More about credit cards, debt, pyramids, and eschatology

My recent post “Why I’m canceling my Bank of America credit card” brought a comment pointing out that cancelling credit cards can adversely affect one’s credit score, perhaps making it difficult to borrow for cars and houses. That may well be true, but it seems to spring from a view of credit and debt quite different from mine. Rather than dump this on the hapless commenter as a reply, I’ll say it here.

First, the companies have no incentive to restrict credit, and I expect they’ll soon be back to sending out credit apps to dogs and kindergartners. When the banks lose money through extending credit unwisely, they raise rates on the rest of us to recoup. Worst case, as now, the taxpayers bail them out, they buy each other up, write off debt, get tax breaks for losses. So I think people can safely cancel all but one or two cards, and still be able to use credit to make major purchases.

Second, I’m hoping that ordinary people, who DO have an incentive to learn from the present debacle, may start restricting their debt to large necessary items. Cars and houses usually do require going into debt. But I’m old enough to remember life without credit cards; my mom had a metal “charge-a-plate” for Macy’s, and there was layaway at some stores, but no credit cards. If you wanted something you saved up for it. If you couldn’t afford to go out to dinner, you didn’t go. To those accustomed to incurring chronic credit-card debt for indulgences, such a life may seem a bleak prospect. But actually I recall very few people growing despondent for want of cruises, concert tickets, and designer handbags.

Back in the 1980’s when I saw items at an Oregon department-type store bearing tags that said “Want me? Buy me!” and a credit card logo, I viewed it as a dangerous & selfish attitude to cultivate. Along with it came the re-definition of human beings as “consumers”.

The present economic system is a pyramid scheme because it is predicated on continual growth. We do not live in a world of infinite resources and space, therefore neither population nor consumption/production can continue to increase forever. Business interests, and even the administration, expect increased consumption to get us out of this depression. If it does, it can be only a temporary fix.

I know there are a lot of optimists out there who say not to worry about dismal stuff like the economy, climate change, and all that, because the world is going to end in 2012 (Mayan Calendar theory) or “soon” (some Christian fundamentalist theories). But I just can’t be that optimistic. Call me crazy, but what if we’ve got those Mayan numbers just a little bit wrong? Or some translator introduced an inaccuracy into the Book of Revelations? What if God has changed His mind, and now thinks it might be amusing to see how His little creatures manage with these challenges? We just can’t know. Better to keep our eyes on the ball, as it were (in this case the planet & its inhabitants) and not count on the Umpire calling the game on account of End of Time.

Desperate retailers: come get free stuff!

JC Penney, one of America’s big traditional retailers, sent out “savings certificates” in early December offering $10 off a single in-store purchase of $10 or more. There were exclusions, including cosmetics, electronics, cookware, and small appliances, but even so there must be plenty of small items like gloves and sox, that would be less than $20, for a discount of >50%.

JC Penney has slipped in the Fortune 500 ratings of America’s largest corporations, from number 74 in 2005, to 126 in 2008.

The Top Ten for 2008?

1. Wal-Mart Stores

2. Exxon Mobil

3. Chevron

4. General Motors

5. ConocoPhillips

6. General Electric

7. Ford Motor

8. Citigroup

9. Bank of America

10. AT&T

AT&T has been buoyed by merging with Cingular and others, and by the success of the Apple iPhone. The oil companies are doing very well, but all the others on this list are reeling from the end of the finance bubble, except for the only retailer: Wal-Mart. It’s our giant conduit between the US and China—jobs go out, Chinese landfill fodder comes in. What do we fill those ships with for their return voyages? Oh yes, dollars and T-bills.

Developed nations circling the drain

In a related note, io9 summarizes a news item in the journal Foreign Policy:

Remember back when you knew you were in the so-called developed world because the economy was doing better than the so-called developing world? Well times are changing. Today the International Monetary Fund announced that, for the first time since World War II, the world’s developed economies would be shrinking by 0.3 percent in 2009 and America will decline by 0.7 per cent. American unemployment is at a 25-year high. When the globe emerges from this economic shakedown, membership in the “developed” club may have changed dramatically. [via Foreign Policy]

A few more cheery predictions:

Japan’s estimate [of growth, by the International Monetary Fund] was trimmed to 0.5% growth this year and a 0.2% contraction next, compared with the previous estimate for growth of 0.7% in 2008 and 0.5% in 2009.

