MADMEN

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

The quote is from John Maynard Keynes, perhaps the most influential economist of the 20th century, for his advocacy of government spending to re-prime the stalled economic pump.  Deficit spending drives conservatives nuts, of course, because it contributes to a number of things that cost them money.  Liberals, I suppose, are people who have no money, and thus are free to advocate tax and spend programs.

Deficit spending by government rubs conservatives the wrong way because this is no way to run a business w/o going bankrupt.  The difference is that a nation is not a business and is responsible for running an economy, which while containing myriad businesses, is not run as a business itself.

Deficit spending runs up the already large national debt, the product of all of the discretionary wars we enter, such as Vietnam and Iraq, as though the mandatory ones, such as WWII, PG-1, and Afghanistan weren't costly enough.

The interest on the debt is paid by our grandchildren, those nice little kids we all know and love.  We're saddling them with a birthday present when they turn eighteen that they're not going to appreciate laboring under, as the payments are coming out of their paycheck and tax dollar.

When business is taxed it must raise prices to customers.  This is called price inflation.

When prices rise for customers, meaning consumers, what do they have to do?  Seek higher wages, salaries and fees for services, is what they have to do.  This is called wage inflation.

The two spiral upward together, hand in hand.  Together they're commonly called just plain inflation.

When these go up, something else goes up as well.  Home values.  I can't point to a cause and effect correlation, but I do know that over the past six decades, the home my parents bought for around $7,000 is now valued at $407,000.  I drove past it on a recent hometown visit and it looked better than I remembered.  In my mind, it's still a house valued at $7,000.  The $20 - 30,000 homes when I was growing up seemed a lot more luxurious.  A $400,000 home in those days didn't exist on Staten Island.

That amount doesn't buy you a lot of home in San Francisco today, although with the bursting of the home inflation bubble with the subprime loan mess, better homes are coming into reach for those with steady incomes in excess of the cost of living.  How many people like this do you know?  Among the youngsters coming up, this is a tough economy in which to find a job and finance a home.  This is a big part of what the current crisis is about.  Homeowners who took out loans they couldn't afford are in foreclosure.  Buyers who want to take advantage of lower prices can't get loans.  Both sides are stuck because the banks are stuck.

Thus the Fed has to decide how to get the economy unstuck.

Stuck is such a wonderful word.  My grand-daughter learned it at age three.  I'd taken her to the beach where she sat on a little cliff that she could slide down to the sand, provided her diapered bottom didn't get stuck on the rocks.  But if she moved aside a bit, she could slide down on the sandy part.  Naturally she sat on the rocky part and couldn't move, as I stood below to catch her at the bottom of the slide. So I told her, "Liana, you're stuck."  She understood that, for when I moved her over a bit, down she slid. 

Later, getting ready to drive home from the beach, I opened the car door and Liana climbed in, but decided that she didn't want to use the children's car seat that we used for safety.  She just sat on the regular bench seat.  "Liana, you have to get into your seat, please," I more or less asked.  She didn't want to cooperate.

"Liana, if you don't sit in your seat this car is stuck.  It will not go."  She hopped right into the seat where I watched her buckle herself in, perhaps with a little assist from grandpa, and off we drove.

Liana knows stuck from unstuck.

It's hard to get unstuck, sometimes.

People get stuck in their ideas sometimes.

A close family member has adopted the conservative views of her investment banker husband.  When she comes out with what I view as ill-considered anti-union statements indicating a major prejudice against unions, I remind her that our father, a union man whose union activities supported the family he was raising, depended on the right to associate with other workers to seek higher wages, not to mention fairer hours and safer working conditions.  There's a huge history here that many of us ignore, perhaps because these days it's no longer part of our daily lives, unionizing, going on strike for higher wages, etc.  When I was a kid in the 'forties and 'fifties, these were all around us all the time.  We didn't have to read about it in history books.  Now we do, but we don't.  So my sister has forgotten and has a whole new set of attitudes more in line with her businessman husband, a very conservative brother-in-law.

Well, it takes all kinds to create a nation and many of the major themes remain with us generation-by-generation.  How do you feel about the Fed bailing out Wall Street?  Or do you prefer Main Street?

We didn't have a Fed before 1914, the year my father was born.  We had J.P. Morgan.  He saved our necks in the Panic of 1907, which is what they called a depression in those days.  When customers panic, a run on the bank occurs and it fails.  Why?  Because banks take in your deposits at 3% (in the old days) and lend them out at 6%.  They only need to keep about one-ninth on hand to handle daily business of cashing checks and handling small withdrawals for the few customers who come in (again, this is in the old days when you had to "go to the bank" to do anyting.  Today we make online transfers, but when I was growing up, you had to walk to the corner where the bank was to put two bucks into your Christmas Club account so you could buy presents come December.  Customers are happy to stay away from the bank as long as they're confident that the money will be there when they need it.  The bank is happy being extended nine times over deposits.  They can lend out your money nine times before they're in trouble.  If, at some point, the public mood sours for any one of a million unexpected reasons, the customers become alarmed and start heading for the front door of the bank to withdraw their money.  They had to protect themselves (again, this is before they had federal insurance of bank deposits up to a certain limit, now $100,000 per depositor).  So they made a run on the bank.  Jimmy Stewart, in "Miracle on 34th Street" explained how it worked.  Panic created runs.  Panic causes the bottom to fall out of financial markets as shareholders move to dump their shares at any price to avoid seeing their value fall even lower.

