The one-hoss shay (repost)

I thought I’d repost this piece from March readers can make the necessary adjustments.

The Fed’s bailout of Wall Street investment bank Bear Stearns has, unsurprisingly, been discussed in terms of the domino theory. A more appropriate metaphor is The Wonderful One-Hoss Shay . This was a carriage constructed on the theory that a system always fails at its weakest spot.

The way t’ fix it, uz I maintain, Is only jest T’ make that place uz strong uz the rest”.

On the Fed’s current approach, the system is unbreakable, provided that “too big to fail” protection is extended to every significant firm in the system. The result of this protection is that the kind of crisis where the failure of one firm leads to a cascade of failures elsewhere is prevented. But then

First a shiver, and then a thrill, Then something decidedly like a spill,– And the parson was sitting upon a rock, At half-past nine by the meet’n’-house clock,– Just the hour of the Earthquake shock!

–What do you think the parson found, When he got up and stared around? The poor old chaise in a heap or mound, As if it had been to the mill and ground! You see, of course, if you ‘re not a dunce, How it went to pieces all at once,– All at once, and nothing first,– Just as bubbles do when they burst.

25 thoughts on “The one-hoss shay (repost)

  1. I find most US domestic commentary on this crisis rather deluded. They all seem to think that Bush, McCain, Pelosi or even Paulson is in charge of things.

    But in fact it’s the foreign investors – especially China and Japan – who are now dictating terms. It’s really not up to the idiots in Washington any more.

    Listen to Paulson:

    “We have a global financial system and we are talking very aggressively with other countries around the world, and encouraging them to do similar things, and I believe a number of them will.”

    China is keeping quiet for now. But as TIME says, top Chinese leaders have already been burned too many times:

    “No. Not again. Not unless you structure a deal in such a way that we simply cannot lose. Otherwise, goodbye.”

    Here’s one Chinese official:

    “You’re basically looking at structuring a deal at this point in which there is no downside — none. Even if a company goes under, like Lehman, you’re first in line to get paid a return on your assets. Take it or leave it.”

    The G7 countries are busy talking but not saying much. German Finance Ministry spokesman said:

    “We have to see if and to what extent those measures make sense for Germany.”

    Under pressure from abroad, the U.S. Treasury yesterday flipped and decided to include institutions outside of the U.S.A. in their rescue plan. This is how Paulson explained it away:

    “The American people don’t care who owns the financial institution. If the financial institution in this country has problems, it’ll have the same impact whether it’s U.S.- or foreign-owned.”

    So massive wads of US taxpayer money will be propping up foreign investors and foreign-owned companies. Obama now says he’s against that component of a deal, but what’s he gonna do? Pledge to raise US taxes by 50%?

    Paulson blames the crisis on “irresponsible lending and irresponsible borrowing.” But he doesn’t mention that it is the Bush administration which has borrowed most aggressively, to fund their obscene oil wars and other get-rich-quick privatization schemes. Japan and China alone now hold 47% of the US foreign debt!

    Here’s Paulson again:

    “This is a humbling, humbling time for the United States of America.�

    Well, he got that right! Or as Senator Jim Bunning from Kentucky said:

    “The free market for all intents and purposes is dead in America.”

    And he’s a Republican.

  2. The Chinese have trillions of dollars worth of US financial assets (that’s including not just foreign currency reserves but investments by state banks and other Chinese investors).

    The state banks’ balance sheets are a lot more solid than they used to be (30-40% per annum growth in deposits makes it easy to bury old bad dents).

    But the Chinese have a huge amount to lose if the US currency and US financial assets simply collapse.

    The Chinese real economy is a lot less exposed to US exports than many people suppose but the consequences for China of a major US recession would still be pretty nasty.

    The Chinese will doubtless negotiate fiercely but they’re unlikely to do anything to put the Peaceful Rise at risk.