Forecasts for emerging and developing economies were adjusted even more sharply, with the 2008 growth estimate falling to 6.6% from 6.9% and the 2009 forecast dropping to 5.1% from 6.1%.

“Among the most affected are commodity exporters, given that commodity price projections have been marked down sharply, and countries with acute external financing and liquidity problems,” the report said, while noting that China and other countries in East Asia are generally in better financial and economic shape.

China’s 2008 forecast was left unchanged at growth of 9.7%, while the 2009 estimate was cut to 8.5% from 9.3%. [Wall Street Journal blog, Nov. 6, 2008]

Like Candide, go and tend your garden (but share the produce)

The popular press is seizing upon greed and stupidity as causes of the ongoing economic ripoff, and that’s true as far as it goes, but there’s a larger context. Here’s part of a European take on it:

The malady of infinite aspiration
In the first of two issues of Esprit devoted to the economic crisis, editor Olivier Mongin argues that market crashes are less the fault of ignorant or irrational traders and more the result of a broader historical trend in politics, philosophy, and aesthetics. Since the nineteenth century, value is no longer a property of each object or idea, but determined by the price it will fetch on the market.

Enter the herd mentality: traders who expect the market to move in a certain direction buy and sell accordingly, and so cause the change they have predicted. Politics and the media are plagued by the same self-destructive introspection. Without stable values, politicians and journalists try to anticipate what the public wants, and attempt to buy into a rising trend. As public discussion converges on these predicted beliefs, it propagates them through society – prophecies that self-fulfil.

One current consensus, notes André Orléan, is that the financial sector needs more regulation. Look deeper, though, and ideological differences remain. The dominant perspective sees markets as sound in principle, merely distorted by concealed risks. Regulate to increase transparency, and markets will get back on track. This view is opposed by those who note that bubbles and crashes appear in the most transparent markets. Markets are too volatile, this group holds, and would best be helped by keeping them connected to the economy of the real world. These fundamentally different approaches deserve to be publicly considered, argues Orléan, and not relegated to technical discussions between economists.

This is from the Eurozine Review, which presents summaries in English from European publications.

The analysis in the third paragraph echoes that of Nassim Nicholas Taleb in a book I’m reading, Fooled by Randomness: the hidden role of chance in the markets and in life. Taleb is a mathematically trained and philosophically inclined trader in the US markets; it seems as though his early life, as a Lebanese Christian whose family lost everything suddenly during the decades-long civil war there, helped him realize the power of chance events and the fragility of human fortunes. He emphasizes not only the role of chance but also the need to consider not just the odds of an investment, but its potential downside. Such consideration precludes participation in bubbles such as the sale of mortgages and credit debt, packaged and presented as safe investments.

Our American attitude has always been one of denying chance; we exalt the individual’s ability to prevail and the concepts of unlimited positive progress. We now find ourselves in a situation where many negative trends/possibilities are beginning to affect us–ones which we have denied, ignored, deferred action and study upon, for more decades than the Lebanese civil war lasted.

If the popular reports from neuroscience and behavioral studies are to be believed, humans have built-in tendencies that make us unfit for facing the complexities we now live with. We embrace short-term gains and ignore long-term risks, we do not judge the magnitude of risks accurately (e.g. we worry about dying on an airliner but drive with blithe blindness to the odds of injury or death on the road), we have short attention spans, and when something conflicts with our established ideas we ignore it or make up reasons why it doesn’t apply (cognitive dissonance behavior). And so on, the list is long.

At this point the rhythm of writing demands that I suggest some positive courses of action in mitigation of what I’ve described, but if you’ve read this far you probably know as well as I do the sort of changes, individual and systemic, that need to be made. When things get bad enough, perhaps some of them will happen in sufficient frequency to help. Until then, we must be frugal, provident, and compassionate in our own lives, and work at extending those principles more widely whenever there’s an opportunity.

