THE MOST DANGEROUS ENTANGLEMENTS

First published on The Policy Think Site  www.jaygaskill.com

THE MOST DANGEROUS ENTANGLEMENTS ARE DOMESTIC

The opinion mavens of the day like to talk about all the wonders and joys of interconnectivity – on the web, in commerce and in our hectic, information-saturated lives.

Yet when the contents of the bilge dump from a foreign vessel vents “non-native” species into local waters; when those alien species devour and displace valuable local species, that kind interconnectivity is considered another kettle of fish.

Hawaii works diligently, for example, to keep local flora and fauna from being “polluted” by non-native, off-island plants and critters, and for good reasons: Hawaiians want to protect paradise from  damaging ecological entanglements.

In this essay, I will be sharing insights about the perils of interconnectivity, especially when our economic bloodstream is placed at risk.

In a follow-on essay, Part Two (to be released next Wednesday), I address some of the early battles that must be fought and refought.

 

A SOBER ANALYSIS

By Jay B Gaskill

 

The real-estate credit bubble of 2008 was not our first.

Back in 1796, a huge U.S. land speculation bubble broke. The ensuing Panic of 1796–1797 became catastrophic disruption of Atlantic credit markets that rippled through Britain and the United States. That credit tsunami exposed the fact that that the USA’s fragile credit system was dangerously entangled with Europe. Gossip in the US capital was all about the warnings against foreign entanglements by George Washington in his Farewell Address.  In is 1801 Inaugural Address, Thomas Jefferson counseled, “…peace, commerce, and honest friendship with all nations, entangling alliances with none.”

Flash forward to the late thirties: physicists discovered that two quantum particles (in the quark family) could be entangled with each other such that even when they were widely separated, what happened to one caused an effect on the other…this seemed to be happening without any known physical link between them.  In 1949, Albert Einstein said that this quantum entanglement was “spooky”. Hold that thought.

In 1961, Alicia Rosenbaum (Ayn Rand) opposed the entanglement of commerce and politics; she advocated erecting “a [wall of] separation of state and economics, in the same way and for the same reasons as the separation of state and church.”

In 2010, experts began warning us, after the fact, that financial risk entanglement is dangerous.

“Modern financial institutions are entangled in a network of illiquid bilateral hedging contracts…. The fear of these instruments affecting the whole financial system was a major … [factor]… in the Financial Crisis of 2008. The system is “entangled”… if banks have large exposures to a few counterparties, [because] they … do not take into account that their own failure also drags down other banks….. Given that banks choose short-term financing, the failure of a single large bank prompts a systemic run. The whole system collapses even though banks have positive equity and are not directly linked through credit exposure…”

This was taken from an academic paper by  Adam Zawadowski (currently Assistant Professor of Finance, Boston University School of Management) { PhD in economics, Princeton University, 2010 / MA in economics, Central European University, 2005 /MSc in engineering-physics, Budapest University of Technology and Economics} 2003 http://faculty.chicagobooth.edu/workshops/finance/past/pdf/JMP_Zawadowski.pdf }

 

TAKEAWAY POINT ONE:

The banking credit entanglement problem of 2008-9 took a heavy toll on all of us; even the solvent banks took hits, in spite of the fact that those banks were not directly linked to the weak ones. It turns out that the same kind of spooky entanglements that freaked Einstein are not confined to some esoteric field of physics; they regularly cause mischief in our economic lives right down to the bread and butter level.

TAKEAWAY POINT TWO:

In its healthiest form, commerce is “pure”, by which I mean that it is essentially free of political meddling (entanglements); and is supplied with an effective support system. Commerce requires common commercial standards that are enforced through a system of laws that require honesty and transparency; allow risk/reward and risk/failure; and support the integrity of agreements, contracts and the necessary financial infrastructure. Both elements – the support system and the freedom from political meddling – are essential to healthy commerce.

I’m not giving away any secrets to point out that we are living in the realm of impure commerce. Almost every financial or business decision in and outside the United States is freighted with a web of approvals and constraints that go far beyond and necessary support system.

Why? …To further the causes of “social justice,” and to support the political class via a system of favors.

