Signs of the Economic Apocalypse, 5-26-08

From SOTT.net:

Gold closed at 925.80 dollars an ounce Friday, up 2.9% from $899.90 for the week. The dollar closed at 0.6342 euros Friday, down 1.2% from 0.6419 at the close of the previous Friday. That put the euro at 1.5767 dollars compared to 1.5578 the week before. Gold in euros would be 587.18 euros an ounce, up 1.6% from 577.67 at the close of the previous week. Oil closed at 131.87 dollars a barrel Friday, up 4.1% from $126.62 for the week. Oil in euros would be 83.64 euros a barrel, up 2.9% from 81.28 at the close of the Friday before. The gold/oil ratio closed at 7.02 Friday, down 1.3% from 7.11 for the week. In U.S. stocks, the Dow closed at 12,479.63 Friday, down 4.1% from 12,986.80 at the close of the previous Friday. The NASDAQ closed at 2,444.67 Friday, down 3.4% from 2,528.85 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.84%, unchanged for the week.

Oil prices resumed their sharp increase last week. Why have oil prices been rising so much over the past few years? Supply and demand? Certainly not based on current supply and demand. Future supply and demand? Maybe. Or maybe it’s supply and demand of currencies, with currencies falling as the flip side of the so-called commodities bubble.

Adrian Ash compares the dizzying proliferations of ways to increase money supply to a hallucinatory frenzy, with all the dissociation and mania that that implies:

The Financial Furry Freak Brothers
The fiat-money experiment and the monsters it's spawned have broken out of the lab and onto the street...

Adrian Ash

22 May 2008

When Albert Hofmann – the Swiss chemist who discovered LSD – passed away at the start of this month, newspaper editors the world over reported it as the death of the man "who experienced the first ever bad trip."

But Hofmann's hallucinations seem little worse than most acid-induced visions. Or so people tell us..."

Beginning dizziness," he wrote in his lab journal for 19 April 1943. Looking to find a stimulant for the circulatory and respiratory systems, he'd just concocted – and taken – a big dose of lysergic acid diethylamide-25.

"Feeling of anxiety," he noted, before adding in due course "Difficulty in concentration. Visual disturbances. Desire to laugh."

Finally, Hofmann scrawled the words "most severe crisis". Then he fled the lab on his bicycle.

It seemed to stay stationary even as it wheeled him back home, where his neighbor – who brought him a nice glass of milk to calm him down – appeared as a witch in a colored mask.

He felt possessed by demons. The furniture in his bedroom began to menace him. All pretty run of the mill stuff if you dabble with psychotropics, in short.

But such "fantastic images" don't always ease into the sensations of "good fortune and gratitude" Hofmann got to enjoy later that day. Hallucinations can still cause the "most severe crisis" – even without some fool laying Witches Hat by the Incredible String Band on the turntable.

"Inflation will return to the 2% target," claimed Mervyn King, head of the Bank of England – and one half of the financial furry freak brothers running Anglo-American monetary policy – last week."

Growth will eventually recover to a sustainable rate."

Just a central banker's wide-eyed hallucination? Maybe not. Like Albert Hofmann's wobbly bike-ride six decades ago, the credit cycle will get us home in good time, ready to turn once again from boom to bubble to bust. But like any powerful psychedelic, the trip gobbled down by Western investors could take much longer to wear off than anyone dares hope right now.

And just what was the Governor smoking when he claimed that "in these [current] circumstances, the household saving rate is likely to rise"...?

The Bank of England has been cutting UK interest rates since December. Its latest Inflation Report says it will continue to cut interest rates "in line with [bond] market expectations," too.

And UK households have grown their savings only once when interest rates fell in the last four-and-half decades. That brief period lasted for two years at the start of the 1990s.

Both before and since – and most markedly during the previous post-war recessions (of 1974 and 1981) – people have tweaked their savings almost precisely in line with changes to the rate of interest, as set by the Bank of England itself.

King's starry-eyed vision, however, "is part of a rebalancing of the UK economy, away from spending and importing, towards saving and exporting," he told reporters last week, pointing at the surge in household savings swirling above his head before asking if anyone wanted to split a Juicy Fruit chewing gum.

The sky's turned all purple in Washington too if US policy-makers think the credit crunch will somehow boost household savings there. Consumers aged 45 and above are in fact raiding their retirement accounts, reports the American Association of Retired Persons (AARP) – "a horrific scenario," according to Tom Nelson, the CEO."

People are feeling this pinch [of tight credit and surging inflation] in the short term...but the long-term consequences that are facing these individuals – and our economy – for years, if not decades, are frightening."

One in four middle-aged workers surveyed by the AARP says they're delaying retirement because of the crunch. The same proportion is withdrawing funds from pension and other savings accounts. The youngest baby-boomers are also failing to pay utility bills, reports MarketWatch – and "even cutting back on medications."

Well, they're cutting back on reported medications at least. Who can say what's being cooked up at home with the kids' old chemistry sets, dusted down from the attic?

Put another way, "who had heard of collateralized debt obligations just 10 years ago?" as Niall Ferguson, history professor at Harvard, asked in a speech opening New York's new Museum of Finance back in January this year."

Collateralized loan obligations? Credit derivatives? These forms of financial instrument are of very recent origin. So are the hedge funds; so are the private equity partnerships; so are the sovereign wealth funds; and so are those wonderfully named entities, the conduits..."

Ferguson then flashed up a series of charts "to illustrate the speed with which these phenomena have proliferated." First, mortgage-backed securities. Starting in 1980 – "when scarcely any such thing existed" – they total $3.5 trillion-worth today. Then he cited "the whole range" of other newly-born asset-backed instruments – automobile loans, equipment loans, student loans, credit card-backed debt derivatives..."

Over the counter derivatives outstanding?" the professor asked. "Well, if you'd asked someone to name that figure in 1987 it would have been a very small number indeed."

Today we're talking about $450 trillion," said Ferguson. (He wasn't to know back in December that the global outstanding total of over-the-counter derivatives based on debt, currencies, commodities, stocks and interest rates had in fact expanded by 44% in 2007 to $596 trillion...)

Ferguson's theme bears repeating; he likens the huge growth in complex financial products to an evolutionary spurt, "an explosion of lifeforms [amid an] unusually benign climate."

Whereas here at BullionVault, we see it more as a chemistry experiment gone horribly wrong. The hare-brained PhDs mixing up the medicine are too spaced out to even guess at what's now sitting in the petri dish. And the financial monsters it has spawned aren't merely in the scientists' minds.

Take hedge funds, for example; Ferguson notes that in 1990, those financial life-forms known as "hedge funds" numbered around 600 (also including funds of funds). Now they've reproduced and multiplied up towards 10,000."

As a form, the hedge fund dates back to the 1940s. But this population explosion is of very recent origin.

"The raw numbers also hide a "regular, annual dying out"; there's chronic survivorship bias in the data. In 2006, for example, 717 hedge funds were culled; the 2007 figure should be even larger. And here, believes Ferguson, we see survival of the fittest in action. If he's wrong, perhaps it's just the contingency of life itself, allowing the standard proportion of idiots to thrive and market their "top decile" performance to a new generation of unwitting investors.