  3. would someone please write again that the capitalist system is fundamentally sound? i want to believe, but these princes of capitalism seem to continually take steps to institute (socialism) and it’s very hard for a layperson to understand.

    incidentally, this socialist layperson may not understand the attractions of capitalism as an academic exercise, really, “puts”, “takes”, selling something you haven’t got.. (isn’t that theft dressed up as a 3 card trick?,) but: i do grasp the utility of owning real estate as an investment for old folks like me, while providing flexible or temporary accommodation to occupier. you could do this in a socialist society, too. so why not outlaw all this flash paper-claims-on-other-paper, and save the world from the next time ‘the system is fundamentally sound’.

    oh, i just remembered, they have outlawed short selling, temporarily. that’s rather like saying “murder isn’t murder in months with an ‘r'”.

    i’d like to laugh to at all the people who insist ‘the system is fundamentally sound’, but they can’t seem to get the joke, so laughing would be unkind.

    when the earth was flat, capitalism, or ‘law of the jungle’ as it was known as then, made a rough sense. need something? go out in the limitless jungle and take it, from nature or a weaker possessor. but we live in spaceship earth now, overcrowded, with dwindling resources and mounting effluents. planning is necessary. call it managed capitalism if it will make you happier, but socialism it will be.

    if the prospect of state socialism doesn’t appeal, the alternative is democracy. sorry.

  4. Let’s put it this way Al – can you cite an actual socialist systems (past or present) that wrok as well?

  5. Certainly the social democratic/Keynesian system that prevailed until the 1970s is looking better every day by comparison.

  6. Well here we come back ot the porblem of terminology.

    i’m sure al isn’t advocating we copy the soviet system, but I’m not sure exactly what he is advocating.

    For my part, I think the Us system needs pretty major reform – but i’m not convinced the rest of the developed world is in nearly as bad shape. (The fact that Basel II which failed so spectaculrly in the US is alos the basis for bank regulation elsewhere is a major worry though.)

  7. The last two remaining investment banks Goldman Sachs and Morgan Stanley have now decided to become banks. This means they will have access to the Feds liquidity support but will now be more tightly regulated, with stringent capital requirements among many other things.

    Wall Street’s investment banks — so powerful, so imperious, so arrogant, the masters of the universe, are now all gone. Their remaining shells are now reduced to begging from public servants. The US Government has nationalised the world’s biggest insurance company with no compensation to the shareholders. Fidel Castro, eat your heart out.

    This really is a revolution and like many revolutions, it came suddenly, like the fall of the Berlin Wall.

  8. Ian,
    I would advocate mutualism. As practiced by Owen, the Mondragon co-operatives, the Rochedale co-operatives, and for most of Australia’s 19th and early 20th century history. Mutualism is definitely socialist, but not state socialist.
    CF the collected works of Race Mathews.

  9. And a tiny observation:

    Today the ASX was open only from 11:00 to 16:00 hrs due to the suspension of all short sales.

    The All Ord finished 4.3% up on Friday. The share price of the ASX (‘the market maker’) finished by over 4% down.

    Says something – doesn’t it.

  10. James – I was on the board of the ANA Friendly society for about a decade and am currenctly President of a Housing Co=op.

    I’m well aware of mutualism and have been suporting it for about the past fiftenn years.

    In and of itself I’m not convinced it provides an alternative to capitalism.

    I also hold to the view that we need to establish the models for a mutualist society first and then progressively replace segments of the current private sector and government sectors.

    Evolution not revolution.

  11. I really don’t get this “economy” thingy. If the bubble has burst, exactly what are they trying to prop up.

    Having just read some of Paul Krugmans comments, I think that he is making a similar point… i.e. the rescue package probably won’t work… thus we will have deflation in asset prices. I’m not sure how this will play out in Oz though. Maybe someone could give us a few hints. For example are we going to see much higher rates of unempolyment?

  12. “Mutualism is definitely socialist”.

    No, only under systems in which only mutual action is possible. However, the spectrum of mutualism also allows individual action, partnerships, etc., merely displacing today’s familiar corporate structures; it only turns socialist if the last crowds out the rest. See Kevin Carson’s blog.

  13. “I’m not sure how this will play out in Oz though. Maybe someone could give us a few hints. For example are we going to see much higher rates of unempolyment?”

    I think any increase in unemployment here will be pretty modest.

    I think it will stay below 5% and is highly unlikely to exceed 6%.

    That’s bad by the standards of the last 5 years but not by the standards of the last 50.

    The key questions for the Australian economy are:

    1. Will Australian investors suffer dramatic losses as a result of their US debt exposures”

    I suspect the answer is “no”. There will be further losses but they’re unlikely to exceed say $10 billion across the entire economy.

    2. Will Chinese demand for Australian commodities decline?

    Probably also “no”. Chinese growth will take a hit, slowing the growth in demand for commodities, pushing down prices and hurting investment in additional production capacity here.
    But total volumes are likely to stay around current levels or continue tro grow but at a slower rate.

