Frank also makes an important point: in the recent political climate, ignorance really has been strength. You might think that the hermetic intellectual universe the right has created for itself, a kind of alternative reality walled off from any evidence that might contradict faith in the wonders of free markets and the evils of government intervention, would be a liability for the GOP. And it does indeed wreak havoc with actual policymaking. In political terms, however, it has given Republicans unity and certainty where Democrats have been weak and divided.

Euorzone redux. 

Many ‘debt sinners’ in 2007

Right before the financial crisis of 2007-8, few Eurozone countries could claim to have been fiscally disciplined. The figure below shows that Finland, Spain and Ireland could, but not Greece and Italy. Most other Eurozone nations – including Germany – were in the grey zone. Then the wheels of fortune that drive self-fulfilling crises started to spin, leaving us with an impression that strong moral judgments have to be terribly relative.

Figure 1. Public debts in 2007 (% of GDP)

My take is simple and less moralistic: the EU monetary union was ill-designed and poorly implemented. Some countries benefited from McExports, others benefited from McBubbles. Everybody shares some responsibility, but as is always the case in economic matters, those who benefited think themselves smart and moral and disciplined, and refuse to share any collective blame, while also doing everything in their considerable power to blame those who “lost” this round of musical chairs for their behavior and extract punishment rather than chip in on a solution. Ho hum.

Latvia is your austerity success story? This desire to “punish” economic “losers” for bad “moral behavior” is what makes the idea of Austerity so appealing in the face of logic and evidence. The kind of myopic vision that refuses to see the Austerity end game also finds weird little comforts and confirmations for their ideas in places wholly unsuited to providing said evidence. Here is a more accurate picture of Latvia (read the whole thing for a detailed explanation)…

Austerity’s advocates depict Latvia as a plucky country that can show Europe the way out of its financial dilemma – by “internal devaluation”, or slashing wages. Yet few of the enthusiastic commentators have spent enough time in the country to understand what happened. Its government has chosen austerity, its people have not. Finding no acceptable alternative, much of the labour force has elected to emigrate. This is a major factor holding down its unemployment rate to “just” 15 per cent today.

Incoherent “economic liberties.” I’m glad Mike Konczal weighed in on this. His thinking is often very similar to mine (only better organized and articulated)… The question is, essentially, can you enshrine some basic economic liberties in the constitution and expect market forces to spew forth a more just and fair society? Like a “market-based-democracy?”

Now here’s what I mean by incoherent: treating economic issues as a basic liberty tells us nothing about how to address stabilization one way or the other and substantially confuses our intuitions about how to approach the problem – which is one of tradeoffs. The first principle would only allows certain breaches of inalienable economic liberty in order to make the most extensive set of liberties, compatible with similar liberty for others. Now I understand that the regulation of basic liberties (like free speech) is problematic for Rawls, but it dissolves into nothingness here under market democracy.

Basic liberties can’t guide us, because liberty for one comes at the expense of liberty for others. Which economic liberties are we to preserve? The one of the unemployed to work, the entrepreneur to have customers, bosses to their profits or rentiers to their capital income? All of these liberties are part of the economic realities of each agent, and these are fundamentally in tension with each other. There’s no way to view them as “compatible” with each other as a sufficient condition to animate decision-making.

The only way to address them as a matter of policy is to balance them against each other according to some principle. Full employment? Price stability? Deflation and the Gold Standard? Bringing in the concept of liberty prevents the ability to discuss these in terms of tradeoffs, as the whole point of basic liberties is that groups of citizens can’t have their basic liberties traded off each other.

One could say that the only system is thus one of no stabilization. But this is a policy choice, no different than emphasizing full employment at all costs. There’s nothing about mass unemployment that must contain more inalienable liberty than full employment – it is just a different set of actors who benefit. And this would look suspiciously like bringing in one set of arguments for how the economy should work and whom it should work for through the courts, rather than democratically through argument in the public sphere.

This incoherence exists more broadly. For instance, uses of basic liberties aren’t up for being traded. I can’t sell you my vote, and I can’t ask the government to enforce a contract where you’ve sold me your right to a fair trial. Yet economic transactions are all about trading off economic rights. When I sell you my labor I’m accepting serious limitations on what I can do with my labor – it now belongs to you.

This seems less like an intelligent solution than the final rotting of our brains under the all-powerful delusion of “markets are perfect” in every way. Must.Resist.MUST.RESIST.must… Ho hum.

From Fed Accounting Fraud to the Socio-Economic Structure of Anarchy?

Today the links start off crazy like usual, but end up on an optimistic note… I must be coming down with something. The optimism will pass. {{Shrug}}

Here is some top-notch crazy: Did the recent analysis of the effects of the great recession on household wealth leave out a crucial little cluster of oligarchs? It is entirely possible that the Fed left out the top 400 richest Americans from its study. 400 people – what is that, maybe 0.0000035%?? How much influence on the study could 400 people really have?

You might say that the exclusion of 400 people isn’t significant; after all, it’s just 400 people.  How big a difference could that really make?  Well, it turns out, as of 2011, that the top 400 people in America own more than the entire bottom 60% of Americans.  So this is not a trivial exclusion.  The Fed claims in the report that it has a method for adjusting for rich people who don’t respond to their survey.  Why the Fed has just not included the Forbes 400 is not clear, and I’m curious how they adjust for leaving out Mr. Gates and Mr. Buffett and company.  I’ll send an email to the Fed to find out.