The survivors have been getting larger too, with the top five hedge funds running assets of around $100 billion. All told, in fact, hedge funds accounts for between one-third and one-half of all trading on the US and UK equity markets. Yet they barely showed up in newspaper and TV reports before 1997, when the death of Long-Term Capital caused a blip in their break-neck rate of evolution.

Where Ferguson's analogy breaks down is in his admission of "intelligent design". Whether or not you hold with this evolutionary sop to religion, casting central bankers in the role of "minor gods" gives them more power than they really hold, even if it's less power than they believe they can wield. And Niall Ferguson accepts this."

Without occasional bouts of what Joseph Schumpeter, the Harvard economist, termed creative destruction," he wrote in the Financial Times last December, "the evolutionary process will be thwarted. Japan's experience in the 1990s stands as a warning to legislators and regulators that an entire banking sector can become a kind of economic dead hand if institutions are propped up despite underperformance."

But the bad trip of Japanese deflation – now running for almost two decades in equities and real estate prices – failed to scare off those fabulous furry freaks at the Bank of England and Federal Reserve. Tinkering with near-zero and sub-zero real rates of interest throughout this decade, they helped create two impossible hallucinations.

First, that the resulting credit expansion would fail to show up in consumer inflation. Second, that the credit cycle could keep on running forwards forever, without needing to turn. Just like the wheels on Albert Hofmann's bike."

A lot of reporters ask me these days whether we're in the midst of a commodity bubble," said Dr. Benn Steil, senior fellow at the Council on Foreign Relations, at the Hard Assets Conference in New York last week."

In fact, I'm going to Washington to give a Senate testimony. [Because] my perspective is that the more interesting, and indeed more important, question to ask is whether we're at the end of what I would call a 'fiat currency bubble'."

Like Professor Ferguson, Dr. Steil looks back "to the early 1980s" to find the origins of whatever it is we're now watching mutate, if not die out.

Under Paul Volker at the Federal Reserve, "inflation, and at least equally importantly inflation expectations, were driven out of the system through a pretty ruthless policy of very tight money, high interest rates. Very tight money."

What followed was "the golden age of the fiat Dollar" says Steil, reminding us that credit expansion was unshackled from Gold in 1971, when Richard Nixon stopped redeeming the US currency for bullion altogether. It took tight money – "very tight money" – to bring the resulting inflation of the 1970s under control.

The fiat money experiment then broke out of the lab with the "explosion" of financial life-forms witnessed from 1980 right up to last summer. Indeed, it all ran just fine until around 2002, when the cost of key raw materials – notably wheat and oil, as in Steil's charts above – began to shoot higher in terms of Dollars and other government-backed currencies.

Measured against Gold Prices, however, they've barely budged. "That shouldn't surprise people," says Steil, "because as we go back to the era of the gold standard from about 1880 until the outbreak of the first World War in 1914, prices around the world in countries that were on the gold standard were also remarkable flat.

"The figure looked just like this. So Gold is behaving as it has historically."

Back in the chemistry lab, however, the hot fetid conditions brought on by below-zero real interest rates and surging credit supplies aren't helping ease the central bankers' hallucinations. The financial furry freak brothers, Ben Bernanke and Mervyn King, actually think they can cage the monsters spawned by their fiat money experiment.

And tripped out on delusions of "minor god" status, they really believe they can talk Wall Street and the City back down from their moment of "worst crisis ever".

With Barack Obama seemingly poised to take over the U.S. presidency, not much attention has been paid yet to what his economic policies might be like. One sign, frightening to anyone who has read Naomi Klein’s Shock Doctrine, is that Obama’s economic ideas were influenced by economists from the University of Chicago, traditionally the intellectual center of world psychopathy. Yet his ideas are not of the pure free-market style of Milton Friedman. No, that would be too clear-cut for Obama, who prefers compromise at the center by blending two contradictory tendencies. According to John Cassidy writing in the New York Review of Books, Obama advocates “libertarian paternalism.”

Economics: Which Way for Obama?

John Cassidy

June 12, 2008

Nudge: Improving Decisions About Health, Wealth, and Happiness
by Richard H. Thaler and Cass R. Sunstein
Yale University Press, 293 pp., $26.00

The bursting of the housing bubble and the associated credit crunch has so far wiped out about $3 trillion of wealth—nobody knows the exact amount—caused havoc in the financial markets, and prompted hundreds of thousands of homeowners to default on their monthly mortgage payments. Some experts predict that by the end of 2009, the number of homes entering foreclosure could reach two million. Not surprisingly, the question of what to do about the housing crisis has emerged as a divisive policy issue in the 2008 presidential election, with each of the three leading candidates representing a distinct economic ideology.

John McCain, for all his protestations that economics is not his strong point, has put forward a coherent, if somewhat heartless, case for doing nothing, or very little, anyway. Echoing the arguments that Andrew Mellon, Friedrich Hayek, and other enthusiasts of the free market espoused in the early years of the Great Depression, McCain has said it is no business of the government to bail out people who took out loans they couldn't afford. Evidently such socialistic interventions would only reward reckless behavior, and, in any case, they wouldn't work. The laissez-faire argument says it is better to let the market "correct"—i.e., let the foreclosures mount up—until people learn to live within their means and prices become more affordable, at which point sustainable economic growth will resume.

Hillary Clinton, after initially equivocating, has emerged as the would-be heir to FDR and John Maynard Keynes. In addition to imposing a ninety-day moratorium on foreclosures and a five-year freeze on certain adjustable mortgage rates, she would have the federal government buy up an undetermined number of troubled home loans, enabling lenders to convert them to more affordable deals and putting a floor under the housing market.

Clinton would also allow bankruptcy judges to reduce the value of mortgages, a proposal the banking industry vigorously opposes, and she has criticized McCain as the reincarnation of Herbert Hoover—a comparison that is a bit unfair to the thirty-first president, whose intellectual commitment to voluntarism didn't prevent him from expanding public works programs, raising taxes on the wealthy, and creating two institutions that funneled federal money into the housing market: the Federal Home Loan Bank and the Reconstruction Finance Corporation.

Barack Obama has also criticized McCain for sitting back and watching while so many American families face eviction. Yet his own proposals are more nuanced than Hillary's. They include setting up a $10 billion fund to help prevent foreclosures, cracking down on mortgage fraud, providing tax credits to low- and middle-income homeowners who don't currently itemize their interest payments, and standardizing the terms of mortgages so that potential borrowers can more easily figure out when they are being hoodwinked. Obama has also expressed support for Democratic Senator Chris Dodd's plan to expand the Federal Housing Administration's ability to refinance troubled loans. So far, though, he has been noticeably less enthusiastic than Clinton about a large-scale injection of public funds into the market for mortgages and mortgage securities.