Over time, the political class has imposed layers upon layers of social goals (some conflicting) on the commercial sector, until they collectively burden its operation. At first blush, it may seem self-defeating to impose measures that impair the generation of the real income on which the economy depends, but the political class benefits specially. The various social goal measures became the political foundation of a system of electoral paybacks that benefit a working majority of the political class, but not necessarily of the electorate. This has become an ongoing a feedback loop. It operates like a damaging biological or ecological invasion, as when a parasite begins to fatally weaken its host, or an invasive species threatens the ecosystem.

These are the inevitable results of the entanglement of “economics” and “politics” about which Ayn Rand and other have warned. We might talk about the “state” or “the government” as if it is still some neutral arbiter, a source of eternal fairness and justice. But in the modern situation that is an indulgence in fantasy.  There are no neutral arbiters in politics.  Interest group politics is all about buying votes via the allocation of monetary and regulatory burdens.

Commerce is about creating wealth. In the pure commercial model, failure is a teaching moment, not the occasion for a subsidy; its impact falls primarily on investors, not on taxpayers.  In the pure commercial model, success is a teaching moment for others to emulate, not the occasion for a “fairness tax” on success.

The pure commerce model works.  We know that by comparing the performance of economies that are less burdened by political meddling with those that are more burdened. Over time, relatively pure commerce (nothing in life is truly “pure”) outperforms all other models.

Politically managed commerce does not do well over time. The wisest thing a liberal or conservative government can do for the common well-being is to provide the necessary support system for the commercial system to operate; then get out of the way.

Note to public money humanitarians: You can’t tax a moribund economy (or bleed an anemic host) for long.

Even Xi Jinping, China’s new, business-friendly president gets it.  Allowing for the lingering ideological shadow of Mao, President Xi Jinping shows a better understanding of the basic needs of commerce than many members of the American political class seem to grasp – and that is no endorsement of the Chinese way.

Some discouraged observers have given up; they maintain that our current level of political and economic entanglement is a metastatic cancer that has perverted the political system and overburdened the economic system in ways that are almost beyond remedy.

That is self-defeating.  It is also ridiculous.

Think of being the landlord of the nightmare rental occupied by a recluse. A formerly elegant home is crammed floor to ceiling with pet debris, empty tuna cans, old shoes, older clothing, piles of obsolete electronics, magazines, unused coupons, bottles, boxes and other undefinable heaps of “stuff”,  clutter as far as the eye can see.  You lecture the occupant; you get promises that never are kept. But nothing meaningful happens until the occupant-in-residence is evicted, or decides it’s time to leave.  On that happy day, change is in the air.

In four days, a work and cleaning crew has hauled away all the junk, and scrubbed the place down to the bare walls.  When the new tenants arrive, the old house takes on new life.

We, the American people, are the landlords.  The political class, liberals, conservatives, centrists, progressives and ward heelers all, are our tenants.  The solution is essentially the same as in the bad tenant example: …Eviction. …Cleanup. …Recovery.

Of course, our real life time frame is more extended; after all it’s a very big house, and the tenants have been messing it up for decades. The eviction process necessarily takes place in stages.

This is not rocket science. …Although to the political class common sense might as well be quantum physics. Our success will be apparent when the political burden on commerce is once again much lighter, much more predictable, much more bearable and rational. That success will seem like a “back to the future” moment, but it will actually constitute an authentic creative change, a new, new thing on the earth.

The full creative powers of commerce have yet to be unleashed anywhere in the world.  When we eventually succeed in this liberation, and we will, we need to be wise in our moment of victory. We or our descendants will need entanglement-firewalls to ensure that the following generations don’t walk back into the same trap again.

I believe that this will take place because it will be a self-evident necessity for humanity to survive.  American exceptionalism comes down to this. The USA is the single, most viable nation of significant size and power left standing, that has the capacity to bring this creative economic and political change to fruition within the lifetimes of children now alive.

And this brings to mind the admonition of the sage, Hiller the Elder, who charged his and all subsequent generations: “If I am not for myself, then who will be for me? And if I am only for myself, then what am I? And if not now, when?”

As Americans we need to accept our role as stewards of the future.

JBG

Stay tuned for Part Two, in one week.

 

COPYRIGHT© 2013 BY JAY B GASKILL, ATTORNEY AT LAW

PULL QUOTES AND LINKS ARE ENCOURAGED

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