Son of a…

Spain is getting hammered. I mean you can say it all fancy if you wanna, but we call this “throwing good money after bad.”

Yields on 10-year Spanish bonds surged to a record high of almost 7.3pc as investors ignored the victory of pro-bailout parties in Greece’s elections.

The closely-watched two-year yield rocketed by 65 basis points in a matter of hours, signalling a near-total collapse of confidence in Spain’s €100bn (£80.3bn) rescue from the EU last week to shore up its banking system.

Cristobal Montoro, the economy minister, warned that Spain is now in a “critical” condition and pleaded with the European Central Bank to act with “full force” to defeat markets hostile to the euro project.

The entire approach needs to be changed, but that would mean admitting to a deep ideological error and backing off of a hostile neo-liberal take over of social democracies… I’m betting with the bond markets here – as in, not gonna happen. A little more depth on Spain:

What is obviously true is that Spain is in trouble, and needs help. Five years after the Global Financial Crisis broke out unemployment is at 25% of the labour force (and rising), house prices continue to fall, non performing loans continue to rise in the banking sector, bank credit to the private sector is falling, and, as Finance Minister Cristobal Montoro said two weeks ago, the sovereign is having increasing difficult financing itself. Hence the bank bailout.

On top of which Spain’s economy is once more in recession, a recession which will last at least to the middle of 2013, even on the most optimistic forecasts, and is in danger of falling into the dynamic which has so clearly gripped Greece, whereby one austerity measure is piled onto another in such a way that the economy falls onto an unstable downward path, as austerity feeds yet more austerity. Spains citizens are naturally nervous, anxious and increasingly afraid. Hardly a dynamic which is likely to generate the kind of confidence which is needed for recovery to take root.

Dark Money. Great little article on campaign finance… I often think that the most dangerous delusion is that we actually & fully “think for ourselves.” I mean, how could money be such a determining factor in elections? Simple – it buys ads and ground troops. That being said, we are damn near selling elections. And the truth is that, from a strictly self-interested and rational (read: pseudo-economic) perspective, driving to the polling place to vote is unlikely to yield you a “return on your investment” because of gas and opportunity costs that can’t possibly be rewarded by the relatively insignificant influence of your single vote. But when you can dump tens of millions of dollars into organizations that already do their own polling and shift attack ads to the districts and states that are closest… That is influence, and it goes way beyond 1 person – 1 vote. Such a sham. I did, however, find something interesting – see below – that was at least marginally hopeful.

For decades, the campaign finance wars have pitted two ideological foes against each other: one side clamoring to dam the flow while the other seeks to open the floodgates. The self-styled good-government types believe that unregulated political money inherently corrupts. A healthy democracy, they say, needs robust regulation—clear disclosure, tough limits on campaign spending and donations, and publicly financed presidential and congressional elections. The dean of this movement is 73-year-old Fred Wertheimer, the former president of the advocacy outfit Common Cause, who now runs the reform group Democracy 21.

On the other side are conservatives and libertarians who consider laws regulating political money an assault on free markets and free speech. They want to deregulate campaign finance—knock down spending and giving limits and roll back disclosure laws. Their leaders include Senate Minority Leader Mitch McConnell (R-Ky.), conservative lawyer James Bopp Jr., and former FEC commissioner Brad Smith, who now chairs the Center for Competitive Politics, which fights campaign finance regulation.

In this ongoing battle, the upper hand shifts regularly. Wertheimer and his allies scored historic victories in the 1970s in the wake of Watergate and again in the early aughts. Yet more recently, the deregulation camp has won a series of court decisions—FEC v. Wisconsin Right to Life, SpeechNow.org v. FEC, and, of course, Citizens United—that have toppled more campaign finance regulations in less time than ever before. Even the Tillman Act’s century-old corporate contribution ban is under siege by conservative interest groups.

Meanwhile, money is flooding the political system like never before. This has forced lawmakers, as many of them will forlornly admit, onto an endless fundraising hamster wheel in which they spend more and more time beating the bushes for campaign cash and less and less time actually legislating. In the 2012 election, experts project spending could top a staggering $11 billion—more than double the 2008 total.

Dark Ages of Politics.

We are witnessing an epochal shift in our socio-political world.  We are de-evolving, hurtling headlong into a past that was defined by serfs and lords; by necromancy and superstition; by policies based on fiat, not facts.