Should Obama win the nomination, political considerations may well force upon him a more interventionist position, but his first inclination is to seek a path between big government and laissez-faire, a trait that reflects his age—he was born in 1961—and the intellectual milieu he emerged from. Before entering the Illinois state Senate, he spent ten years teaching constitutional law at the University of Chicago, where respect for the free market is a cherished tradition. His senior economic adviser, Austan Goolsbee, is a former colleague of his at Chicago and an expert on the economics of high-tech industries. Goolsbee is not a member of the "Chicago School" of Milton Friedman and Gary Becker, but he is not well known as a critic of American capitalism either. As recently as March 2007, he published an article in The New York Times pointing out the virtues of subprime mortgages. "The three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans," Goolsbee wrote. "These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital."

When I spoke to Goolsbee earlier this year, he said that one of the things that distinguished Obama from Clinton was his skepticism about standard Keynesian prescriptions, such as relying on tax policy to stimulate investment and saving. In a recent posting on HuffingtonPost.com, Cass Sunstein, who for ten years was a colleague of Obama's at the University of Chicago Law School—and has said he is "an informal, occasional adviser to him"—made a similar point regarding government oversight of the financial markets: "With respect to the mortgage crisis, credit cards and the broader debate over credit markets," Sunstein wrote, "Obama rejects heavy-handed regulation and insists above all on disclosure, so that consumers will know exactly what they are getting."

If Obama isn't an old-school Keynesian, what is he? One answer is that he is a behavioralist—the term economists use to describe those who subscribe to the tenets of behavioral economics, an increasingly popular discipline that seeks to marry the insights of psychology to the rigor of economics. Although its intellectual roots go back more than thirty years, to the pioneering work of two Israeli psychologists, Amos Tversky and Daniel Kahneman, behavioral economics took off only about ten years ago, and many of its leading lights, among them David Laibson and Andrei Shleifer, of Harvard; Matt Rabin, of Berkeley; and Colin Camerer, of Caltech, are still in their thirties or forties. One of the reasons this approach has proved so popular is that it appears to provide a center ground between the Friedmanites and the Keynesians, whose intellectual jousting dominated economics for most of the twentieth century.

The central tenet of the Chicago School is that markets, once established and left alone, will resolve most of society's economic problems, including, presumably, the mortgage crisis. Keynesians—old-school Keynesians, anyway—take the view that markets, financial markets especially, often fail to work as advertised, and that this failure can be self-reinforcing rather than self-correcting. In some ways, the behavioralists stand with the Keynes-ians. Markets sometimes go badly awry, they agree, especially when people have to make complicated choices, such as what type of mortgage to take out. But whereas the Keynesians argue that vigorous regulation and the prohibition of certain activities such as excessive borrowing are often necessary, behavioralists tend to be more hopeful about redeeming free enterprise. With a gentle nudge, they argue, even some very poorly performing markets—and the people who inhabit them—can be made to work pretty well.

In a fortuitous accident of timing, Sunstein and his friend Richard Thaler have just published a book that makes the behavioralist case in nontechnical language: Nudge: Improving Decisions About Health, Wealth, and Happiness. On the face of it, finding two more suitable coauthors would be difficult. Sunstein is a one-man think tank and a prolific writer—by my count, this is his eighth book in as many years. Thaler, who, like Goolsbee, teaches at Chicago's Graduate School of Business, is one of the founders of behavioral economics. During the 1980s, he began publishing a series of columns in the Journal of Economic Perspectives about economic phenomena that defied the accepted wisdom of the subject, which depended heavily on the twin assumptions of individual rationality and market efficiency.

Thaler's columns, some of which he coauthored with Kahneman and Tversky, ran under the rubric "Anomalies." Among the things they highlighted were the failure of participants in economic experiments to pursue their own self-interest; the buyer's remorse suffered by many auction winners when they contemplate what they have bought; and the popularity of lotteries. (If people were fully rational, they would realize they had virtually no chance of winning.) The articles, which in 1992 were published as a book, The Winner's Curse: Paradoxes and Anomalies of Economic Life, inspired many bright young economists to take a closer look at human psychology…

Exploring the limits of human reason is interesting in its own right… but what has it got to do with Obama? Thaler and Sunstein lay out a number of principles that can be used to encourage better choice-making, and they apply them to various topical issues, including retirement saving, health care, and the environment. In a number of cases, the measures that Thaler and Sunstein recommend are mirrored by proposals in Obama's voluminous policy papers, which can be downloaded from his Web site.

In a chapter entitled "Save More Tomorrow," Thaler and Sunstein endorse the idea of automatically enrolling people in corporate savings plans, such as 401(k)s, rather than making them fill out a form if they wish to opt in. In the idealized world of neoclassical economics, this shouldn't make much difference—rational people will decide what works best for them and do it. In reality, because of the status quo bias, or, perhaps, because of sheer laziness, the fallback option matters plenty. Studies show that when employees have to sign up, participation rates are often as low as 50 or 60 percent. When people are enrolled as a matter of course, with an option to opt out, the participation rises to more than 90 percent.

For decades now, economists have been bemoaning the fact that so many Americans save hardly at all. Simply offering tax breaks for saving has been tried many times, and it doesn't have much impact on overall savings rates. Here is a simple, noncontroversial measure that seems to work. An Obama administration would build upon it by requiring firms that don't offer 401(k) plans to open a direct deposit retirement account for their workers, with an opt-out clause rather than an opt-in clause. For the first $1,000 in savings that an employee contributed, the government would provide a $500 tax credit.

Elsewhere, Thaler and Sunstein endorse Justice Louis Brandeis's injunction that "sunlight is...the best of disinfectants." In financial markets, especially, prices are often opaque, which gives unscrupulous businesses ample scope for ripping off customers by imposing on them hefty hidden charges, late fees, and the like. Thaler and Sunstein propose that credit card companies, mortgage issuers, and other financial services firms should be forced to disclose all of their charges clearly, in plain language, so that potential customers can comparison shop. Applying the same argument to cell phone plans, the authors write: "The government would not regulate how much issuers charge for services, but it would regulate their disclosure practices." Adopting similar language, Obama has proposed a Credit Card Bill of Rights, which would require issuers to provide lenders with full and clear information about the terms of their loans, including all charges.

Disclosure not only helps consumers make better choices: it can also shame businesses into curbing their egregious behavior. Thaler and Sunstein cite the Toxic Release Inventory, a piece of legislation from the 1980s that forced companies to disclose to the government what potentially harmful chemicals they had stored or released into the environment. As James Hamilton pointed out in his 2005 book, Regulation Through Revelation, the measure was originally intended simply to provide the Environmental Protection Agency with more information, but once enacted it allowed activists and the press to target the worst offenders. Fearful of attracting bad publicity, many companies changed their policies, and overall emissions fell sharply. In light of this experience, Thaler and Sunstein propose setting up a Greenhouse Gas Inventory, which would require companies and other organizations to publish the total amount of carbon they are releasing into the atmosphere:

In all likelihood, interested groups, including members of the media, would draw attention to the largest emitters. Because the climate change problem is salient, a Greenhouse Gas Inventory might well be expected to have the same beneficial effect as the Toxic Release Inventory. To be sure, an inventory of this kind might not produce massive changes on its own. But such a nudge would not be costly, and it would almost certainly help.

