Sunday, 3 January 2010

The Driver of Social Change (1 of 2)

In developing the characteristics of speculative capital, I wrote in Vol. 1:
Speculative capital is, by definition, opportunistic. It is constantly on the lookout for “inefficiencies” across markets which it can arbitrage. The opportunities arise suddenly, so the capital that hopes to exploit them must always be available; it cannot afford to be locked into long-term commitments. The requirement to be opportunistic translates into the need to be mobile, to be nomadic and interested in short-term ventures. Such are the inherent attributes of speculative capital.
Then added:
Because these attributes define speculative capital, the manager of speculative capital must employ it in activities that are consistent with these attributes. This rigidly defined role turns him from being a manager of speculative capital into its agent, someone who nominally “runs” the speculative capital but must in fact follow its “agenda.” Speculative capital becomes the grammatical subject of the sentence as if it were alive.
In addition to traders who act on its behalf, capital also has agents who speak on its behalf. These agents are a curious mix of dissembling advocates and ventriloquist dummies. Their advocacy is unconditional but indirect, as if to throw off the scent. Yet, they are unaware of the role and influence of their ever-present “client” and speak of their “free will” in earnest. That is how they are dissembling advocates and ventriloquist dummies; knaves and fools in equal parts.

Observe, if you will, Prof. Gary Becker of University of Chicago. He is commenting on the U.S. economy in The Wall Street Journal of Dec. 21:
Productivity has gone very well actually throughout the decade, even during recession. That’s an excellent sign for the economy, if that can continue … The thing that concerns me is whether we are getting too much regulation and social engineering in the next few years. I would be concerned about that as a possible factor that is putting brakes on the growth of the economy.
Now, return and read these comments again, this time substituting “capital” for “I”, “me” and “economy”.

The substitution clarifies the professor's comments and eliminates the seeming contradiction implied by “even during recession”. This is how it appears to me, with my thoughts automatically appending themselves to the text in brackets:
The productivity [that is, workers producing more with the same or lower wages and salaries,] has gone very well actually throughout the decade. [It is not surprising that this has taken place] even during recession. [In fact, it is precisely during a recession that workers can be made to produce more with less.] That’s an excellent sign for [the further accumulation of] capital, if that can continue. The thing that concerns capital is whether we [i.e., the sum total of capitals] are getting too much regulation and social engineering in the next few years. Capital would be concerned about that as a possible factor that is putting brakes on the growth of the capital.
There is no reference to people, either explicitly or implicitly; productivity and recession are mentioned in the same vein one might describe good air quality or bad weather – or the sighting of a black swan. And Prof. Becker is the winner of the 1992 Nobel Prize in economics “for having extended the domain of microeconomics analysis to a wide range of human behavior and interaction”.

I am not writing to criticize the good professor's language. His is the standard language of economics and finance professors everywhere. What I want to focus on here is social engineering. Prof. Becker does not like social engineering because it puts “brakes on the growth of the economy”. By the same token, he does not like regulation because it is the agent of social engineering. His ideal society, we can surmise, is one where the “economy” grows “naturally”, without any regulatory burden or interference.

Prof. Becker is correct in associating regulation with social engineering. Social engineering is consciously influencing and altering the course of the development of the society. It is the attempt by men to direct the social and economic forces towards a definite end. To the extent that regulation is aligned with that goal, it can be the agent of social engineering.

But Prof. Becker is fundamentally wrong in believing that the absence of regulation is synonymous with the “natural” economy or society. There is no such thing as natural economy, no matter how primitive the society. And there is no such thing as the absence of the regulation, only that law and regulation favoring the dominant force in the society are enacted at such tectonic scale and fine level of technicality that they are all but invisible to the general populace – and economics professors. What is the deregulation on whose behalf Prof. Becker and his colleagues have been the most tireless cheerleaders for the past 35 years if not the most brazen attempt in social engineering undertaken on behalf of speculative capital?

I devoted a full chapter in Vol. 1 to the way speculative capital – the latest and most advanced form of capital in circulation – affects the law and regulation. I wrote:
Speculative capital abhors regulation. Regulations interfere with the cross-market arbitrage that is its lifeline. If speculative capital cannot freely operate, it cannot generate profits and must cease to exist. The opposition of speculative capital to regulation is thus not a matter of some technical or tactical disagreement but a question of life and death.

The attack of speculative capital on regulation is not indiscriminate. Speculative capital singles out only those regulations which directly or indirectly hinder its free flow across the markets. Meanwhile, it supports and pushes for the passage of sweeping laws that favor its expansion. In so opposing the regulation and supporting the law, speculative capital distinguishes between the two in ways few philosophers of law could.
And the beat goes on. Listen to Bill Gross, the chief investment officer of PIMCO, the largest fixed income fund in the world. He is talking to the New York Times about the impact of near zero interest rates which has forced the traditional savers, always risk-averse, to financing a “second bailout of financial institutions”:
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”
The good man is exactly wrong – or expediently pretends not to know – in saying that “it’s capitalism”. It is precisely not capitalism, in the sense of the market forces determining the prices and the rates. If it were, the interest rates would skyrocket in the face of massive debt financing, as they did in the case of the auction-rate securities.

The near-zero interest rate, rather, is the result of sustained interference in the markets by the Federal Reserve in accordance with a deliberate policy set by the Federal Reserve. Prof. Becker does not see that as social engineering, but regardless of his sensitivity to what takes place around him, the effects are there. Look at this reverse mortgage “product” from the same Times article:
Eileen Lurie, 75, is taking out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates ... Such mortgages allow people who are 62 and older to convert equity in their homes into cash tax-free and without any impact on social security or Medicare payments. The loans are repaid after death.
The name itself is interesting. Mortgage and reverse mortgage. Just like repo and reverse repo.

But there is a difference. Repo and reverse repo are transactions in capital markets. Both refer to temporary financing. In repo, you borrow money and post security as collateral. At the end of the term, typically overnight or a week, you pay back what you borrowed (with interest) and receive your collateral. Reverse repo is the reverse. You lend money and get security as collateral.

In reverse mortgage, there is no reversing in the sense of having a second transaction. You receive monthly payments on your house. When you die, the lender gets your house.

Note the reference to tax and Medicare. In the U.S., income is taxable (except for the Maddoff “investors”). Also, in the U.S., income beyond a certain level would disqualify an individual from receiving Medicare, the government run health insurance. Someone has gone through the trouble of introducing legislation to specifically exclude the reverse mortgage payments from the calculation of income. One could always claim that the deed benefits senior citizens. But the law has also made reverse-mortgages enticing to cash strapped senior citizens. It has made the product “salable”. If I were a betting man, I would bet that lobbying for the measure did not come from isolated senior citizens.

A reverse mortgage transforms capital to money. A house is capital by virtue of its capacity to generate rent. That is why its price increases over time. The money received as part of the value of the house and spent on say, food and medicine, is wealth (capital) converted to money. So whilst previously a working man could dream the American dream of owning a house and perhaps leaving it to his children, now he must hand it over in return for sustenance. That is a curious twist on New Hampshire’s state motto, Live free or die. It is now live and die free – of worldly possessions.

That is social engineering par excellence.

It is social engineering in excelcis.

But Prof. Becker would have nary a word on it because a social condition that enables predators to get the better of the old and the vulnerable is a part of the natural order of things for him.

Still, these are small matters. I will return with a discussion of the European Union, the counter move to deregulation; one of the most brazen social engineering projects in history being countered by one of the most colossal social engineering projects in history.

And Prof. Becker has had nary of word on them.