I often think in what I would call “Integral” terms. There is a sense that our worldviews, our culture, politics, media, communications, socio-economic structures and business organization all move in tandem – at least to a certain degree. The problem, as I see it, is that there is no way to realistically accomplish the non-hierarchical vision of the anarchists – at least not yet… The libertarians are naive about their vision of individualism. You simply can not dismantle the state. But the state could be transformed, perhaps. I read a Hayek essay the other day, and came away with a few points:

  • His idea of “emergent, organic” structures is correct.
  • But the very nature of emergent systems shows the fallacy of radical individualism.
  • Think in terms of cells and the human organism, as a metaphor. Certainly the 100 Million cells exert an upward control of sorts on “you.” But the nature of emergence is such that “we” are more than just our cells. “We” exert top down control over our cells also (where they go, what they get fed, etc).
  • I don’t think you can completely do away with hierarchy, but we can potentially rebalance the scales. But that will require new socio-economic structures.
I bought this book almost a year ago now, but just started reading it the other day – I got distracted. There is a certain genius to it. I am only concerned about the viability of widespread renewables; but I doubt it is an insurmountable obstacle. Anyway, here is a video describing the “Third Industrial Revolution.” It is not dissimilar from the “Smart-Grid” based vision of “Hot, Flat & Crowded,” except that it seems to focus on the social organization that would emerge from a non-hierarchical energy distribution to compliment our distributed internet communications system. All in all, it is appealing to me. I’ll write it up in more detail if it still makes sense when I finish the book. Keep in mind one thing – we seem to be conducting a massive “natural experiment” with these ideas in Europe right now. This is not simply academic activism.
Ho hum.

Beyond the “Nation-State” to a “Free-Market-Collective???”

Never a good day when Stolid Joe Stiglitz thinks we’ve been brainwashed.

The fact that the 1 percent has so successfully shaped public perception testifies to the malleability of beliefs. When others engage in it, we call it “brainwashing” and “propaganda.” We look askance at these attempts to shape public views, because they are often seen as unbalanced and manipulative, without realizing that there is something akin going on in democracies, too. What is different today is that we have far greater understanding of how to shape perceptions and beliefs — thanks to the advances in research in the social sciences.

I incorrectly identified Noah Smith as a “center-right” economist, while he claims to be “center-left” or even full-on liberal. Maybe I caught him on some supply-side days and drew the wrong conclusions. His thesis adviser does appear to be claiming to be a “Supply-Side Liberal,” though so far I have found less agreement with him personally than I do with Noah, generally. What is important is that Noah Smith takes a reasonably “scientific” approach to economics, which is why I liked him even when I thought he was further from my particular views than he is(?). The importance of this cannot be overstated. If you are not going from the empirical data to the model, validating the model, making predictions and confirming your analysis in a peer-reviewed way (not just to an uncritical chorus of hallelujahs) then you are not doing science.

…Because as nice as it is to have a team, I have a stronger and deeper allegiance, which is to science. And by “science” I basically mean rational skeptical empiricism. My dad raised me on these ideas; they’re very important to me, and I believe they are the best. So if I think an idea makes sense, I’m going to say why. If I don’t buy a theory, I’m going to say I don’t buy it. I believe that only by being intellectually honest can we find the best answers and the best policies.

Now here you may cross your arms and say “Economics isn’t a science! Hrmph!” But if so, you’re missing the point, which is that it can be a science and (according to Noah Smith’s value system) it should be a science, and when it’s not a science that’s bad.

Anyway, just wanted to correct the record. Also, to give you an example… When the crisis first hit, I had no idea what a liquidity trap was. I naively assumed that in all cases, at all times, if you increased the supply of money beyond the expanded need for more (say, simply, population growth) then there would be an automatic supply & demand type of inflation / currency devaluation. I was not a regular reader of Paul Krugman until I started looking into some of the underlying dynamics of the crash. I had no dog in this fight – no intellectual edifice to defend; no academic career built on a particular set of economic models; I just wanted to know what was going on. Now, there are still some deep questions surrounding the structure of “money as such” and “credit issuance” and how that has changed significantly over the past several decades, but the fact remains that if any of the people had been right about their simplistic fiscal / monetary theories, we would have seen very different results. See this litmus test:

The policy response to financial crisis has, in effect, given us a great natural experiment in macroeconomics — an experiment that can and should be viewed as a test of two views of the economy. One view — which includes both freshwater macro and much of what Austrians say — is in effect classical macro as Keynes described it, in which the economy is always constrained by supply. The other is a more or less Keynesian view in which a depressed economy is constrained by demand, not supply.

These two views had strong implications on three fronts. One was interest rates: would large budget deficits drive rates up, as a classical view implied, or would they do no such thing under depression conditions? A second was the effects of austerity (which has been much larger than the weak efforts at stimulus, and therefore provides the real test); would austerity policies release resources to the private sector, as per the classical view, or lead to economic contraction? Finally, a third implication involved inflation: would large increases in the monetary base produce soaring inflation, again as classicists of all kinds claimed, or do no such thing under depression conditions?

All that being said, I did run across a truly disturbing article while drinking my morning coffee – Finance and the Mafia State. The premise seemed to be – and there is quite a bit of evidence that this has been going on – that we are moving from a Nation-State based organization to a one world “market-based-politics.” I often take the long view on things. Sure, we have not always had nations. In fact, nations arose out of specific needs – we humans organized as society got more integrated, trade increased and city-states became too disorganized and restrictive – or so the story goes. Most historical accounts get a little more nuanced about power factions and power grabs, etc, etc… But the idea remains the same – a bigger umbrella for more interconnected people. Now, I can see certain organizations gaining in power on a more equitable global power distribution over time – we are a much more connected world yet again – though certainly the US and a few other powers are not too keen on giving up any power just yet… But a “One World Market Economy???” That scares the be-jeesus out of me. To my mind – and the evidence seems clear – that means a world dominated entirely by bankers.To the extent that democracy and self-governance exist and are possible, surely they are possible through government organizations, not market “organizations.” Yikes.