All of this makes for interesting reading, and much of it is sensible. Having written many times about the shortcomings of neoclassical economics, and the political ends to which it has been exploited, I am sympathetic to Thaler and Sunstein's effort to construct a more realistic economic philosophy, and one partly based on insights borrowed from other disciplines. However, the more I read of Nudge the less convinced I was that its authors, for all the useful and interesting material they present, have succeeded in their larger aim…

In defense of Thaler and Sunstein, their emphasis is on public policy. Yet the program they outline seems unduly restrictive. Not content to be behavioralists, they are also libertarians, and they endorse something they call "libertarian paternalism." They write:

Libertarian paternalism is a relatively weak, soft, and nonintrusive type of paternalism because choices are not blocked, fenced off, or significantly burdened. If people want to smoke cigarettes, to eat a lot of candy, to choose an unsuitable health care plan, or to fail to save for retirement, libertarian paternalists will not force them to do otherwise—or even make things hard for them. Still, the approach we recommend does count as paternalistic, because private and public choice architects are not merely trying to track or to implement people's anticipated choices. Rather, they are self-consciously attempting to move people in directions that will make their lives better. They nudge.

A nudge, as we will use the term, is any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.

Many of the policies we recommend can and have been implemented by the private sector (with or without a nudge from the government).... In areas involving health care and retirement plans, we think that employers can give employees some helpful nudges. Private companies that want to make money, and to do good, can even benefit from environmental nudges, helping to reduce air pollution (and the emission of greenhouse gases). But as we shall show, the same points that justify libertarian paternalism on the part of private institutions apply to government as well.

On the penultimate page of the book, they write:

The twentieth century was pervaded by a great deal of artificial talk about the possibility of a "Third Way." We are hopeful that libertarian paternalism offers a real Third Way—one that can break through some of the least tractable debates in contemporary democracies.

The addition of the word "real" was presumably meant to distinguish Thaler and Sunstein's ideas from the "Third Way" approach that Bill Clinton, Hillary Clinton, and Tony Blair endorsed back in the 1990s. But just as that well-meaning intellectual construction project, in which the London School of Economics sociologist Anthony Giddens had a prominent part, suffered from soggy intellectual foundations, libertarian paternalism has some fundamental problems, beginning with the fact that it sounds suspiciously like an oxymoron.

Once you concentrate on the reality that people often make poor choices, and that their actions can harm others as well as themselves, the obvious thing to do is restrict their set of choices and prohibit destructive behavior. Thaler and Sunstein, showing off their roots in the Chicago School, rule out this option a priori: "We libertarian paternalists do not favor bans," they state blankly. During a discussion of environmental regulations, they criticize the Clean Air Acts that banned some sources of air pollution and helped to make the air more breathable in many cities. "The air is much cleaner than it was in 1970," they concede, "Philosophically, however, such limitations look uncomfortably similar to Soviet-style five-year plans, in which bureaucrats in Washington announce that millions of people have to change their conduct in the next five years."

If you start out with the preconceptions about free choice of John Stuart Mill or Friedrich Hayek, it is difficult to get very far in the direction of endorsing active government. (This is precisely the problem that the New Liberals of the late nineteenth century, men like L.T. Hobhouse and T.H. Green, faced.) Once again, consider the subprime crisis. At this stage, it is hard to find anybody willing to defend some of the mortgage industry's practices, such as offering gullible borrowers artificially low teaser rates that shot up after a couple of years. Hard, but not impossible. "Variable rate mortgages, even with teaser rates, are not inherently bad," Thaler and Sunstein write. "For those who are planning to sell their house or refinance within a few years, these mortgages can be highly attractive."

Strictly speaking, Thaler and Sunstein are correct. But many of the borrowers who took out loans planning to sell, or refinance at lower rates, within a few years were speculators, and unwittingly they helped to generate the biggest property bubble in American history. Others were simply taken for a ride. Dealing with this bursting of that bubble is going to involve spending a lot of taxpayers' money, which surely justifies the placing of some limits on future borrowers and lenders. A refusal to accept that individual freedoms sometimes have to be curtailed for the general good is an extreme position even for a neoclassical economist to take, and it is alien to the traditions of the Democratic Party.

As it happens, there is a coherent and well-developed economic philosophy that was explicitly designed to deal with the law of unintended consequences, and it is regulatory Keynesianism of the sort practiced in the United States and Britain from the end of World War II until the 1980s, a period, not coincidentally, in which working people saw their living standard improve at an unprecedented clip. With respect to the national economy, Keynesians worry that unfettered capitalism is subject to ruinous boom-bust cycles, so they advocate management of demand through interest rates or government programs that create jobs. On the micro-level, they believe that some economic activities have harmful effects that the price mechanism fails to capture, so they support taxation and regulation. Behavioral economics, by demonstrating how people often fall victim to confusion, myopia, and trend following, provides another convincing rationale for Keynesian policies, but you wouldn't realize that from reading Thaler and Sunstein.

Obama, as far as I know, doesn't refer to himself as a libertarian, but on occasion he appears to be unduly influenced by the need to preserve choice. Rather than mandating universal health coverage, for example, he has promised to set up a new, subsidized, government-operated insurance plan for people who aren't covered by their employers and who don't qualify for Medicare. But if a young and healthy person, for whatever reason, didn't want to buy health coverage, an Obama administration wouldn't compel that person to do so, despite the strong financial and moral arguments for expanding the risk pool. Just how to compel healthy young people to buy health insurance remains a large question; but it is one that should be addressed.

On other issues, such as trade policy and regulation of the financial industry, Obama has recently adopted a more dirigiste tone than Thaler and Sunstein would care for. More generally, he has talked about confronting entrenched interests and giving a voice to the excluded. Doubtless, he means what he says, and his ability to attract new voters, especially young ones, suggests he could have more success in overcoming the forces of inertia and reaction than the Clintons did in 1993–1994.

But for what policy purposes are the masses to be mobilized? According to Obama's program, the answers include another middle-class tax cut; more tax credits for education and fuel-efficient cars; a bigger budget for the National Science Foundation; and the establishment of a National Infrastructure Reinvestment Bank, with an annual budget of $6 billion. At best, these proposals would represent a useful start in redressing the inequities and shortcomings produced by twenty-five years of Republican domination. If the next Democratic president wants to leave a truly lasting legacy, he or she will have to do more than nudge the country in a different direction.

This helps make sense of Obama’s insistence on a new kind of politics an on overcoming traditional divisions. But the problems facing him if he gets elected seem way too enormous to be handled by gentle “nudges” in the proper direction. Also, contructing “choice architecture” to channel free decisions in paternalistically decided directions only nudges the public. What is really needed is a way for the public, for citizens, to constrain their leaders, or, which amounts to the same thing, for normal people to constrain psychopaths in the most efficient and humane way possible. The debate between Keynesians, Friedmanites, and Behaviorists (funny how they leave out Socialists) is over how best for leaders to constrain and discipline the public. Libertarian Friedmanites think that the market can do it with the most amount of freedom, but they still believe in the discipline of the market. Clearly, Obama does not yet understand what the human race is up against, he appears to have not come to grips with evil. What will nudging people to save more for retirement do to stop the Dick Cheneys of the world?