    3. Does the Australian government have the capacity to provide any required economic stimulus?

    Probably yes.

    Current official interest rates have the capacity to be cut substantially. Real interest rates here are around 3% while real US interest rates are negative.

    At the same time, the surplus means that even allowing for a moderate fall in revenue because of a possible recession, the government can afford to provide tax cuts and other forms of economic stimulus (like a boost to pensions).

    There’s also the question of the Infrastructure Funds set up by Labor which should be in a position to start spending in the next year or so, putting several billion dollars a year into the construction sector and related industries.

  14. Ian, Hear hear for Evolution not Revolution. BUT we are going to need legislative change at some point to stop things like the AMP ripoff making destroying mutuals profitable for their boards.

    Where do you think the best points of entry for mutualism are at the moment? certainly I’ve been encouraged by the quasi-mutualism of the Bendigo Bank’s community banks to think about how mutuals could be used to revive rural Australia.

    Thanks for the tip to that blog, PM Lawrence.

    I understand socialism to be fundamentally defined by a belief that labour creates value and is entitled to a share of that value created, above and beyond the market-determined wage. Mutualism’s stress on “employee” ownership on a democratic (one person, one vote) rather than shareholding (one share, one vote) basis makes it intrinsically socialist by that definition. A one-person business is socialist as the owner retains the value he/she creates (if they aren’t just a contracted employee replacement earning the same wage).

    Socialism is often confused with state socialism which says that the best way to ensure that labour gets a share of value is for the state to appropriate and redistribute either the profits from value creation, or the value-creation machinery itself. But this is an elaboration not a fundamental requirement of socialism IMHO (I’m sure you know all this already).

  15. “Where do you think the best points of entry for mutualism are at the moment?”

    Identify sectors of the economy where government is failing and provide viable alternatives.

    Before the 1950’s in Australia that was health insurance – and friendly societies filled the need.

    (Freidnely society medical insurance was pretty much wiped out by Bob Menzies and the AMA who worked together to eliminate “group practice” whereby doctors were actually employed by Friendly Societies and paid a capitation rater than a per service fee.)

    Currently, I think there’s a huge need for better housing solutions and that’s where I’m focusing my efforts.

    The thing is I don’t see mutualism as replacing either government or the private sector, I see it as complementing them both and having a dynamic give-and-take relationship.

  16. ‘Mutualism’s stress on “employeeâ€? ownership on a democratic (one person, one vote) rather than shareholding (one share, one vote) basis makes it intrinsically socialist by that definition’.

    That’s rather the point – you are narrowing down to just a part of the range covered by mutualism. It is entirely possible to recommend mutualist solutions that don’t fit that profile. Purely for illustration, and not claiming that this represents the whole range either, here is one: you have partnerships and sole proprietorships, with one partner one vote the norm but capital contribution plans also the norm so that one employee and one share tend to converge. Then it can be oriented one way or the other according to whether “partner” is read as “nominal partner” or “paid up partner” – and, of course, both types can be represented.

    The key thing is that mutualism can avoid the separation of the individual as participant and the individual as contributor. The contrast you made is a false dichotomy in the ideal case, since both are present; it would only be a socialist form of mutualism if it plumped for individual as participant as taking priority and allowed that separation to occur – but you can still be mutualist if you plump for individual as contributor as taking priority, provided you also try to build up that convergence of the two aspects. If the separation can be made an immaterial exception, it actually becomes meaningless to speak of socialism.

  17. I suppose for people who have vast knowledge in the history of social or political movements, the classification of organisational forms is interesting and important. I respect that. I’d like to pick your brains:

    What do you think of asking the question: Which organisational forms are best suitable to address practical problems encountered by one (or a very small number of) generation? (this would allow, a priori, the corporate form of business, owner-managers, mutuals, state owned enterprises, and …to coexist and their relative importance and specific rules and regulations would evolve over time)

  18. EG, to my mind the best forms are, basically, sole proprietorships and partnerships of natural persons and/or “moral persons” that have been turbocharged, as it were, with any or all of the following:-

    – limiting their commercial liability exposure by buying suitable insurance, which would novate so that if the insurer defaulted the liability would not revert to the purchaser of the insurance;

    – allowing specialised equipment to be funded by issuing bearer bonds secured by it, suitably insured to cover reduced distress resale value;

    – allowing enduring entities to sell annuities etc. to raise capital;

    – reducing their operating capital needs by fleet leasing operating equipment (other than specialised equipment, unless insured as above);

    – automatically terminating any commercial liability after a run out period after persons leave a business, unless explicitly varied (however, wilfully, recklessly or negligently abusing this would give rise to a criminal offence without time limitation).