As I have argued before, it is impossible to deregulate financial markets because money is rules about value and obligation. So what happened instead when financial markets were “deregulated” is that the governments’ role as the setter of rules was handed over to traders, who made up their own rules: more than $700 trillion of derivatives, intense high frequency trading and so on. It results in a weird contradiction: governments trying to save their systems from the new rules being created by the traders, yet the traders relying on the state’s rules about finance to overlay their games of meta money. Meta money traders have to have conventional share trades between buyers and sellers to apply algorithms to manipulate the markets at high speed.

You need conventional commerce in commodities to use derivatives to play commodity futures, for example. It is why governments are constantly attacked by players in the financial markets who are simultaneously hard at work exploiting those “errors” to make money. Meta hypocrisy to accompany the meta money, I suppose.

The tsunami of this meta money, which is borderless, stateless and has no thought for its effect on governments or polities, still relies for its very existence on the rules set up by governments. And as has been obvious since the GFC, governments and tax payers are expected to clean up the mess when it inevitably all goes wrong. That can be done once. When it goes wrong a second time, the firepower will not be there, as is increasingly evident in Europe. The conventional rules will have been weakened too much by the rules invented by the traders of meta money.

It represents a comprehensive failure of government, and will not lead to the creation of a new type of state. It is rather a new type of chaos. It is especially pernicious when governments start to dabble in the meta money, as Greece did when the government covered up its debt by using derivatives. That is wholly unforgiveable. It is bad enough that governments have allowed traders to make up their own rules with money, in effect playing Russian roulette with money itself. But when they, too, start using the same tricks, then the road back to sanity becomes long indeed.

Ho hum.

The Fight Between Capitalism & Democracy??

Today’s crazy making only took me a few minutes to stumble across, but will likely have me scratching my head and re-evaluating my worldview for a few days or weeks or perhaps even longer. Deep down, I am starting to wonder if our preferred form of capitalism – this virulent free-marketism – isn’t definitionally opposed to democracy. And not just in theory, but in practice also. While there are many ways we could approach capitalism, democracy seems easier to measure: are we collectively doing what is best for the majority of the citizens? I know this is simplistic, but I don’t think it is wrong. And you can make the case that from 1870-1950 (we can quibble over start and stop points) the power of money over-rode all but the semblance of democracy. As inequality was flattened out, citizen participation seemed to bloom, circa 1950-1980, and since then money has been on the ascendency yet again.

It would seem that the more socially responsible visions for capitalism have never been capable of holding sway for very long. We can see perhaps even the entire European crisis as capital’s final power moves to forcibly dismantle the remnants of “social democracy.”

This is not yet a coherent thought. But these little snapshots sure do paint a picture.

Globalization is good? Not for the middle class.

As a rich country internationally, the United States is necessarily a capital abundant country. As a comparatively low population density country, it is land abundant but labor scarce. The answer is to our initial question is then quite clear: expanding trade is harmful to U.S. workers because imports of labor-intensive products and services from abroad create competition for American workers, reducing their real wages. As I have discussed before, U.S. real wages have remained below their peak for 39 straight years…

Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).

Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing’s establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.

Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.

I tend to have two core problems with Libertarian thought: excessive insistence on individualism, to the point of failing to account for social, collective goods & way too much faith in unregulated markets. If more Libertarians talked like this, I’d be far more open to the rest of their arguments, which often have merit but are overshadowed by those two core failings. I do, however, wonder just what kind of standing this type of “liberalized” thinking has in libertarian circles. She is probably a “socialist.”

Externalities, asymmetrical information, and other collective action problems are even more pervasive in economic life.  Countless ways of conducting business reap gains for some while imposing unjust costs on others.  Create a cartel.  Stuff rat feces in sausages.  Engage in insider trading.  Dump toxic waste in rivers.  Market useless medicines.  Withdraw renewable resources at unsustainable rates.  Stuff insurance contracts with obscure loopholes, collect premiums from customers, and then deny their claims.  Fill corporate boards with cronies who reward top managers with huge bonuses even when they fail to meet contracted performance requirements.  Rig the terms of a complex loan to trap financially unsophisticated borrowers into spiraling debt and fees.  Get rating agencies to certify worthless assets as AAA. Use leverage to reap profits from self-generated asset bubbles, sending the global economy into financial collapse when they burst.  Without extensive regulation, markets happily accommodate such negative-value-added business plans.  Tomasi sometimes acknowledges this fact.  But he puts a heavy thumb on the scales against regulation by describing economic activity in general in terms of “self-authorship” and “economic liberty.”  Such descriptions cut no normative ice with respect to destructive or predatory business plans.  Nor should judges, who lack the expertise to assess economic regulations designed to stop such abuses, use such exalted abstractions to strike them down.

But financial innovation – surely that is how we add value and increase net worth and world wealth, right? Well, not so much.

Here’s proof. According to a 2010 paper by Andrew Haldane, head of the Bank of England’s financial-stability department, the financial crisis of 2008-09 produced an output loss equivalent to between $60 trillion and $200 trillion for the world economy. Assuming that a crisis occurs every 20 years — just about what does happen —  the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year, Haldane says. What that means is that overall, our unrestrained financial sector does not add any net benefit to the economy—its repeated crises cost us far more than Wall Street brings to overall economic growth.

