‘American Dream’ Film: Communicating Economic Ideas Dramatically

I’m interested as much in the way ideas get communicated as the ideas themselves. What brings this to mind is the animated film I saw today called The American Dream. This is the most creative expression I’ve seen of the more non-mainstream view of economics — the idea that the Federal Reserve is an evil conspiracy against America.

Some of the film’s explanations are less controversial — how banks manipulate the economy and create what amounts to a house of cards that is supposedly too big to fail. But the film does move into some uncomfortable areas, almost advocating violent revolution — patriotic language and images are used to whip up sentiments. Still, as I said, the most interesting thing to me is the innovative presentation of the creators’ arguments.

By the way, I also like Chris Martenson’s “Crash Course in Economics” — kind of a ‘chalk-talk’ approach — as another example of creative presentation of economics ideas.

The American Dream is a half-hour film available in two parts on YouTube.

AB — 25 January 2011

Do Companies Really Act in Their Own Interests?

Economics 101 would make one think that all actors always act in their own self-interest and that that is what makes a free-market economy work so well. But deeper economic study helps you to appreciate that the reality is much more nuanced.

This is emphasized in posts today by James Kwak at The Baseline Scenario and Felix Salmon at Reuters. What they are saying confirms my frequent observation that economic actors — from individuals to large companies to governments — can do really stupid things that are contrary to their own self-interests, as well as to the benefit of society.

In his post “Why banks are self-defeating on housing,” Salmon discusses banks’ disinclination to move ahead with short sales (in the real-estate sense — in such a case, the sale price is less than the amount owed on the loan — see the Wikipedia entry on this kind of short sale), even though the bank will lose in the long run if they let the property go into foreclosure. The problem is the human disinclination to got through pain in the short term, even though they will benefit in the long run:

Bank executives, it’s worth remembering, are human. Every time you do a short sale, you take a substantial loss on your loan. And no one likes doing that: it’s painful. So it’s understandable, from a psychological perspective, that they will drag out the process as much as possible, putting off until tomorrow the pain they know has to come at some point.

In his post, “The Private Sector Fallacy,” Kwak makes a similar point about large companies in general. He points to three factors as to why that is so:

One [factor] is that big company executives are prone to exactly the same sort of cognitive fallacies as ordinary people, and hence make stupid decisions routinely.

The second is that the incentives of individual people who make decisions (or provide information to people who make decisions) are only tangentially related to the interests of the company as a whole, and certainly not when you think of those interests over the long term.

A third factor is simply that companies are big, dumb, poorly designed institutions.

In spite of these problems with the classical “invisible-hand” model of economics, says Kwak,

the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.

AB — 30 June 2010

The annoying thing about The Big Oligarchy

The annoying thing about The Big Oligarchy …

the banks

the insurance companies

the government

the giant firms

and their privileged controllers

… is that you pay into It all your life through premiums, taxes, and the money It makes from the float on your cash …

but then when you ask for the promised (or implied) benefits, It begrudges paying you and does Its best to stonewall.

AB — 26 March 2010

How the Wall Street Boom Went Kablooey

Reading Barbara Ehrenreich’s new book Bright-Sided recently, I became aware of Michael Lewis’s November 2008 article for Portfolio, “The End of Wall Street’s Boom,” which offers a fascinating inside look at how bubbles develop, sustain themselves, and then collapse.

Lewis makes an interesting connection with the delusional “positive thinking” mode that seems to be an important component of economic bubbles. This is the source of Ehrenreich’s interest in what Lewis has to say.

The main character of Lewis’s story is Steve Eisman, who built a busines toward the end of the bubble short-selling mortgage originators and homebuilders riding the subprime boom, as well as Wall Street firms and even rating agencies that were complicit.

Lewis relates that Eisman said something both interesting and funny to Brad Hintz, a prominent financial analyst at a conference in spring of 2007. Eisman told Hintz that his group had just shorted Merrill Lynch. Hintz wanted to know why.

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

Lewis is a former Wall Street hack who wrote the 1989 expose Liar’s Poker about his experiences in the industry in the 1980s.

His 2008 article ends on a curiously touching note as he recounts his recent lunch meeting with John Gutfreund, the ex-CEO of Salomon Brothers who took the company public and then led it during its period of prominence in the 1980s.

In relating his meeting with Gutfreund, Lewis offers an interesting analysis of the shift that took place in the 1980s, led by figures such as Gutfreund:

You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil.

Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.

… From that moment … the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished.

The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

AB — 15 January 2010

‘Life Inc.’ author Douglas Rushkoff on Colbert Report

Douglas Rushkoff, who writes about media and popular culture, appeared July 15, 2009, on The Colbert Report. Rushkoff is currently promoting his new book, Life Inc.: How the World Became a Corporation and How to Take it Back.

Rushkoff does a great job explaining the premise of his book, which is that corporations are only happy when individuals are contributing to the GDP, which is why they are always bugging us to do something productive rather than something useless like, for example, going out and watching birds.

As always, Colbert does a great job of helping Rushkoff explain his book by pretending not to like it. Here’s a link to the video — it’s a great six minutes.

AB — 17 July 2009