Signs of the Economic Apocalypse, 2-25-08

From SOTT.net:

Gold closed at 947.80 dollars an ounce Friday, up 4.7% from $905.40 for the week. The dollar closed at 0.6744 euros Friday, down 1.0% from 0.6813 at the close of the previous Friday. That put the euro at 1.4828 dollars compared to 1.4678 the Friday before. Gold in euros would be 639.20 euros an ounce, up 3.6% from 616.84 at the close of the previous week. Oil closed at 98.81 dollars a barrel Friday, up 3.3% from $95.67 for the week. Oil in euros would be 66.64 euros a barrel, up 2.2% from 65.18 at the close of the Friday before. The gold/oil ratio closed at 9.59 Friday, up 1.4% from 9.46 for the week. In U.S. stocks, the Dow closed at 12,381.02 Friday, up 0.3% from 12,348.21 at the close of the previous week. The NASDAQ closed at 2,303.35 Friday, down 0.8% from 2,321.80 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.79%, up two basis points from 3.77 for the week.

Last week we asked whether Barack Obama had any intention of following up on his recent economic populist rhetoric if he got elected president. Bill Van Auken noted that the origins of his advisors and of his campaign’s financial contributions would argue that he wouldn’t. Since then, the establishment sent him a couple of clear messages to make sure he doesn’t try. The first was in the form of an editorial in the Washington Post:

A shot across the bow against Barack Obama
Washington Post criticizes populist rhetoric

Jerry White

19 February 2008

In an editorial Sunday the Washington Post, the major daily newspaper in the US capital, criticized the leading contender for the Democratic presidential nomination, Barack Obama, for stirring up “class warfare” in his recent campaign appearances.

The Post column begins approvingly, saying, “At his best, Sen. Barack Obama is a tribune of hope, an eloquent politician-prophet who unabashedly calls on Americans to remember that ‘we rise or fall as one nation.’ But then, it continues, citing a speech the Illinois senator gave to auto workers at a General Motors factory in Janesville, Wisconsin last week, “[T]here are moments like last Wednesday, when Mr. Obama struck some unusually sour notes in what was billed as a major economic policy address. Yes, there were the trademark invocations of ‘shared sacrifice and shared prosperity.’ But Mr. Obama’s remarks were also tinged with an angrier, and intellectually sloppier, message. We thought we’d heard the last of class warfare and populism when former North Carolina senator John Edwards bowed out of the race. In his speech, Mr. Obama quoted Mr. Edwards approvingly; he then echoed him in implying that he could pay for new domestic programs with an immediate U.S. withdrawal from Iraq and in exaggerating the “millions” of job losses attributable to trade agreements...”

The Post editorial followed an article in the Wall Street Journal’s weekend edition, entitled, “Democrats’ Attacks on Business Heat Up,” which singled out the same speech for attack. In particular, the Journal singled out Obama’s criticisms of trade deals with “plenty of protections for corporations and their profits, but none for our environment and our workers who’ve seen factories shut their doors and millions of jobs disappear.”

The Journal noted that “business groups are dismissive of the Democratic attacks,” quoting Randel Johnson, a vice president of the US Chamber of Commerce. “They should be talking about ways to grow the economy such as deregulation and lessening burdens on employers, rather than criticizing them with simplistic politically driven rhetoric,” said Johnson.

Obama, for his own political purposes, is seeking with considerable success to tap into the widespread and deep mood of social anger and political frustration among voters. In his Wisconsin speech he pointed to the widening gap between the wealthy and the rest of the American population, noting that many CEOs were making more in a day that the average worker makes in a year and that a typical family’s annual income had dropped by $1,000 over the last seven years.

Obama’s tepid proposals for reform in no way challenge the economic monopoly of America’s ruling elite. Far from calling for a radical redistribution of wealth, Obama proposed to provide families with a few hundred dollars worth of tax credits. He calls for a $6 billion a year infrastructure program—roughly what the Pentagon spends every three days—under conditions in which the American Society of Civil Engineers estimates $1.6 trillion is needed to bring the nation’s roads, bridges and public buildings into good condition.

To the extent, however, that he makes an appeal to social discontent, no matter how insincerely, he raises popular expectations that neither he nor any other bourgeois politician can meet. Within major business and political circles there are concerns that any appeal to class sentiment—given the level of social tensions in America after more than three decades in which the class struggle has been suppressed—could be the proverbial match being thrown into a powder keg.

Up until now Obama has been given wide latitude by the media to pursue the Democratic nomination. The Washington Post editorial and Wall Street Journal article are signs that the political and media establishment may well rein him in. If he fails to heed their advice to tone down the populist rhetoric, the media could turn on Obama like a dime.

There are, however, significant policy and tactical differences being fought out in the contest between Obama and Hillary Clinton. The day after the Post editorial, New York Times columnist Roger Cohen wrote an op-ed piece defending Obama against criticism and arguing he would be more effective than Clinton in refurbishing the international image of the United States and thereby defending the geopolitical interests of corporate America.

In a column headlined “A Realist Called Obama,” Cohen argues that the Bush administration has alienated US allies and squandered opportunities to expand US influence in the Middle East, Africa and Asia. At the same time, he says, Hillary Clinton is too sullied by “her husband’s coterie of the world’s rich and famous, with its dubious deal-making from Kazakhstan to Colombia,” to project the image of a “U.S. renewal.”

Therefore a “realistic view of Obama,” Cohen says, “would be that he is best placed to seize and shape a new world of such possibilities. He has the youth, the global background, the ability to move people, and the demonstrated talent for reaching across lines of division, even those etched in black and white.”

Cohen says Obama would help “rebrand” America. This, he says, is crucial to advance US interests worldwide. Such “rebranding,” Cohen says, was even used by the Papacy, in the late 1970s, with the elevation of a Polish pope, John Paul II, adding, “and Poles then precipitated the fall of the Soviet empire.”

Rejecting arguments about Obama’s inexperience, Cohen says his administration would have a “tough foreign policy team” to confront Iran and other potential adversaries. At the same time, Cohen reassures the foreign policy establishment, the Illinois senator “needs to recall what he once said: ‘No president should ever hesitate to use force—unilaterally if necessary—to protect ourselves and our vital interests when we are attacked or imminently threatened.’”

Cohen makes clear that those pushing Obama’s campaign see him as a useful tool to advance the interests of US imperialist policy.

The Obama campaign, however, seeks to conceal the contradiction between the interests of his supporters in the ruling elite and the concerns and hopes and expectations he is arousing within the electorate on the basis of vague calls for unity, renewal and change, and his identity as the first African-American with a serious chance to become president.