Matt Taibbi’s head explodes when he finally watches Jamie Dimon in front of the Senate Banking Committee. You should read the whole thing, but here is a choice bit:

112:54 Finally there are some tough questions. Jon Tester starts asking Dimon why he accepted collateral from MF Global, even though Chase’s own risk management people were concerned that these might have been customer-segregated funds. In other words, Chase knew something was up at MF Global, but it still allowed Jon Corzine’s firm to trade off-limits customer money for cash, essentially helping Corzine rob his own customers.

This is an interesting line of questioning, but watch the sequence from minute 112 on – Dimon grows visibly annoyed by Tester’s inquiry, to the point where Tester sort of ends up apologizing for even asking these questions. The big crew-cutted Midwesterner throws his hands up a little and basically says, “Hey, man, I’m sorry, I’m just looking out for the farmers who got wiped out by MF Global, with your help. It’s nothing personal.”

“That’s all,” says Tester in a conciliatory voice. “Just lookin’ out for my folks.”

“I hope they get their money back,” sniffs Dimon halfheartedly. “I still believe they will, by the way,” he adds, staring off into the distance with undisguised boredom. He’s not quite rolling his eyes at all this nonsense about wounded farmers, but almost. If he was my child pulling that face at the dinner table, I would have grabbed him by the ear and sent him straight to bed without ice cream. But the senators bent to his annoyance like it was legitimate. It was disgusting.

Decoding Europe a bit. This is a showdown between neo-liberal globalization and, well… Perhaps the backlash of real social democracy. That first piece, over at Slackwire, is phenomenal. The point they are making is that the European Central Bank is deliberately enacting the neo-liberal agenda, and holding hostage the economies of sovereign nations to do so. (You should read this article) Here, after much evidence, is the critical thesis:

It’s hard not to think here of Perry Anderson’s thesis, developed (alongside other themes) in The New Old World, that the EU project is fundamentally a response by European elites to their inability to roll back social democracy at the national level. The new supra-national institutions of the EU have allowed them to bypass political cultures that remain stubbornly (if incompletely) egalitarian and solidaristic. In Alain Supiot’s summary:

In Anderson’s view, the European project has engendered neither a federation nor an intergovernmental organization; rather it is the most fully realized form of Hayek’s ultraliberal ‘catallaxy’. … Like a secular version of faith in divine providence, belief in the spontaneous order of the markets entails a desire to protect it from the untimely interventions of people seeking ‘a just distribution’ which, according to Hayek, is nothing more than ‘an atavism, based on primordial emotions’. Hence the need to ‘dethrone the political’ by means of constitutional steps which create ‘a functioning market in which nobody can conclusively determine how well-off particular groups or individuals will be’. In other words, it is necessary to put the division of labour and the distribution of its fruits beyond the reach of the electorate. This is the dream that the European institutions have turned into a reality. Beneath the chaste veil of what is conventionally known as the EU’s ‘democratic deficit’ lies a denial of democracy.

I hate to overly simplify things, but this becomes (in my mind at least) a very real battle between capitalism (as conceived in the neo-liberal mold, at least) and democracy. I don’t believe that to be hyperbolic in the slightest. And it would appear that neither do many of Europe’s citizens. From the above Jacobin Article:

There is no need to rehearse the narrative of the endless Eurozone crisis that began in 2009. Suffice it to say it has, for the first time, thrown into question fundamental features of the monetary union first conceived twenty years ago: the no-bailout principle insisted on by Germany; the independence of the central bank; the irreversibility of euro membership. What was once seen as a bewildering technical issue has become a vital matter of day-to-day social stability in country after country. Austerity enforced from Brussels, Frankfurt, and Berlin is not only sinking Europe into an ever-deeper depression with no visible endpoint; it is searing the political connection between daily hardships and E.U. structures into the consciousness of the continent’s citizens. In the interview featured in this section, the French political scientist Emmanuel Todd speaks of a “vast debate on economic globalization which will inevitably take place after the [May presidential] election,” and predicts that the winner will face decisive pressure from the French middle and even upper classes, who “are now turning their backs on free trade and perhaps even on the euro.”

Moreover, the astonishing defiance of democratic norms that has become an essential feature of European Union governance – a key issue in the rise of the Dutch Socialist Party (SP) highlighted by Steve McGiffen in this issue – is increasingly becoming its defining characteristic in the eyes of Europe’s citizens. Already in 2005, after the European Constitution failed in referenda in France and the Netherlands, it was simply repackaged as an ordinary treaty and passed via national parliaments; when that treaty was then rejected by the Irish in a referendum of their own, they were made to re-run their vote like schoolchildren who had failed a test. Last fall, when Greek prime minister George Papandreou had the temerity to call for a popular referendum on the austerity package that will subject his country to years of impoverishment and social disintegration, he was swiftly forced to resign and replaced with a technocratic viceroy dispatched from the European Central Bank. The same month, a former European Commissioner, Mario Monti, was brought in to run Italy after Berlusconi lost the confidence of E.U. leaders.

Because of what very much appears to be an ideological power play – a willingness to destroy the village in order to save it – the social contract is unraveling.

