J.P. Morgan Chase and Lonergan's Economics

[Forum Administrator]

Would someone familiar with Lonergan's macroeconomic theory be able to write several paragraphs that would locate the current J.P. Morgan Chase events in terms of that theory? Are we talking about something going awry in the redistributive function? Is that where one would begin to try to understand this set of events?

[Phil McShane]

This is a precise question that has been "on" here for some time. I have only just entered, so think it best to answer more broadly. There are two important entry-points into present culture for Lonergan's economic analysis: [a] the elementary area that I have dealt with in various places, e.g. in chapter one of Sane Economics and Fusionism (SEAF), or in the Appendix to The Road to Religious Reality (RRR). That entry point is summarily describe by the claim,"there are two types of firm", and it can be communicated to schoolkids in grade 11.  the area of the question asked,: the area that I can roughly designate as the area of the commoditization of money: it taints what we might call old-style ordinary banking. There is a literature on the tainting, and some references and discussion are given in SEAF. For a glimpse of the tainting I recommend three pages of The Economist (October 18, 2008), 79-81.
(I can send these to interested people).  One can, of course, google Hedge Funds, Credit Default Swaps, Derivatives, etc and get descriptions but not critical assessment. E. g., the three pages from The Economist talks of the Chicago Black-Scholles theory of option pricing, but to find the folly of that theory - and most other probabilistic messes re optioning - you need to ingest the sanity of my Randomness Statistics and Emergence, chapter 4, on "Reasonable Betting" .

There is lots more to say about this mess, but perhaps I might put in here a general presentation that I supplied to someone interested in the Occupy Wall Street Movement, and then make some concluding points.. 

Here you are:
 
The Gross Immorality of Higher Financing and Trading
The “Occupy Wall Street” has the backing of the Scientific Economics generated by Bernard Lonergan seventy years ago. That theory does not suit the Establishment: it reveals simple errors regarding the nature and flow of monies.
Money, in a sane economy is intrinsically connected with the promise of production, including creativities of productive imagination. The structure of well-working economy does in fact generate, in definite rhythms, a flow of money that becomes available for sustained creativity. This flow of money is a delicate flow, needing communal care, which care must be rooted, of course, in individuals who are genuinely caring.  There is a statistics of such individuals which, in a sane economy, would be a Poisson distribution in favor of sanity: the lunatic and greedy would be a small group. Present culture pitches the curve in the opposite direction: indeed, it is taken for granted that money-grabbing is a world of adventure. One hopes for moral shifts, but meantime legislation is needed to cut out the world of commoditized money from the global economy.
There are a host of other ills but this one associated with Wall Street needs urgent tackling in the face of contemporary global money-crises. But what eventually has to be faced by economists is that the present economic pseudo-science is just that. It lacks the correct elementary variables.

Concluding Comments:
The end of that previous paragraph points back to [a], and on that there is the grade 12 class stuff I mentioned above. A really good commonsense presentation, by 5 authors, is available in the journal Divyadaan, Vol. 21, no. 2 (2010), "Do you want a Sane Global Economy?".  I have copies i can send on, free, if you are interested in this follow-up.

But on the banking question, we need to tackle, on various levels, the morality of the commoditization of money. We have to get back to messing around with, inculturating, the primitive reality of money as promise, as "taking note of promises".  Later cultures will appreciate this as a New Covenant of Global Promise. [This is utterly remote from the financial jugglings in Europe at the moment!!].
   The 'taking note' has to build up into a culture that appreciates the radical meaning of CREDIT, giving credit for a good inventive idea [Schumpeter's focus in ]Business Cycles] (1939)] . Robert McNamara (1968, his takeover of the World Bank) destroyed this and the mood then of American financial madness was there to enlarge the ignorance and malice.
   The proper economic theory of Lonergan brings out the delicacy of controlling democratically the financial flows [see The Financial Problem in the 1942 mss, but broader the full meaning of 'Concomitance' as supplied by the index to CWL 21]. That delicacy manifests as  immoral the idiocy that has emerged in the past sixty years of Hedge funds, mad mortgaging and packaging, CDSs, etc etc.  NOW THIS NEEDS TO BE WRITTEN UP IN A GOOD ESSAY: ANY TAKERS??
   The legislative elimination of that zone is only a beginning of a cultural re-education, back to the fundamental meaning of CREDIT. And then there is the larger education that breaks the madness of the removal of responsibility by myths regarding corporate personalities.
   Perhaps in 50 years the economic news  in papers and TV will actually be about creativity and inventive relevance, and in a 100 years Stock Markets will be quiet places that open for a few hours once a month!!         
Phil McShane

[Forum Administrator]

Very helpful response. Thanks!