It is not possible to reconcile the domestic and international interests of America’s financial aristocracy with the needs of the masses of working people. The only means of ensuring a decent future for workers and young people is to break the economic and political stranglehold of the Wall Street banks and large corporations.

Should he win the nomination and be elected, there is no doubt whose hopes and expectations he will disappoint. In the face of the mounting crisis of American and world capitalism, the Democratic Party—the second party of American big business—will place the burden of the economic catastrophe squarely on the backs of working people.

Just in case Obama didn’t get the message, the following incident should do the trick:

Police concerned about order to stop weapons screening at Obama rally

Jack Douglas, Jr.

Thu, Feb. 21, 2008

DALLAS -- Security details at Barack Obama's rally Wednesday stopped screening people for weapons at the front gates more than an hour before the Democratic presidential candidate took the stage at Reunion Arena.

The order to put down the metal detectors and stop checking purses and laptop bags came as a surprise to several Dallas police officers who said they believed it was a lapse in security.

Dallas Deputy Police Chief T.W. Lawrence, head of the Police Department's homeland security and special operations divisions, said the order -- apparently made by the U.S. Secret Service -- was meant to speed up the long lines outside and fill the arena's vacant seats before Obama came on.

"Sure," said Lawrence, when asked if he was concerned by the great number of people who had gotten into the building without being checked. But, he added, the turnout of more than 17,000 people seemed to be a "friendly crowd."

The Secret Service did not return a call from the Star-Telegram seeking comment.

Doors opened to the public at 10 a.m., and for the first hour security officers scanned each person who came in and checked their belongings in a process that kept movement of the long lines at a crawl. Then, about 11 a.m., an order came down to allow the people in without being checked.

Several Dallas police officers said it worried them that the arena was packed with people who got in without even a cursory inspection.

They spoke on condition of anonymity because, they said, the order was made by federal officials who were in charge of security at the event.

"How can you not be concerned in this day and age," said one policeman.

The fact that this security lapse happened in Dallas was probably enough to get the message through to Obama: “We can do to you what we did to Kennedy.”

As Jerry White pointed out, the ruling elite need someone like Obama to “rebrand” the U.S. Empire, to put a new face, more acceptable to the world, on it. And they are not really afraid of what a politician they have bought and paid for will do economically. But they seem very worried about having the public’s hopes raised too much. It’s not Obama they are concerned about, it’s the hope and enthusiasm for change his candidacy is raising that worries them. Why? The following piece suggests some answers:

When Change Is Not Enough: The Seven Steps to Revolution

Sara Robinson

“Those who make peaceful evolution impossible make violent revolution inevitable.”
- John F. Kennedy

There’s one thing for sure: 2008 isn’t anything like politics as usual.

The corporate media (with their unerring eye for the obvious point) is fixated on the narrative that, for the first time ever, Americans will likely end this year with either a woman or a black man headed for the White House. Bloggers are telling stories from the front lines of primaries and caucuses that look like something from the early 60s - people lining up before dawn to vote in Manoa, Hawaii yesterday; a thousand black college students in Prairie View, Texas marching 10 miles to cast their early votes in the face of a county that tried to disenfranchise them. In recent months, we’ve also been gobstopped by the sheer passion of the insurgent campaigns of both Barack Obama and Ron Paul, both of whom brought millions of new voters into the conversation - and with them, a sharp critique of the status quo and a new energy that’s agitating toward deep structural change.

There’s something implacable, earnest, and righteously angry in the air. And it raises all kinds of questions for burned-out Boomers and jaded Gen Xers who’ve been ground down to the stump by the mostly losing battles of the past 30 years. Can it be - at long last - that Americans have, simply, had enough? Are we, finally, stepping out to take back our government - and with it, control of our own future? Is this simply a shifting political season - the kind we get every 20 to 30 years - or is there something deeper going on here? Do we dare to raise our hopes that this time, we’re going to finally win a few? Just how ready is this country for big, serious, forward-looking change?

Recently, I came across a pocket of sociological research that suggested a tantalizing answer to these questions - and also that America may be far more ready for far more change than anyone really believes is possible at this moment. In fact, according to some sociologists, we’ve already lined up all the preconditions that have historically set the stage for full-fledged violent revolution.

It turns out that the energy of this moment is not about Hillary or Ron or Barack. It’s about who we are, and where we are, and what happens to people’s minds when they’re left hanging just a little too far past the moment when they’re ready for transformative change.

Way back in 1962, Caltech sociologist James C. Davies published an article in the American Sociological Review that summarized the conditions that determine how and when modern political revolutions occur. Intriguingly, Davies cited another scholar, Crane Brinton, who laid out seven “tentative uniformities” that he argued were the common precursors that set the stage for the Puritan, American, French, and Russian revolutions. As I read Davies’ argument, it struck me that the same seven stars Brinton named are now precisely lined up at midheaven over America in 2008. Taken together, it’s a convergence that creates the perfect social, economic, and political conditions for the biggest revolution since the shot heard ’round the world.

And even more interestingly: in every case, we got here as a direct result of either intended or unintended consequences of the conservatives’ war against liberal government, and their attempt to take over our democracy and replace it with a one-party plutocracy. It turns out that, historically, liberal nations make very poor grounds for revolution - but deeply conservative ones very reliably create the conditions that eventually make violent overthrow necessary. And our own Republicans, it turns out, have done a hell of a job.

Here are the seven criteria, along with the reasons why we’re fulfilling each of them now, and how conservative policies conspired to put us on the road to possible revolution.

1. Soaring, Then Crashing

Davies notes that revolutions don’t happen in traditional societies that are stable and static - where people have their place, things are as they’ve always been, and nobody expects any of that to change. Rather, modern revolutions - particularly the progressive-minded ones in which people emerge from the fray with greater rights and equality - happen in economically advancing societies, always at the point where a long period of rising living standards and high, hopeful expectations comes to a crashing end, leaving the citizens in an ugly and disgruntled mood. As Davies put it:

“Revolutions are most likely to occur when a prolonged period of objective economic and social development is followed by a short period of sharp reversal. The all-important effect on the minds of people in a particular society is to produce, during the former period, an expectation of continued ability to satisfy needs - which continue to rise - and, during the latter, a mental state of anxiety and frustration when manifest reality breaks away from anticipated reality….

“Political stability and instability are ultimately dependent on a state of mind, a mood, in society…it is the dissatisfied state of mind rather than the tangible provision of ‘adequate’ or ‘inadequate’ supplies of food, equality, or liberty which produces the revolution.”

The American middle class was built on New Deal investments in education, housing, infrastructure, and health care, which produced a very “prolonged period of objective economic and social development.” People were optimistic; generations of growing prosperity raised their expectations that their children would do even better. That era instilled in Americans exactly the kind of hopeful belief in their own agency that primes them to become likely revolutionaries in an era of decline.