Suicides have increased sharply. Garbage is not being picked up. Public transportation is largely a thing of the past. Even though Greece always had a large black market, more people are resorting to barter, which shrinks the tax base. And in some ways worst of all, the health care system is on the verge of collapse. Critical medicines are not being imported and hospitals are short of basic supplies. Not only are people dying unnecessarily due to their inability to get drugs and operations, but worse, the breakdown of healthcare greatly increases the risk of a public health crisis. How many children are being vaccinated, for instance? What happens when curable but silent killers such as syphilis go untreated?

Greece has been told to reduce health care from its current 10% of GDP to below 6%. Imagine what would happen if the US were told to cut its medical expenditures by over 40% in a one or two year period. And if the IMF boot were put on the US neck, and we were told to get medical spending down to 6% of GDP, we’d need to reduce it by 2/3.

Ho hum. The News Makes Me Crazy.

Elite Opinion Makers, Stimulus & Long Term Debt Reduction

It is important to note another key feature of my frustration with economics (as practiced in the realm of public policy theater): the “elite opinion makers” seem to keep recycling their arguments, even when reality keeps delivering them evidence to the contrary. We’ll talk labor mismatches and union busting, but then we see that labor mismatches don’t work and the economy is definitely being dragged down by public sector job losses (in Red states, primarily), so we switch to the regulation and government policy schtick for awhile – and when that falls apart under scrutiny, we are back to the government debt and “invisible bond vigilantes” or some obtuse version of magical pixie dust and  the “confidence fairy.” On and on and on we go. And the beauty of it is that each time we confront the arguments all over again, as if seeing them for the first time. As a purely intellectual exercise it ceases to hold any meaning after awhile, but as a delay tactic – if delay furthers your agenda – it is sublime excellence.

So, here is a new twist on an old game, and a fresh look at the “new conservative position” – that is to say, having forgotten their position that stimulus doesn’t work (I’ll give them credit for almost abandoning “expansionary austerity” under the groaning weight of reality) but having reversed their position on stimulus (without admitting as much) they are hanging onto the idea that long term debt reduction must be tied to short term stimulus. The truth or falsity of that claim is not at all clear to me (or anybody else crunching numbers dispassionately) but it has become the “common wisdom.” This is an example of just how dangerous these “elite opinion makers” can be. Anyway, let’s get started with Mike Konczal’s excellent debunking.

The question posed is simple: “If short term stimulus is a good idea, why isn’t a good idea devoid of other constraints?” Why should we tie our hands and offer up any kind of long-term concessions or give any bargaining power to that camp if we all agree we need short term stimulus? First Konczal gives two examples of “Very Serious People” and their proposals along these lines, then he asks and answers the question of why these two different proposals (short term stimulus and long term debt reduction) must supposedly go together:

Take the Domenici-Rivlin Restoring America’s Future plan. In the overview it states, “First, we must recover from the deep recession that has thrown millions out of work… Second, we must take immediate steps to reduce the unsustainable debt … These two challenges must be addressed at the same time, not sequentially.” (The deficit hawk Comeback America Initiative report is similiar, with $500 billion dollars in infrastructure over two years tied to focusing on long-term deficit reduction.)

It’s never very clear why these two must move together. The more aggressive argument is that the market will panic and raise interest rates if the long-term deficit is not addressed, immediately canceling out the stimulus. The more widely used version is that stimulus now would increase the longer-term debt, hence making the longer-term challenges worse and the crises and challenges occur more quickly.

So first we have the aggressive version: beware the bond vigilantes, despite having been proven wrong again and again, and then – in case you’ve wised up to that little piece of unreality – we’ll give you the “more debt means scarier stuff sooner argument,” which sounds reasonable by comparison… But is it? Konczal quotes a paper by Delong & Summers:

This is why something like Delong-Summers paper “Fiscal Policy in a Depressed Economy” is so important. It finds that “under what we defend as plausible assumptions of temporary expansionary fiscal policies may well reduce long-run debt-financing burdens.”

Yes, THAT Larry Summers. The more you look, the more you find that what passes for “common sense” is actually opposed by some very heavy hitting, right leaning economists (plus all the usual lefty suspects). You have to be increasingly radical in your Free-Marketeer beliefs to ignore the reality. Konczal is arguing with an Elite Opinion Maker in this piece, Peter Orszag.

Here’s where Peter Orszag’s “Barbell Approach Only Way to Lift Heavy Economy” enters the picture. Orszag argues that that Delong-Summers approach is flawed because it ignores this two-deficits (or what he calls the barbell) problem, which argues that even if short-term stimulus is a good idea it should be linked to long-term deficit reduction…

