"Ready For Anything" Nation

A few thoughts on the GSE situation. Unlike most of what's happened during the past seven-plus years, there's enough blame to go around for both Republicans and Democrats. If you don't know how institutionalized Fannie and Freddie have become, here's a good, basic article from over the weekend. I've posted before (most recently here) about the exigencies of the "system" and how the government's ability to both guarantee and bail out depends on the primacy of the dollar. Any country that rejects that primacy creates unpleasant consequences, and that constitutes an existential threat to the system. Keep it in mind over the next few months. Remember, statists hate consequences, especially when culpability is clear.

I think right now the main danger is that the current bunch (yes, including Bernanke) knows it will be gone soon, so expediency could determine policy even more than it has during the past few years. In January, with oil at $100, I wrote:

I think years from now Bernanke will be seen as a temporary cut-out, an Arthur Burns mini-me, a front man for expediency, someone to damn the monetary torpedoes and then get the hell out before some Very Serious People (who no doubt quietly shifted their own savings into euros and gold long ago) announce that no, that didn't go well, but we've found a Volcker-type to come in and clean things up.

That outcome's looking increasingly likely. But if you think inflation's a problem now, wait until you see what happens to the dollar and therefore the cost of living if we breezily embark on some massive new expansion of government liabilities. The dollar has already factored in part of this, so the worst effects might not be felt right away. But down the road -- after January 20, 2009, obviously -- it would be devastating.

Next, the "ownership society." The debacle with housing, Bear Stearns, and the GSEs has redefined the concept. You mean you didn't hedge your savings against inflation and the socialization of risk by speculating in real estate, or by owning stock in Fannie (or Bear Stearns or other financial firms) and deftly selling before the collapse? Well, too bad. This is what an ownership society is, or at least becomes when fiscal and monetary policy go awry. You'd better dutifully play along with the charade on the way up, because you'll definitely be included on the way down.

Related, if you're one of those strident advocates of "fixing" Social Security via private accounts (as is McCain, and others on the Right who were strangely silent about the financial market turmoil last week) you've got some 'splainin to do. This mess exposes the folly of building an even higher government backstop in the name of ownership society. And let's not kid ourselves: if Social Security funds were invested in the common stock of Fannie or Bear Stearns or the raft of other financial firms currently in trouble, what effect would that have on Washington's definition of "too big to fail"? Since the mid-90's, the Federal Reserve has proven itself unable to resist the pressure to take extraordinary measures to boost the stock market. That's part of the reason we're in this mess. On a political, economic, social, and perhaps most importantly a spiritual level, do we really need the financial markets to become an even greater national priority, and for the Fed to expand its role as the Keeper of the Flame of National Purpose? Why not a stock market ticker on every street corner, continually flashing "Your retirement money guaranteed by the federal government." Or maybe "Bubbleamus, ergo sumus" -- which, if I remember my verb conjugations from seventh-grade Latin, should roughly translate as "We bubble, therefore we are."

Finally, does anyone else find the lack of national outrage about all this a bit unsettling? It's almost a serene, sedated acceptance. Maybe after seven-plus years it's outrage fatigue. Maybe the pain's not bad enough yet. Or maybe democracy's simply working as it should, and people will vote calmly in November to throw the bums out. I'm not sure what I expected in terms of outrage. But in a week that saw oil wink at $150, one of the largest bank failures in U.S. history, and media speculation about a doubling of the public debt with a bailout of Fannie and Freddie, I didn't expect to hear a top economic advisor to one of the candidates claim that it's all in our heads. I do think that if things get bad enough, eventually there will be calls to prosecute the policymakers -- both elected and appointed -- responsible for this mess. War crimes or something else might be the proximate cause for that prosecution, but economic collapse, if it happens, could create an environment in which the public demands it. Electoral victory shouldn't confer the unfettered right to run a country into the ground.

But if "sedated acceptance" explains the absence of pitchforks, that has ominous implications. Thomas Mann described the effects of inflation on a nation's collective psyche, but his observations arguably apply to any period of profound institutional failure to which the public becomes inured:

The market woman who demanded in a dry tone "one hundred billion" mark for a single egg had lost during inflation her ability to be amazed at anything. Since that time nothing was so mad or so atrocious that it could have caused any awe in people anymore.

In Crowds and Power, Canetti argues that economic chaos causes a society to place less value on human life:

The natural tendency afterwards is to find something which is worth even less than oneself...It is not enough to take over an old contempt and to maintain it at the same level. What is wanted is a dynamic process of humiliation. Something must be treated in such a way that it becomes worth less and less, as the unit of money did during the inflation. And this process must be continued until its object is reduced to a state of utter worthlessness. Then one can throw it away like paper, or repulp it.

Sebastian Haffner on what happens when sedated acceptance meets Canetti's dynamic process of humiliation:

Everything takes place under a kind of anesthesia. Objectively dreadful deeds produce a thin, puny emotional response. Murders are committed like schoolboy pranks. Humiliation and moral decay are accepted like minor incidents. Even death under torture only produces the response 'Bad luck'...The result of this million-fold nervous breakdown is the unified nation, ready for anything, that is today the nightmare of the rest of the world.

The woman selling eggs in the market starts to look abroad. I don't think you can blame "the rest of the world" for watching us right now with a very wary eye -- and not just for currency reasons.