The Entire Field Of Economics Is Nothing More Than The Projection Of Power Politics?

What Makes a Bank Stable?

by Thomas Eisenbach and Tanju Yorulmazer - Liberty Street Economics, Federal Reserve Bank of New York

"One of the major roles of banks and other financial intermediaries is to channel funds from savings into valuable projects. In doing so, banks engage in 'liquidity and maturity transformation,' since they finance long-term, illiquid projects while funding themselves with short-term, liquid liabilities. By performing this important role, banks expose themselves to the risk of runs: If depositors or other short-term creditors worry about their claims, they may withdraw funds en masse and cause the bank to fail."

Really? When was the last time worry about FDIC-insured bank deposits caused panicked depositors to withdraw the majority of fiat currency deposits from a plain old US commercial bank?

Meanwhile, diverse, heterodox economists (and operational bankers) routinely say that banks in a fiat currency system loan neither reserves nor deposits nor even their own financial capital.

Rather, banks, for a [supposedly] regulated fee, agree to act as middlemen to underwrite and [supposedly] manage to completion, credits & debits, which are denominated and backed by the electorate, through their agent, the Treasury, and it's checking account, the Fed.

The electorate is the real middleman in a fiat currency regime. Our Treasury, Fed and publicly-licensed banks are simply their agents.

Banks MAY have to put SOME of their own capital at risk if a creditor defaults, but my understanding is that they typically do NOT initially loan out their own or depositors capital, or banking reserves.

Rather, they RECORD matching credits/debits, and notify the Fed to adjust recorded banking reserves accordingly, for whichever banks hold the newly denominated credits and debits. (They might not be the same bank.)

Given all that, here's what I've really come to think about orthodox "economics."

It's far more sensible to describe orthodox "economics" as political economics, and admit that POWER negotiators define success as asserting control over most variables (including incomes & employment levels) by force - so that they can "manage" the performance of their preferred asset variable.

By fixing most variables within arbitrary bounds, managers try to force unruly systems to follow the projections of a simplistic model - theirs. That's standard practice in the experimental practice of the scientific method, but that's no reason to treat national politics as an experiment run of, for and by naive power-brokers with myopic aims.

The entire field of economics is nothing more than the projection of power politics? regardless of the outcome, it is still distorted by the brain-dead oversimplification of aristocracy & class, which is just one variant of Central Planning failure?

This will never work adequately for anything except the personal pleasure of dictators. Every discipline applying any sort of statistics immediately arrives at "infinite agility" as the variable driving success, sustainability and evolution. (Cue Thermodynamics, chemistry, biology, Darwin, Shewhart, Deming, Construction, and DoD force-readiness.)

The only economic concept that even comes close to an agility reference? A a "pass-through economy," where the ascendancy of Dynamic Assets - distributed and aggregate - is inherent, as an axiom.

What we call "orthodox economics" is merely the simplistic, negotiated gang-rules of a growing, squabbling mob, still trying to re-organize into a sustainable aggregate?

Such gang-rules are always rife with organizational hacks known as arbitrary taboos, covered over by DoubleSpeak.

The price of imposing crudely hacked gang-rules is a certain level of social violence, to keep people from talking about all the, taboo, Pink Elephant conundrums in the room .... such as existing fiat currency operations.

The core issue was pretty much nailed by the early Greek city states. They quite vividly discussed the organizational hurdles in transitioning from tribal to organized, supra-tribal population levels, and zeroed in on both the emerging frictions and available social methods for circumventing them.
It all comes down to speed & breadth of public discourse? If that is maintained, then any pattern of INDIVIDUAL-BASED decision-making can be countered with TIMELY, distributed feedback, to keep isolated decision-making from breaking too many existing & emerging inter-dependencies.

The aggregate or summed quality of distributed decision-making is a function of the distribution, focus and tempo of distributed feedback? That is the first corollary of all "system" theories! By definition, "systems" are those things which include internal methods allowing them to actively respond - autocatalytically - to their own interdependencies.

Yet we've gotten away from the obvious when discussing our own Democracy!

Economics discusses most local decision-making in terms of static, individual TEMPTATIONS. Yet that is a mistake. Social species are defined as those which benefit by selectively pre-programming themselves - to varying degrees - so that a large variety of dynamic inter-dependency signals can and do override the presumed static-resource-temptations which economics simplistically focuses on.