And now, thanks to 28 years of conservative misrule, we are now at the point where “manifest reality breaks away from anticipated reality;” and the breach is creating political turbulence. The average American has seen his or her standard of living contract by fits and starts since about 1972. This fall-off that was relieved somewhat by the transition to two-earner households and the economic sunshine of the Clinton years - but then accelerated with the dot-com crash, followed by seven years of Bush’s overt hostility toward the lower 98 percent of Americans who aren’t part of his base. Working-class America is reeling from the mass exodus of manufacturing jobs and the scourge of predatory lending; middle-class America is being hollowed out by health-care bankruptcies, higher college costs, and a tax load far heavier than that of the richest 2 percent. These people expected to do better than their parents. Now, they’re screwed every direction they turn.

In the face of this reversal, Davies tells us, it’s not at all surprising that the national mood is turning ominous, from one end of the political spectrum to the other. However, he warns us: this may not be just a passing political storm. In other times and places, this kind of quick decline in a prosperous nation has been a reliable sign of a full-on revolution brewing just ahead.

2. They Call It A Class War

Marx called this one true, says Davies. Progressive modern democracies run on mutual trust between classes and a shared vision of the common good that binds widely disparate groups together. Now, we’re also about to re-learn the historical lesson that liberals like flat hierarchies, racial and religious tolerance, and easy class mobility not because we’re soft-headed and soft-hearted - but because, unlike short-sighted conservatives, we understand that tight social cohesion is our most reliable and powerful bulwark against the kinds of revolutions that bring down great economies, nations and cultures.

In all the historical examples Davies and Brinton cite, the stage for revolution was set when the upper classes broke faith with society’s other groups, and began to openly prey on them in ways that threatened their very future. Not surprisingly, the other groups soon united, took up arms, and rebelled.

And here we are again: Conservative policies have opened the wealth gap to Depression levels; put workers at the total mercy of their employers; and deprived the working and middle classes of access to education, home ownership, health care, capital, legal redress, and their expectations of a better future for their kids. You can only get away with blaming this on gays and Mexicans for so long before people get wise to the game. And as the primaries are making clear: Americans are getting wise.

Our current plutocratic nobility may soon face the same stark choice its English, French, and Russian predecessors did. They can keep their heads and take proactive steps to close the gap between themselves and the common folk (choosing evolution over revolution, as JFK counsels above). Or they can keep insisting stubbornly on their elite prerogatives, until that gap widens to the point where the revolution comes - and they will lose their heads entirely.

Right now, all we’re asking of our modern-day corporate courtiers is that they accept a tax cut repeal on people making over $200K a year, raise the minimum wage, give us decent health care and the right to unionize, and call a halt to their ridiculous “death tax” boondoggle. In retrospect, their historic forebears might have counseled them to take this deal: their headless ghosts bear testimony to the idea that’s it’s better to give in and lose a little skin early than dig in and lose your whole hide later on.

3. Deserted Intellectuals

Mere unrest among the working and middle classes, all by itself, isn’t enough. Revolutions require leaders - and those always come from the professional and intellectual classes. In most times and places, these groups (which also include military officers) usually enjoy comfortable ties to the upper classes, and access to a certain level of power. But if those connections become frayed and weak, and the disaffected intellectuals make common cause with the lower classes, revolution becomes almost inevitable.

Davies notes that, compared to both the upper and lower classes, the members of America’s upper-middle class were relatively untouched by Great Depression. Because of this, their allegiances to the existing social structure largely remained intact; and he argues that their continued engagement was probably the main factor that allowed America to avert an all-out revolution in the 1930s.

But 2008 is a different story. Both the Boomers (now in their late 40s to early 60s) and Generation X (now in their late 20s to late 40s) were raised in an economically advancing nation that was rich with opportunity and expectation. We spent our childhoods in what were then still the world’s best schools; and A students of every class worked hard to position ourselves for what we (and our parents and teachers) expected would be very successful adult careers. We had every reason to believe that, no matter where we started, important leadership roles awaited us in education, government, the media, business, research, and other institutions.

And yet, when we finally graduated and went to work, we found those institutions being sold out from under us to a newly-emerging group of social and economic conservatives who didn’t share our broad vision of common decency and the common good (which we’d inherited from the GI and Silent adults who raised us and taught us); and who were often so corrupted or so sociopathic that the working environments they created were simply unendurable. If wealth, prestige, and power came at the price of our principles, we often chose instead to take lower-paying work, live small, and stay true to ourselves.

For too many of us, these thwarted expectations have been the driving arc of our adult lives. But we’ve never lost the sense that it was a choice that the America we grew up in would never have asked us to make. In Davies’ terms, we are “deserted intellectuals” - a class that is always at extremely high risk for fomenting revolution whenever it appears in history.

Davies says that revolutions catalyze when these deserted intellectuals make common cause with the lower classes. And much of the energy of this election is coming right out of that emerging alliance. The same drive toward corporatization that savaged our dreams also hammered at other class wedges throughout American society, creating conditions that savaged the middle class and ground the working class toward something resembling serfdom. Between our galvanizing frustration with George Bush, our shared fury at the war, and the new connections forged by bloggers and organizers, that alliance has now congealed into the determinedly change-minded movements we’re seeing this election cycle.

4. Incompetent Government

As this blog has long argued, conservatives invariably govern badly because they don’t really believe that government should exist at all - except, perhaps, as a way to funnel the peoples’ tax money into the pockets of party insiders. This conflicted (if not outright hostile) attitude toward government can’t possibly lead to any outcome other than bad management, bad policy, and eventually such horrendously bad social and economic outcomes that people are forced into the streets to hold their leaders to account.

It turns out there’s never been a modern revolution that didn’t start against a backdrop of atrocious government malfeasance in the face of precipitously declining fortunes. From George III’s onerous taxes to Marie Antoinette’s “Let them eat cake,” revolutions begin when stubborn aristocrats heap fuel on the fire by blithely disregarding the falling fortunes of their once-prosperous citizens. And America is getting dangerously close to that point now. Between our corporate-owned Congress and the spectacularly bad judgment of Bush’s executive branch, there’s never been a government in American history more inept, corrupt, and criminally negligent than this one - or more shockingly out of touch with what the average American is going through. Just ask anyone from New Orleans - or anyone who has a relative in the military.

Liberal democracy avoids this by building in a fail-safe: if the bastards ignore us, we can always vote them out. But if we’ve learned anything over the last eight years, it’s that our votes don’t always count - especially not when conservatives are doing the counting. If this year’s election further confirms the growing conviction that change via the ballot box is futile, we may find a large and disgruntled group of Americans looking to restore government accountability by more direct means.

5. Gutless Wonders in the Ruling Class

Revolution becomes necessary when the ruling classes fail in their duty to lead. Most of the major modern political revolutions occurred at moments when the world was changing rapidly - and the country’s leaders dealt with it by dropping back into denial and clinging defiantly to the old, profitable, and familiar status quo. New technologies, new ideas, and new economic opportunities were emerging; and there came a time when ignoring them was no longer an option. When the leaders failed to step forward boldly to lead their people through the looming and necessary transformations, the people rebelled.