The market is mood driven, a product of emotion.  This is why you can't devise a rational model that will always work.  Since people aren't rational, neither are their markets.  A few people may seem rational part of the time, even most of the time, but even the rational ones have emotions that carry them away.  They put their trust in the financial gods and hope for the best.  This is the problem with the Bernard Madoff scandal.  Some of the wealthiest, most sophisticated individuals, brokers, and hedge funds invested with him.  He was arrested by the Wall Street cops the other day, the SEC, and admitted to running a Ponzi scheme that was $50 Billion in the hole.  That's a lot of money to steal with a pen.  You need to generate a lot of confidence to accomplish that.  Guys with guns net $50 bucks out of the till.  But guys with pens, and country club memberships, now that is what I call Criminality with a capital "C."

We could go on.  I began this on one thing and morphed over into another.

I'd been trying to say that a lot of the stuff we believe and can't find a source for has been around since the nation began (the prejudice against banks, for example, see Jefferson fighting with Hamilton during Washington's administration and Andrew Jackson fighting and killling the Second Bank of the United States in 1832, the establishment of the Federal Reserve in 1914, and the current whatever-you-call it where we go down the toilet.  So we have these beliefs.  Keynes noted, in the quote referred to above, that we're in thrall (it means "enslaved") to some ancient economist (or political philosopher).  The interesting thing is that most of the ideas that you hold most dear can be traced to what seems their origin.  Ideas have histories just as nations and people do.  You just need to know where to look.

I tried to trace an idea once.  It took a long time and a lot of work.  The idea was "reason."  I had a case where a man was falsely accused and it was my job to get the case dismissed, otherwise he'd go to jail for close to 500 years.  A deal for half-time wouldn't cut it.  I really had to win this case, which, I'm proud to say, I did, after a long trial and even more fighting after that, because the jury failed to acquit (or convict), but hung.  How could my legal system be so irrational, I thought.  Why couldn't these people see the light, I wondered.  Can't they see reason?  What is reason?

Our whole legal system is based on the idea of reason.  Evidence cannot be used unless it has a "tendency in reason" to decide a disputed issue in a case.  Laws are unconstitutional unless they pass the rule of reason:  they cannot be self-contradictory, meaning self-defeating, in effect, for example.  If they are, and successfully challenged in court, the law is held null and void because unconstitutional.

But where do we get this idea of reason?  I began to read works on the philosophy of science. Scientists ought to be paragons of reason, right?  Wrong.  They're subject to making the same errors as lawyers and politicians, it seems.  They cheat, fudge data, overinflate claims, overvalue test results that support their favorite theory of the moment and undervalue contrary signs. Why do they do this?  Because there's money in it for one thing, meanng grants, and reputation, which translates into money.  So they play games, even when not aware of it.  See Richard Feynman's "Cargo Cult Science."  You can Google this site.

The idea of reason, as we understand and use it today, comes not from the ancient Egyptians, Babylonians, Hebrews, Etruscans, or other folks.  It comes from the Ancient Greeks.  People like Socrates, Plato and Aristotle, and their predecessors, such as Thales and the fellow who said that if cows could draw their gods would have four legs.  This is where we were taught  how to think the way we would all like to think if only our emotions and preconceptions didn't get in the way.

This is one big idea that is traceable back over 2,500 years.  There's a wonderful saying by author Rita Mae Brown to the effect that each of us in Western Civilization rides two horses galloping in opposite directions, such as the scientist who urges his golf ball to "Go in the hole!"   One is the clear, hard, thinking of the Greeks, and the other is the mysticism of the ancient Hebrews, much of it transmitted by the Christians.

Tracing ideas is important and can be fun, if you find yourself getting caught up, as I did.  I learned a lot, about us.  I learned there's a lot of madness, and a little reason.  The reason has to do all the work, against terrible odds.  This is why, for example evolution cannot be taught in American public schools without a fight.  Religious fundamentalist groups organize to oppose what they think is a threat to their belief that their god created the world in seven days, not some impersonal process, described by Darwin, over millions of years.  This was a big part of the most recent presidential election, in which Pres. Bush's forces, based on the religious right, were defeated.  Some didn't support Sen. John McCain and the rest, who did, went down. Sen. Barack Obama has just appointed the head of the Lawrence Livermore Lab, Steven Chu, to be his next something in the cabinet.  This is a real scientist who knows how the world was really created to a much greater degree than to claim that God did it.  Why blame poor God for a thing like that?

I could go on, but it's getting late.