Humans simply do not behave as reliable calculators of dynamic outcomes from simple, reliable static-value inputs.

Rather, they behave as an analog computing device, where an incredibly large number of different inter-dependencies may or may not be triggered, by a wide variety of cues, themselves gated by a wide variety of variable conditioning factors. 

Legions of studies have shown that people and groups who reliably act certain ways in given contexts, may be easily triggered to act differently, by introduction of the seemingly most unpredictable cues. That is certainly not even unique to humans. There is no known formula that can provide real-time advice useful for managing the incredible - and increasing - numbers of inter-dependencies and degrees of freedom which all aggregates display.

It is always, by definition, a mistake to apply any rules-based approach to contingency management for a dynamic aggregate. Rules, by definition, presume static degrees of freedom, where no stasis exists.

Human cultures will little note nor long care who receives another Nobel Prize in Economics for pointing out that things long known in thousands of other disciplines can be added to the naive field of Political-Power-Economics? Surprise, surprise!

No wonder system-scientists & statisticians are so against the very concept of distracting prizes. Any feedback structure that strays from aggregate success being it's own reward ..... ends up, by statistical definition, giving isolated people individual prizes for shitting in their own aggregate's nest!

And humans think they are so smart? In reality, you can always detect brain-dead credentialism by the combined crowing and trailing odor.

Has It Happened? Is This A Call For A Dictator? "Temporary" Of Course!

Two recent articles seem to have passed under the radar screen of most mass media in the USA. Yet they're the kind of "calls to action" that Wall St. financiers can get behind. Like the early support from foreign investors for, say, Mao, Tojo, Hitler, Stalin and Lenin, just to name a few. We could add a long list of smaller actors too, from Pinochet to Quisling, all supported by "business interests" interested more in business than in the general welfare of the people of their respective countries.

Should we worry about the following calls for action? Should we at least discuss them widely, and ensure that more than just the input from "investors" is represented? What is - for us - different this time is that it is the USA itself that is the target of the latest call to action and "intervention."

You can read these articles for yourself.

Strengthen the Presidency?

The Decay of American Political Institutions

David Brooks and FRANCIS FUKUYAMA seem to be in agreement that we have a problem.

“So we have a problem.”

Do we, though? Or are we the problem?

If it's us, then making one of us a temporary dictator seems to be grasping at straws.

James Madison and the other Framers of the US Constitution thought long and hard about what had been written about the fall of all prior republics and democracies. They foresaw what we're now facing, called it "factionalism" and said that the best way to forestall it's development was to form a more unique form of government than had come before, one with MORE, not fewer, checks and balances.

Fukuyama calls that a "vetocracy." Greater minds, 200 years ago, called it what it was precisely intended to be, institutional checks and balances.

In addition, the framers of the Constitution also explicitly cautioned us that it will always be the character of our people, not the peculiar form of our government institutions that get us through national challenges.

So my suggestion would be to revise the character of our people first, and be more selective about whom we send as representatives to our national Congress ... before we consider weakening the checks and balances that got us this far.

If Ben Franklin were here today, he might scoff at calls for more power, and repeat his famous "table talk" about shaving something from all planks in order to join the parts together into a enduring piece of furniture. He might then go on to ridicule calls for a sledgehammer to smash the furniture, if one faction felt it was taking too long to produce something in their narrow interest.

It'll take a bigger intellect with a more reasoned argument than calls for unlimited emergency powers to make me acquiesce to temporary dictatorships, one faction at a time. That sounds more like a return to the old thinking that held sway before the US Constitution was written, when government of the people, by the people and for the people hadn't yet taken hold, and the ancient device of despots calling for more power was recognized as leading to national insanity.

Fukuyama argues that "We need stronger mechanisms to force collective decisions." Surely he jests? By definition, a collective decision is not one that is forced. As Walter Shewhart and W.E. Deming lamented for decades, an ounce of prevention and preparation speed the quality, not just the tempo, of distributed decision-making - far more than any attempt to repair the process after the development of the actors.

If dictatorships were so valuable, surely the USMC would also be calling for them on the battlefield, rather than going the opposite direction, and also acknowledging the enduring superiority of improving the quality (including tempo) of distributed decision-making. That kind of quality comes only from preparing and developing the character of the people involved, not in trying to force unqualified people through chattle-chutes of imaginary quality. The path that Brooks and Fukuyama dream of has led only to collective disaster, albeit temporary gain for individual looters.