What should happen at the International meeting on the economic crisis?

On Nov. 14 and 15, leaders from around the world (the “Group of 20”) will meet in Washington DC to negotiate a response to the continuing economic crisis. An article from the Washington Post on Nov. 2nd gave some good background to this meeting, for those of us who are not versed in international finance. An article yesterday at gives more detail.

Discord on Economies In a World Of Trouble––
Conflicts Emerge as Nations Seek Solutions

By Steven Mufson, Mary Jordan and Edward Cody

Washington Post Staff Writers

Presidents and prime ministers from major countries around the world will gather in Washington in two weeks to begin heated negotiations over the shape of global financial regulation as they scramble to avoid a deep worldwide recession and restore confidence in markets.

Key European allies are pushing for broad new roles for international organizations, empowering them to monitor everything from the global derivatives trade to the way major banks are regulated across borders. But the Bush administration has signaled reluctance to go that far. In the past, it has resisted similar proposals as potentially co-opting the independence of the U.S. financial system or compromising free markets.

Some economists and policymakers say the summit could launch important reforms. But others predict it could turn into an economic tower of Babel, with weak political leaders promoting solutions fundamentally at odds with one another. And if leaders cannot bridge their differences, they could risk another bout of financial disarray.

There are also differences of opinion on the issue of timing. French President Nicolas Sarkozy, who pressed for the 20-nation summit, says it must produce concrete and immediate results. But the host, President Bush, is a lame duck who says the meeting will be “the first in a series” and should focus on principles even though “the specific solutions pursued by every country may not be the same.” Emerging proposals to sharpen existing regulatory tools appear to conflict with plans to create entirely new ones.

What is clear is that expectations for the summit among many observers are high.

“At the moment, I don’t think it would be acceptable for the major leaders to come back from this conference and to go to their respective parliaments or whatever and say, ‘Yes, we rearranged the deck chairs a little bit.’ Because this is genuinely a Titanic crash,” said Howard Davies, director of the London School of Economics and former head of Britain’s financial regulator, the Financial Services Authority.

But no matter what parliaments and people may think about the need for prompt and effective action, it seems to me unlikely that the meeting will succeed in doing much more than talking; the establishment of a new global economic monitoring agency with “teeth” faces too many obstacles: lack of preparation, lack of a precedent or foundation for such a global regulatory institution, too many parties who must agree, Chinese insistence on unfettered national sovereignty.

The summit does have a precedent, one reaching back more than six decades. At the 1944 Bretton Woods conference, world leaders gathered to design the current international financial architecture, laying the groundwork for the International Monetary Fund and the World Bank. The Nov. 15 summit has been popularly referred to as Bretton Woods II.

But this time is different. Two years of preparation went into the 1944 summit. And whereas the United States and Britain largely shaped the postwar financial system, financial regulation and coordination will now require the participation of a broader and more unwieldy group, including emerging economies, many of them loaded with foreign exchange reserves, foreign debts and influence over global financial markets.

Those emerging economies, far from being “decoupled” from traditional industrial powers as many analysts believed just a few months ago, have found that they and more developed nations need one another.…

Bush, meanwhile, has been reserved. “We need to proceed with caution and care but also with all due speed,” White House press secretary Dana Perino said recently. “The president is concerned about moving too far too fast and wanting to avoid unintended consequences.”

Locking In Allies

World leaders are already maneuvering for position. Sarkozy, in particular, has methodically sought allies.

He won a key, although carefully worded, endorsement for action from China on Oct. 25 in Beijing, where a Europe-Asia economic cooperation summit called for more regulation of global financial markets.

“Each of us perfectly understood that it was not possible to meet [Nov. 15] just to talk,” Sarkozy told reporters at a closing news conference.

“This is about no less and no more than the creation of a new financial constitution,” German Chancellor Angela Merkel said.

Sarkozy has also called a Nov. 7 summit of the European Union’s 27 heads of state and government in hopes of winning a Europe-wide mandate to demand swift action in Washington. Recognizing Britain’s special contacts with the United States, Sarkozy invited Prime Minister Gordon Brown to a strategy session Tuesday at a presidential retreat in Versailles.

