An SF writer’s diagnosis and cure for capitalism

In the opening of Kim Stanley Robinson’s new SF novel, New York 2140, two unemployed financial software engineers known as Mutt and Jeff—unemployed because they refuse to design a possibly illegal program for high-speed trading—contemplate a flooded lower Manhattan from atop the former Metropolitan Life building.

One of them says he has figured out what’s wrong with capitalism.

The basic problem with capitalism, he says, is that the forces of the market forces producers to sell products below cost.

How can you sell below cost and survive?  By offloading your costs onto someone else—onto customers, onto neighbors, onto taxpayers, onto the wider community and onto future generations.

This enables an individual enterprise to survive (sometimes), but, in the long run, leads human society into bankruptcy.

In the novel, global warming has taken place, sea levels have risen and lower Manhattan is under water.  Skyscrapers such as the Met Life building are still survive amid a kind of new Venice.  Uptown Manhattan is 50 feet higher in elevation, and is dry.  In the middle is a tidal zone, where the poor and homeless congregate.

Some environmental problems have been solved, or at least are being coped with.  Gasoline, jet fuel and other fossil fuels no longer exist.  Air travel is by dirigible, ocean travel is by sailing ship and land vehicles are electric.   But the financial structure and distribution of income are more or less like they are now.

New skyscrapers—”superscrapers”—in uptown are owned by the world’s wealthy elite, as investments or as one of multiple homes, and are often vacant.

A hurricane late in the novel leaves many homeless.  They try to storm the vacant uptown towers, and are turned back by private security forces, who outgun the New York Police Department.

Rather than attempt a violent revolutionary overthrow, the common people attempt a political and economic jujitsu.

They join in a nationwide debt strike.  On a given day, they stop paying their mortgages, student loans and credit card balances.  The financial system is go highly leveraged with debt upon debt that it comes crashing down, just as in 2008.   So the financiers go to Washington for another bailout, just as they did then.

But this time, the President and Federal Reserve Chairman, who are in on the plan, act differently.  They tell the banks and investment companies that they would be bailed out only on one condition—that the government be given stock of equal value to the bailout, as was done in the bailout of General Motors.   Those who refuse this deal are allowed to fail.

Now the federal government has the authority to force the banks to act as public utilities.  And the huge profits that once flowed to the financial elite now flow to Washington, which makes it possible to adequately fund public education, infrastructure improvement, scientific research and all the other things the country needs.

And so the American people live happily—not ever after and not completely, but for a while.

The hollow populism of Steve Bannon

Steve Bannon, the chief adviser to President Donald Trump, is probably the most influential person in the Trump administration besides Trump himself.

But I find it hard to get a handle on Bannon’s thinking, since he shuns the limelight, and hasn’t written any books or magazine articles I could get hold of,

His 2010 documentary film, Generation Zero, is probably as good a guide to his thinking as anything else.

It is well done and, despite being 90 minutes long, held my interest—at least until the last 10 minutes of so, which consists of restatements of the main points.

Generation Zero is an analysis of the roots and consequences of the 2008 financial crisis, which Bannon rightly blames on crony capitalism, the unholy alliance of Wall Street and Washington that began in the 1990s.

But if you look at the film’s action items, what he really does—knowingly or unknowingly—is to protect Wall Street by diverting the public’s attention from what’s really needed, which is criminal prosecution of financial fraud and the break-up of “too big to fail” institutions.

Bannon presents himself as an enemy of corrupt politicians and financiers.  But there is nothing he advocates in the film or otherwise that threatens the power of either.

∞∞∞

Generation Zero draws on a book, The Fourth Turning by William Strauss and Neil Howe, who claim there is a cycle in American politics based on the succession of generations.  Each cycle consists of four turnings—(1) a heroic response to a crisis, (2) a new cultural or religious awakening, (3) an unraveling and (4) a crisis.

Lessons for Wall Street from Hammurabi’s Code

The Code of Hammurabi in ancient Babylon had this to say about the social responsibility of business.

If a builder builds a house and the house collapses and causes the death of the owner, the builder shall be put to death.  If it causes the death of the son of the owner, a son of the builder shall be put to death.

Nassim Nicholas Talbeb, author of Fooled by Randomness, The Black Swan and the forthcoming Anti-fragile: Things That Gain From Disorder, said in a still-relevant interview last October that the banking crisis is due to the fact that we’ve forgotten the age-old wisdom of every civilization since the time of Hammurabi—that people should be responsible for the consequences of their actions.

The opposite has been the case with the U.S. banking and financial system since the Reagan administration, he said.  The pattern is that financial institutions gain huge profits from taking huge risks, the executives walk away with huge bonuses and then when their gambles fail, they successfully look to taxpayers to be bailed out from the consequences of their actions. This is wrong.

“If there is an upside, there should be a downside,”  Taleb said.  If you get to keep the profits, you should bear the losses.  If your negligence causes other people to suffer, you should suffer yourself.   This has been well understood down through history until very recently.

No executive of a financial institution that has been bailed out should ever receive a bonus, Taleb said; no executive of a financial institution that has been bailed out should be paid more than a civil servant of equal rank.  After all, if the bank or investment firm has been rescued with U.S. tax dollars, then the executive are in effect employees of American taxpayers.

Taleb himself is a speculator in options and derivatives.   Speculation, like high-stakes poker, does no harm so long as the speculator is gambling with his own money and the money of people willing to take a chance on losing it.

Below is a later interview with Taleb.

Bailouts and the risk premium

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Interest on some kinds of bonds is higher than on others.  That is because of the “risk premium.”  The higher the risk that the borrower will default, the higher the interest rate the lender will charge.  That is why high-yield bonds are called “junk bonds.”  High interest rates on certain corporate bonds offset the risk that the company that issued the bonds goes bankrupt.  High interest rates on certain government bonds offset the risk that the government defaults.

But the policy of the Federal Reserve Bank and the U.S. Treasury Department is that bondholders should be protected from risk, no matter what the cost to the public.  This goes against the principle of a free enterprise system, which is to reward success and punish failure.

These thoughts came to mind when I read a New York Times interview with Sheila Bair, outgoing chair of the Federal Deposit Insurance Corp., an Eisenhower-type Republican who found herself in the minority when she opposed the “too big to fail” mentality so prevalent in the government.  Here are some key paragraphs from the article.