Fukuyama goes on to mention multiple points of personal frustration, in a manner reminiscent of all people who have yearned for simple dictatorships. He wraps it all up with what is itself a peculiar claim.

"Whatever the reasons, the American state has always been weaker and less capable than its European or Asian counterparts."

Personally, I predict that that particular statement will produce more surprise, laughter and outright indignation than agreement from Americans. If not, then I truly don't know my country.

Predictably, Fukuyama then trots out the bogeyman of regulation, both it's absolute magnitude, various distributions, and methods of development. Having built several premises, i.e., that there IS a problem, that said problem is embedded in our very institutions, he now asks credible readers to wrap those presumptions around what "everybody knows," i.e., that there's too much regulation. Of Wall St, presumably?

At this point, I sincerely do hope that most credible readers are, indeed, laughing. Yet what Fukuyama is toying with is not a laughing matter. Tojo would have approved of his underlying message, even if he chafed at the slow, political correctness of it's delivery. If nothing else, you have to credit Brooks and Fukuyama for working so hard at what is, at heart, an incredibly simple and ancient message. "Give us the Goddamn Power! NOW!"

Finally, Fukuyama unravels his own case by making the mistake of exposing a simpler solution to his entire thesis.

"Thus, conflicts that in Sweden or Japan would be solved through quiet consultations between interested parties through the bureaucracy, are fought out through formal litigation in the American court system."

Fine. Delegate more of the tactics and strategies that now masquerade in Congress as National Policy, and get Congress, SCOTUS and the POTUS the heck out of tactics, and back in matters of true policy, national goals and Desired Outcomes for the nation ... where they belong.

For that, you don't need a dictator. Shoot. You don't even have to strengthen the Presidency. Just improve the quality of distributed decision-making, by investing more in the character development of all citizens? What a concept! Again, Fukuyama shoots his own argument in the foot, by overdeveloping it's lopsided armaments.

[PS: Note that Fukayama conveniently does NOT review all the failures of every other form of government worldwide, during the time course of the events he laments in the USA. Japan? Right. Nothing has happened in the last 70 years of THEIR government's history. His oratorical arguments lack the barest of required statistical controls. His arguments wouldn't receive any attention at all in any scientific debate. Indeed, they receive attention only for the dangers they present to an electorate challenged with responsibility for reasoned and logical discourse.]

Nevertheless, Fukuyama drones on and on about various cases, each time imaging tactical issues that he's presumably conditioned readers to see a Strengthened POTUS as the solution to. He even mentions the current mess of financial regulation, but not how elegantly the same issue - and effective responses - were developed back in the 1930s. We didn't bother strengthening the Presidency back then. Why now?

While it's unstated, the underlying, fantastical premise is that the ONLY rational solution for a Congress filled with micro-managers is to have a POTUS free to veto each and every inappropriately micro-managed Congressional gambit?

That's not the way the Framers of the Constitution saw it. Even though Fukuyama's essay mentions and discards James Madison's comments, there is nothing of substance in Fukuyama's essay that wasn't more fully developed by James Madison et al, first in the Virginia Plan, then in the Congressional Convention leading to the actual signing of the Constitution, and on to it's initial amendments. [Madison's actual notes on this process are fascinating, and little read by our 320 million citizens of today.]

The solution that the Framers saw as a better way, was to maintain the quality of the American electorate, and charge THEM with preventing the development of an incompetent class of politicians in all three branches of the newly designed government.

I see no further use in belaboring all the remaining points Fukuyama or Brooks trot out in their call to action. Rather, I'll close with a simple point.

The easiest way to form a vetocracy of the type they fear, is to populate ANY form of government with irresponsible people unfit for the task at hand.

Rather than trying to create a fool-proof formula for protecting ourselves from the Idiocracy they fear, isn't the simpler, and more scalable solution to instead invest in the quality of people we send as representatives to any form of government? And to do that by developing an electorate capable of selecting better quality representatives for themselves.

No Child Left Behind? How about no Democracy left behind, by leaving no citizens behind?

Personally, I don't see any other way. If Fukayama and Brooks are right, then we could engineer institutions so idiot proof that we could populate them with the proverbial 500 monkeys with typewriters, and then just sit back to wait for the guaranteed results.

There is a better way.

"Knowledge will forever govern ignorance: And a people who mean to be their own Governors, must arm themselves with the power which knowledge gives."
- James Madison to W. T. Barry, 1822