We’re hard up against some huge transformative changes now. Global warming and overwhelming pollution are forcing us to reconsider the way we occupy the world, altering our relationship to food, water, air, soil, energy, and each other. The transition off carbon-based fuels and away from non-recyclable goods is going to re-structure our entire economy. Computers are still creating social and business transformations; biotech and nanotech will only accelerate that. More and more people in the industrialized world are feeling a spiritual void, and coming to believe that moving away from consumerism and toward community may be an important step in recovering that nameless thing they’ve lost.

And, in the teeth of this restless drift toward inevitable change, America has been governed by a bunch of conservative dinosaurs who can’t even bring themselves to acknowledge that the 20th century is over. (Some of them, in fact, are still trying to turn back the Enlightenment.) Liberal governments manage this kind of shift by training and subsidizing scientists and planners, funding research, and setting policies that help their nations navigate these transitions with some grace. Conservative ones - being conservative - will reflexively try to deny that change is occurring at all, and then brutally suppress anyone with evidence to the contrary.

Which is why, every time our current crop of so-called leaders open their mouths to propose a policy or Explain It All To Us, it’s embarrassingly obvious that they don’t have the vision, the intelligence, or the courage to face the future that everyone can clearly see bearing down on us, whether we’re ready or not. Their persistent cluelessness infuriates us - and terrifies us. It’s all too clear that these people are a waste of our tax money: they will never take us where we need to go. Much of the energy we’re seeing in this year’s election is due to the fact that a majority of Americans have figured out that our government is leaving us hung out here, completely on our own, to manage huge and inevitable changes with no support or guidance whatsoever.

Historically, this same seething fury at incompetent, unimaginative, cowardly leaders - and the dawning realization that our survival depends on seizing the lead for ourselves - has been the spark that’s ignited many a violent uprising.

6. Fiscal Irresponsibility

As we’ve seen, revolutions follow in the wake of national economic reversals. Almost always, these reversals occur when inept and corrupt governments mismanage the national economy to the point of indebtedness, bankruptcy, and currency collapse.

There’s a growing consensus on both the left and right that America is now heading into the biggest financial contraction since the Great Depression. And it’s one that liberal critics have seen coming for years, as conservatives systematically dismantled the economic foundations of the entire country. Good-paying jobs went offshore. Domestic investments in infrastructure and education were diverted to the war machine. Government oversight of banks and securities was blinded. Vast sections of the economy were sold off to the Saudis for oil, or to the Chinese for cheap consumer goods and money to finance tax cuts for the wealthy.

This is no way to run an economy, unless you’re a borrow-and-spend conservative determined to starve the government beast to the point where you can, as Grover Norquist proposed, drag it into the bathtub and drown it entirely. The current recession is the bill come due for 28 years of Republican financial malfeasance. It’s also another way in which conservatives themselves have unwittingly set up the historical preconditions for revolution.

7. Inept and Inconsistent Use of Force

The final criterion for revolution is this: The government no longer exercises force in a way that people find fair or consistent. And this can happen in all kinds of ways.

Domestically, there’s uneven sentencing, where some people get the maximum and others get cut loose without penalty - and neither outcome has any connection to the actual circumstances of the crime (though it often correlates all too closely with race, class, and the ability to afford a good lawyer). Unchecked police brutality (tasers, for example) that hardens public perception against the constabulary. Unwarranted police surveillance and legal harassment of law-abiding citizens going about their business. Different kinds of law enforcement for different neighborhoods. The use of government force to silence critics. And let’s not forget the unconstitutional restriction of free speech and free assembly rights.

Abroad, there’s the misuse of military force, which forces the country to pour its blood and treasure into misadventures that offer no clear advantage for the nation. These misadventures not only reduce the country’s international prestige and contribute to economic declines; they often create a class of displaced soldiers who return home with both the skills and the motivation to turn political unrest into a full-fledged shooting war.

This kind of capricious, irrational ineptitude in deploying government force leads to public contempt for the power of the state, and leads the governed to withdraw their consent. And, eventually, it also raises people’s determination to stand together to oppose state power. That growing solidarity and fearlessness - along with the resigned knowledge that equal-opportunity goons will brutalize loyalists and rebels alike, so you might as well be a dead lion rather than a live lamb - is the final factor that catalyzes ordinary citizens into ready and willing revolutionaries.

* * *

“A revolutionary state of mind requires the continued, even habitual but dynamic expectation of greater opportunity to satisfy basic needs…but the necessary additional ingredient is a persistent, unrelenting threat to the satisfaction of those needs: not a threat which actually returns people to a state of sheer survival but which put them in the mental state where they believe they will not be able to satisfy one or more basic needs….The crucial factor is the vague or specific fear that ground gained over a long period of time will be quickly lost… [This fear] generates when the existing government suppresses or is blamed for suppressing such opportunity.”

When Davies wrote that paragraph in 1962, he probably couldn’t have imagined how closely it would describe America in 2008. Thirty years of Republican corporatist government have failed us in ways that are not just inept or corrupt, but also have brought us to the same dangerous brink where so many other empires have erupted into violent revolution. The ground we have gained steadily over the course of the entire 20th Century is eroding under our feet. Movement conservatism has destroyed our economic base, declared open war on the middle and working classes, thwarted the aspirations of the intellectual and professional elites, dismantled the basic processes and functions of democracy, failed to prepare us for the future, overseen the collapse of our economy, and misused police and military force so inconsistently that Americans are losing respect for government.

It’s not always the case that revolution inevitably emerges wherever these seven conditions occur together, just as not everybody infected with a virus gets sick. But over the past 350 years, almost every major revolution in a modern industrialized country has been preceded by this pattern of seven preconditions. It’s fair to say that all those who get sick start out by being exposed to this virus.

Hillary Clinton is failing because this is a revolutionary moment - and she, regrettably, has the misfortune to be too closely identified with the mounting failures of the past that we’re now seeking to move beyond. On the other hand, Ron Paul’s otherwise inexplicable success has been built on his pointed and very specific critique of the kinds of government leadership failures I’ve described.

And Barack Obama is walking away with the moment because he talks of “hope” - which, as Davies makes clear, is the very first thing any would-be revolutionary needs. And then he talks of “change,” which many of his followers are clearly hearing as a soft word for “revolution.” And then he describes - not in too much detail - a different future, and what it means to be a transformative president, and in doing so answers our deep frustration at 30 years of leaders who faced the looming future by turning their heads instead of facing it.

Will he deliver on this promise of change? That remains to be seen. But the success of his presidency, if there is to be one, will likely be measured on how well his policies confront and deal with these seven criteria for revolution. If those preconditions are all still in place in 2012, the fury will have had another four years to rise. And at that point, if history rhymes, mere talk of hope and change will no longer be enough.

What Sara Robinson doesn’t realize, with her positive view of revolution, is the diabolical game-theory employed by the elite whose most ruthless elements tend to end up on top after the revolutions sweep away the existing order. If that fate is to be avoided, the public that would be doing the uprising will have to be armed with knowledge of Ponerology, of rule by psychopaths.