    I am assuming some enclosing environment just here; but mutualism is also adaptable to anarchist frameworks. A “moral person” is no mere legal fiction, but where something abstract really does have a life of its own, e.g. football clubs, monasteries, municipalities. Core banking – i.e. providing businesses with working capital – could work by syndicates that cover their exposure with insurance. Municipalities, church groups, whatever could conveniently provide local businesses with operating equipment by fleet leasing. Google Meir Kohn on Capital Markets before 1600 for some relevant background.

    I could go on, but I will spare you…

  19. Ernestine, I’m not sure I fully understand your question. Could you rephrase it?
    My ideal organisational form would be the co-operative, with higher-order services (banking, insurance, etc) provided by co-operatives of co-operatives. As the Mondragon experience has shown, it works damn well.
    I have always been inspired by a question from Dahl: If we believe that democracy is the best form of government, why do we run our businesses like feudal monarchies?

  20. I was a director of a co-operative for many years. So long as the members were happy with the service, we remained in place. It was like a company in that way: the members were free to convene and get rid of us, much like a political democracy except that they weren’t restricted to a three-year election timetable. So in what sense are our businesses feudal monarchies? If they are companies/partnerships, shareholder/partner sovereignty reigns. If they aren’t, for example if they are sole traderships, well then it is hardly feudal monarchy to direct yourself.

    But perhaps you are talking about internal management? About the hierarchy of board -> employee management? No dice there either. Co-operatives require those too. We had employees in my co-operative. They rightly did what they were told, since they were servants of the members, who elected us to represent them. So this ‘co-operative = democracy, other business types = feudal monarchies’ idea doesn’t really reflect reality.


  21. BBB, I am talking about internal management. And my preferred model (as found in the Mondragon co-ops) does not have non-member employees.
    Shareholder/director is feudal in the sense that the weight of one’s vote depends upon one’s command of resources, and there is a large class of stakeholders who get no votes at all. A co-op is a one-member one-vote system.
    Sole traderships don’t really enter into it either way.

  22. James – actually Mondragon has had to take on non-member employees. for that matter some of the Co-operative companies have set up overseas manufacturing companies where none of the employees are shareholders.

    The problems Mondragon has had in maintaining its original structure and principles is what makes me suspicious of the idea Co-operatism is able to completely substitute for capitalism.

  23. “I was a director of a co-operative for many years. So long as the members were happy with the service, we remained in place. It was like a company in that way: the members were free to convene and get rid of us, much like a political democracy except that they weren’t restricted to a three-year election timetable.”

    There’s a substantial difference between the one-voter per member basis of most co-operatives and the one vote per share voting system of most companies.

    There’s also the fact that many co-operatives restrict voting membership to employees and/or customers.

    I should say though that my current work situation (in which I’m a shareholder in a company along with two of the other employees and there’s an extreme flat operating structure) is much closer to a democracy that some co-ops I’ve been involved with.

  24. Re #19, James, thank you for your thoughts and apologies for the delay.

    I take you point about the apparent incompatability between the notion of democracy and the corporate form of business. Cooperatives or mutuals tend to work well in local economies but it is a little difficult to imagine how they could be formed in the so-called ‘global economy’. I understand that there is some historical evidence to support the proposition that the emergence of the corporate form of business (stock company) is associated with the emergence of ‘long distance trade’ (forerunners of multinational firms.) Whether this makes the corporate form a ‘good thing’ or not, and under which conditions, is another question.

    As to rephrasing my question: My question aims to change the focus from ‘pure'(homogeneous) systems (eg partnership vs corporation vs mutuals, state owned enterprises, etc) to ‘mixed’ (heterogeneous) forms or organisations. My question partly arose from my frustration with notions such as ‘capitalism’, ‘feudalism’, ‘mutualism’, ‘socialism’ and any other ‘ism word from the socio-political field.

    While I like very abstract theoretical models in economics for several reasons, my experience is that the most pleasant countries to live in are those where there is a messy mixture of organisational forms, both on the enterprise level and in government.

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