[dwoyler]

The short answer to the question is "yes".  However, this was one instance.  Here is a synopsis of the collapse of the speculative bubble in housing that may shed some light on the problems we face with the gamblers on Wall Street..  This was previously posted on the Lonergan_L Blog.

 What follows is a gloss that assumes an explicit explanatory framework, some of which may not yet exist.The need to do economic statistics in terms of the two cycles has been reiterated a couple of times.  Basically, we need to understand where the money went to understand the economic impact.  What money are we speaking of with the recent economic meltdown?  Basically loans (versus savings).  Loans can lead to permanent expansion of the money supply if they lead to new sustainable schemes of recurrence (economic development).  Then the money remains in circulation (cycles of payments).  With the housing bubble, a significant amount was going into the redistributive function and all that was happening was a spiraling upward of housing prices which lead to more lending. Once prices started falling, the opposite occurred and the market collapsed like the house of cards it was.  Now there also was money going into the first circuit in the building of houses for consumers.  The demand in this market got out of whack with a sustainable rate of development due to the bubble.  Also, there was increased activity in the second circuit for those companies that supplied the means for building the houses.  That, in general, is what needs to be analyzed first I believe.  So there was an impact to both circuits of the housing industry, huge impact to the redistributive housing market which, of course, impacted all home owners to some extent.  The financial industry provided the loans that fueled this, but they also were the true home owners.  With the collapse in the value of the asset they went under water.  As this rippled (or tsunamied?) across the globe, we turned to the lenders of last resort - governments to save the finanacial industry.  They had no choice since most economic activity would have locked up with little liquidity available.  Governments are the only institutions today that can amass enough capital to save the industry and the only ones who have the power to make the changes necessary to do so.  The problem here is that they also rely on loans.  Running a deficit is a gamble that the future economy will grow enough to pay back the current loans and then some (ie. through taxes - inflation is the other alternative).  When that does not happen, then the solvency of the government can come into question and it faces the same issue the investment banks did.  That has played out a number of ways in the past and we are seeing the drama with Ireland and Greece today.

The collapse of the housing market would not have been as bad if the investment banks had not been leveraged 30 to 1.  (A law was passed in by the Bush administration to decrease the reserves they had on hand - since I wrote this it has been noted that they were able to do this prior to anything Bush did).  They bought mortgage backed securities (a form of derivitive) from the banks and then packaged them into a range of financial instruments they then sold. (A good account is in The Death of Capital by Michael Lewitt).  When these went bad we had another collapse which lead to the insolvency of the investment banks and threatened all banks.  The bailout stopped the downward spiral.  How this was handled is another story yet to be written completely, but Paulson's account in his book On the Brink gives a good account.  On top of this mess, AIG provided insurance against default of these securities but had no reserves to pay off the insurance.  Since virtually everyone had bought insurance we had to bail out AIG to limit the insolvencies - which would have been global. (Some models factored in insurance with hedging to lead some to believe they had no risk - oops, except they really did not have any insurance)  Hence the accusation that we were bailing out foreigners.  We were.

So now the general economic impact.  You had the loss of value in homes.  Alone this would prompt people to spend less slowing the economy.  You had the collapse of investment banks and massive layoffs in the financial industry.  All other industries started laying off since we have learned in this "just in time" world to act swiftly when you see recession on the horizon.  Also, due to the nature of the industry that had collapsed, the financial industry, all other companies reliant on liquidity through loans faced imminent collapse.  The auto industry is the poster child.  And then factor in that this was global so that any individual economies growth is limited by the impact to the other economies.

Virtually all governments are contracting due to fewer tax revenues.  Though the US government continues to run large deficits because it still gets loan through the sale of T-Bills, etc, local and state governments need to manage to their income.  As noted above, the governments with poor balance sheets need their own bailouts to maintain solvency.  These are tied usually to unpopular changes to policies.

Why the recovery will be slow is another question tied mostly I think to the nature of the industry that collapsed, housing.  It typically leads the way in the recycling of the business cycle out of recession.  This points to the need to rely on more than the business cycle for economic health.  There needs to be a shift in understanding to Lonergan's phases (see pgs 97- 100 of For a New Political Economy).  In particular we probably should have been in a static phase instead of having money chasing money.  I believe this is the phase it will be most difficult for us to accept the need for.

With respect to models of the economy - the market model is limited basically because markets are part of the economy not the whole.   What needs to be understood is the emergence, development and decline of markets and their interelationships.  The two basic flows are a relating of markets to one another.  We keep making the mistake that if we stabilize or manage markets we are solving our economic issues without understanding that there is a larger context that needs to be managed.