But these stimulus-only proposals, by not lifting the other side of the barbell, are incomplete for three reasons: First, substantial stimulus-only proposals have no chance of being enacted. Second, even if they could be, they would accelerate the date at which we again run up against the debt limit — and their proponents have no strategy for dealing with that impediment. Finally, even if the debt limit were simply assumed away (an ivory-tower approach that might prove appealing to some stimulus-only proponents), the impact of any stimulus would be stronger, and our international credibility enhanced, if it were combined with specific, but delayed, actions to reduce the deficit.
Konczal rightly points out that the first and second arguments are political problems. Meaning, if the other side simply will not do what makes sense unless you give them something, that should hardly count as an analysis of the correct thing to do. In a bigger context, that is admitting that by skewing all the way to the right, all solutions will start at the middle and give up half the distance to crazy, just because the extreme right won’t help otherwise. The correct response to such a problem (and I do believe it exists) is to skew all the way left instead of triangulating, or learn to get along (much public shaming might be necessary) or switch to a parliamentary system where the party in power gets to enact their plans until the public loses confidence and gives the other side a go at it.
Anyway, the third argument is an economic argument, but one that Orszag has seemingly been on the other side of just recently – so it smells like rank ideological opportunism, yet again:
The third is an economic argument, which says long-term deficit reduction measures would increase the credibility of the United States. Normally that translates into lower long-term interest rates for government borrowing. Would that help? Here’s Peter Orszag arguing against QE2 in December 2010: “a modest reduction in long-term interest rates will not have much effect on economic activity at a time when corporations are flush with cash and worried about the future.” Would a few basis points gained through credibility help now, especially if the long-term effects were painful? Even if it did, it may bolster the case for the barbell approach, but it still doesn’t necessitate it.
But this is all just ideological cover. It is not real science, as I have pointed out again and again. The Very Serious People have already decided on the right answer, facts and evidence be damned, and that is the shameful legacy of economics-as-ideological-persuasion-tactic-instead-of-evidence-based-science.
As an interesting side note, Konczal referenced this article in JacobinMag and while I haven’t had time to parse the whole thing, there does appear to be a reference to an interesting economic history of Social Democracies in Europe from WWI – here is a little bit of the flavor of it (Amazon Wishlisted for Later):

The starting point for understanding social democracy’s slow collapse since the 1970s is to grasp the economic underpinnings of its success in the Golden Age. As the Dutch political scientist Ton Notermans documents in Money, Markets, and the State, a penetrating history of social-democratic economic policy since World War I, the precondition of left governance under capitalism has always been the ability to reconcile full employment, requiring expansionary monetary policy, with price stability; and this depends on the availability of mechanisms to control inflation directly at the source, by repressing or moderating wages or prices without having to resort to the weapon of unemployment.

In the absence of such price-repressing instruments, maintaining a tolerable level of inflation requires the bludgeon of permanently high unemployment achieved through tight money. Social democracy under such conditions is impossible, since the only tools that politicians can now credibly claim to boost employment are microeconomic: “reforms” that attack union bargaining power, minimum wages, job protections, social insurance contributions, and the like. To make matters worse, the regime of high interest rates necessitates chronic austerity, as public debt increases faster than national income and social spending has to be constantly cut back.

Dead Student Debt, Sophie’s Presidential Choice, Institutional Mistrust & Freakonomics as Prison System Eugenics

I went from zero to crazy pretty fast this morning. Maybe I’ll dip back into the insanity around lunch time.

Student debt unto the umpteenth generation. I never advocate violence, but I can see how somebody might go postal. Their son is dead, the debt collector scum are hounding them at every turn, they can’t figure out who owns the debt – was it some kind of complex derivative at some point? – and they can barely make ends meet. As we increasingly financialize, monetize and use debt as our primary growth industry, collectors will become more and more empowered. Already they are using the legal system to jail people who do not pay in some states. Rent seeking and usury are back with a vengeance. This isn’t as simple as “contract law;” in fact – just like mortgages and property law, it would appear that the very question of ownership has been subverted by the profit seeking debt overlords. The way property law has been completely undermined by MERS should make any self-respecting libertarian’s head explode, but alas most of them reveal their true colors on this front… Just another horror story / snapshot of the new American normal. Ho hum.

There are, I think, three way you can hear the Obama – Romney dueling speeches from yesterday:

  • An old style conservative versus liberal set of economic ideas (though in reality it is like neo-liberal light versus industrial strength neo-liberal)
  • Subtle jockeying to be the candidate who gets to “frame” the discussion. Romney was all emotional button pressing, while Obama wanted to make it about “choice.” In other words, Romney wants you to vote as a referendum on Obama’s presidency while Obama wants you to see the “rational choice” for the next 4 years.
  • Naive drivel that purports to lay out a choice when in fact the political system is so broken that no *real* choice exists.

David Dayen opted for choice #3.

Obama says that the public will have to settle this debate from these two competing visions. “In this democracy, you, the people, have the final say,” he said. Only it never works this way. It never really has worked this way. In this democracy, money and power have traditionally had the final say, regardless of what the people wanted. First of all, in the modern era, as long as you have 41 Senators of the opposite party, a trifle like an election will not guarantee the passage of any one party’s agenda. But going deeper than that, what we’ve seen over the last decade is that some agenda items will pass regardless of public opinion, and some will not. And here, that filibuster threat just melts away. If the government wants to indemnify telecommunications companies who cooperated on spying on US citizens, divided government will not be a barrier. If Wall Street wants to return to the days of penny stocks and gut investor protections, divided government will not be a barrier. If corporate welfare is needed, the 60 vote threshold is not. If politicians want to go to war – or maybe it’s the contractors who start it off – that can happen, with or without Congress at all, apparently.

In fiscal terms, this idea that the people have the final say should be the standard, but it really has not been in recent years. Budget reconciliation was used on the Bush tax cuts, but not on any straight fiscal measures in the Obama Administration (only as a means to finish off the health care law). Moreover, there are plenty of issues outside the purview of Congress, like on housing or regulatory policy against the banks, where the Administration has not used its power.