Still, despite all the posturing, there are different views on what concrete action would mean.

Sarkozy and Brown have voiced support for a new international regulatory body to supervise large transnational banks. Brown has called for strengthening the Financial Stability Forum, created after the Asian financial crisis of the late 1990s. The group of central bankers, finance ministry officials and international financial institution representatives produces important recommendations, Brown said in a speech this week, but, he added, “It never had enough teeth.”

Merkel, who has been more conservative in dealing with the crisis than the hard-charging Sarkozy, favors a stronger International Monetary Fund, giving it a supervisory role in international finance and making it a “guard” of financial stability. Brown, too, has proposed making the IMF “an early-warning system” for financial problems, singling out low bank capital ratios or wildly mispriced securities.

IMF officials have embraced the idea that the fund could take on a larger role, perhaps as part of a secretariat involving other multilateral institutions.

Sarkozy has also sought support for proposals to curtail tax havens with new international investigative powers; require increased transparency on high-risk hedge fund investments; and regulate financial traders’ compensation packages in a way that would reduce the incentive to make risky investments. But a French analyst said Sarkozy may scale back some of those ambitions given U.S. opposition. “He may have overreached a bit,” said the analyst, who spoke on condition of anonymity so that he could speak candidly.

Japanese Prime Minister Taro Aso, in power just five weeks, spelled out in a nationally televised speech Thursday night what he wants from the summit: international regulation of financial institutions and of credit rating agencies as well as standardized accounting for international business and markets.…

China may prove more cautious than any other nation. Wu Xiaoqiu, director of the Institute of Finance and Securities, said he thinks Chinese officials, while joining their European counterparts in calling for an overhaul of current regulatory systems, would stop short of supporting a proposal for a worldwide organization with significant power.

“It is important to have an agency which can coordinate the global market and policies of different countries,” Wu said. “But China doesn’t like the idea of having a global SEC since no organization should affect the sovereignty of countries.”

Prospects for Politicians

For some leaders, the financial crisis offers a political opportunity at a time when electorates are deeply concerned about the future. Brown, Merkel and Sarkozy are all facing low approval ratings.

“I think all of the governments are uncomfortably aware that they have got very, very nervous electorates. Point one is just to show that somehow there is an agenda which can allow people to feel that something’s under control,” said Davies, the director of the London School of Economics. “People like Sarkozy, in particularly, and Brown know that their future depends on it appearing that they are responding adequately to this crisis.”

There are dangers, though. The pressure to be seen as taking vigorous action could lead to overregulation, say many business leaders, especially in London, where the financial services sector plays a key role in the economy.

Willem Buiter, a professor at the London School of Economics and a former Bank of England policymaker, said he feared “we will . . . end up regulating so tightly that a lot of financial institutions will be untenable and unprofitable and we will spend the next decade slowly chipping away at over-regulation.”

Disunity is another risk. If world leaders fail to coordinate, the consequences could be severe. Their staggered responses to the financial crisis in September contributed to bank runs and currency fluctuations, as money fled to whatever country was promising the most generous guarantees.

“If we forbid alcohol in two pubs only, everyone would just go to the other pubs,” said Dimitrios Tsomocos, professor of financial economics at Oxford University and a consultant to the Bank of England, who added that one nation’s regulatory scheme must not be more attractive to business than another’s.…

Robert Hormats, a vice chairman at Goldman Sachs and former National Security Council staffer, said that the November summit would be valuable if it became the first in a series of G-20 meetings, widening economic coordination.

“We’re at a point of time where the role of emerging economies has become very apparent and where the G-7 does not have the capacity in the eyes of many people in the world to solve this problem alone,” Hormats said.

“We’ve learned from this crisis that you can’t conceivably in the future try to pretend that the global financial system can be run by the occasional phone call between the Fed, the Bank of England, the SEC and the FSA,” Davies agreed. “That’s not going to work anymore.”

Brown, in a speech to business leaders in London this week, said, “We have got to . . . involve China, India and all the emerging market economies because the world economy is changing before our eyes, and the system that is just built on Europe and America will not survive the test of time.”