So when the President says that “this election is about our economic future,” when he says that “this election is your chance to break that stalemate” between two fundamentally different ideas, he makes it sound far more simple than reality. And we can see that reflected in the last four years while he was in office.

So, at least we have that going for us…

If you can believe the polling (and while they didn’t poll on it, I bet pollsters and statisticians poll low in confidence too), but if you can believe the numbers, nobody in America trusts any of our institutions. Except the military.

The data is really clear — when you look across the landscape, American trust in pillar institutions, like the financial sector, big business, media, science and academia, and even religion are at or near all-time lows.

They’re at all-time lows even compared to when this polling was initiated in the 1970s, in the wake of Watergate. The big worry after Watergate was that the country was suffering from a crisis of authority. It didn’t trust institutions. The irony is that the polling was initiated in the 1970s, and what was then viewed as the nadir of public trust in institutions turns out to have been the high watermark. There is much less trust now than there was then. The exception is the military, which is the most trusted institution in American life. The least trusted institution in American life is Congress. I think that says a lot about where we are politically in and of itself.

This book sounds interesting, and so far Chris Hayes has done some good work… But I have a gut-level instinct about this phenomena: While I am sure that rank incompetence and the somewhat abundant availability of that data, plus the institutionalized distrust of institutions (paradox alert) have played their respective parts, I think it runs deeper. We are feeling the full brunt of the “Postmodern, Mediated” interiority expansionary destabilization. OK, I might have made the last few words up, but you can easily grasp my point – we are less trusting because we are immersed in a constant flow of information custom designed, tailor made, market-tested to sell us nonsense about ourselves, politicians, products, worldviews and on and on. We are simply more aware that this is a sham, and that even if it were sincere, there is no truth except my own narcissistic little individual subset of media generated opinions. “One big festering neon distraction.”  And while defaulting to the subtextual, subliminal apprehension that we are at all times and in all ways being lied to, cajoled and marketed at is indeed its own form of paradoxically embedded mediated state – defending even as it succumbs to larger and more subtle framing – it does erode what little trust these institutions have, or at least does so when you talk to pollsters. Very “Meta.”

And if you needed a reason to not believe in your “elected representatives,” here is a nice $ per hour breakdown of what it costs to hold these seats:

Most expensive Senate seats

Sen. Barbara Boxer (D-Calif): $2,444/hour

Sen. Harry Reid (D-Nev.): $2,068/hour

Sen. Al Franken (D-Minn.): $1,875/hour

Sen. John McCain (R-Ariz.): $1,823/hour

Sen. Marco Rubio (R-Fla.): $1,812/hour


Sen. Mitch McConnell (R-Ky.): $1,749/hour

Sen. Joe Lieberman (I-Conn.): $1,685/hour

Sen. Charles Schumer (D-N.Y.): $1,627/hour

Sen. John Cornyn (R-Texas): $1,611/hour

Sen. Maria Cantwell (D-Wash.): $1,573/hour

How about in the house?

Most Expensive House seats

Rep. Michele Bachmann (R-Minn.): $3,391/hour 

Rep. John Boehner (R-Ohio): $2,449/hour

Rep. Allen West (R-Fla.): $1,636/hour

Rep. Eric Cantor (R-Va.): $1,489/hour

Rep. Joe Wilson (R-S.C.): $1,185/hour

Rep. Steny Hoyer (D-Md.): $1,128/hour

Rep. Scott Rigell (R-Va.): $1,128/hour

Rep. Barney Frank (D-Mass.): $1,013/hour

Rep. Paul Ryan (R-Wisc.): $981/hour

Rep. Michael Capuano (D-Mass.): $925/hour

And if that weren’t enough for you, I came across this debunking of the Freakonomics guy:

As Steven Levitt’s S.H.A.M.E. Profile demonstrates, Levitt is a dyed-in-the-wool Chicago School neoliberal who believes in the sanctity of “the market” and a small government whose function is restricted mostly to protecting property rights. He has used “objective” economic research and mainstream credibility as cover, while attacking teachers’ unions, advocating for the privatization of prison labor, spreading crude climate denialism and promoting rank “free market” ideology that sees human labor as a resource to be extracted for maximum profit. Levitt has also developed a nasty habit of misrepresenting the research of other scientists in order to reach predefined ideological conclusions, and has failed to disclose financial conflicts of interest.

But perhaps the most disturbing thing about Levitt is his enduring interest in researching and “proving” the effectiveness of authoritarian and, some would say, borderline eugenicist policies. Aside from doing studies on the positive effects that incarceration has on society (we benefit to the tune of $15,000 per inmate per year if inmates are packed into overcrowded conditions), he published a paper that argued that an increase in abortion rates among black women in the 1970s was the main reason for a drop in crime in the 1990s. The methodology and data of his research were discredited by other economists, but Levitt stuck to his original conclusion linking race and crime: fewer African-American children correlates to less crime. Levitt’s explanation wasn’t just wrong, it was extremely sinister, reinforcing a racist stereotype of the worst kind with a seemingly modern “scientific” explanation.

Ho hum. The News Makes Me Crazy.