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A Trojan Horse brought to you by DailyKos UPDATED

by NBBooks Mon Feb 4th, 2008 at 01:58:55 AM EST

(Update note: I added more material to the discussion of what happened in the 1970s when Volcker was Fed chairman).

For the past few years, DailyKos is reportedly the most popularly read progressive political blog in the world. And on DailyKos, one "BondDad" has established a huge following for his posts on financial and economic matters, usually full of vivid graphs and concise explanations of events in the financial markets. Up until this past summer or autumn, "BondDad" presented his analysis from a perspective I fully agreed with: the U.S. economy was much weaker than it appeared to be because wages and earnings for the working and middle classes have stagnated since the 1970s, and a monstrous bubble of debt has been created to allow Americans to keep consuming despite their declining incomes.

But the past few months I have been increasingly distressed by BondDad’s postings, which have swung into alignment with Rubinomics – the Bill Clinton / Democratic Party version of “free trade’ “free market” economics which is unfortunately called “neo-liberalism.” Yesterday BondDad posted a diary reporting Barack Obama has been endorsed by former Federal Reserve Chairman Paul Volcker. BondDad cannot seem to say enough nice things about Volcker:

Volcker's actions in the early 1980s are the primary reason the country didn't fall into a period of rapidly escalating inflation in the early 1980s.


Volcker is one of the few economists who has correctly diagnosed the the central problem of the US economy.


Volcker has "been there and done that" in more ways then one. He is an accomplished economist with solid practical real-world experience. This is an endorsement that carries a great deal of weight with the economic crowd.

In his epic Latin poem,The Aeneid, Virgil tells us that when Laocoon, the Trojan leader, awakened to find his soldiers dragging the massive Greek ruse into the city, he ran toward the city’s gates, screaming the warning “O wretched countrymen! What fury reigns? What more than madness has possess'd your brains? . . . Somewhat is sure design'd, by fraud or force. Trust not their presents, nor admit the horse.”

Consider this my Laocoonian scream.

If anything or anyone pleases “the economic crowd” at this point, the best thing to do is to take it or them, wrap them in a few hundred pounds of chain, and throw them into some very deep water. Then drop depth charges, just to be sure.

The “economic crowd” that BondDad is apparently now so keen to please is exactly the structure of power that must be demolished if we are to repair this broken, bleeding country of ours and get it moving forward again. BondDad’s “economic crowd” are the cruel-hearted bastards that told Mexico, Argentina, Brazil, and dozens of other countries in the 1980s and 1990s that it is better for schools and hospitals to close and for children to starve than to miss a few interest payments to the financiers and bankers of Wall Street, Switzerland, and the City of London.

BondDad’s “economic crowd” are the warped geniuses that showed Enron, Tyco, Adelphia, and MCI/Worldcom how to game the system and cook their books, then walked away with billions of dollars in commissions and fees when each one of those rotten messes collapsed.

BondDad’s “economic crowd” are the vicious little swine who are anxiously awaiting the next President of the United States to begin “saving” Social Security by establishing “private accounts.”

O wretched countrymen! What fury reigns? What more than madness has possess'd your brains?

Here’s the real story on Paul Volcker, in a somewhat lengthy but important history of the strategic financial movements and policies that have destroyed most of our real economy, The Financial Tsunami: The Financial Foundations of the American Century by William Engdahl:

In August 1979, to restore world “confidence” in the dollar, President Jimmy Carter . . . was forced by the big New York banks, led by David Rockefeller’s Chase Manhattan, to accept Paul Volcker, a protégé of Rockefeller’s from Chase Manhattan Bank, as new Chairman of the Federal Reserve with an open mandate to do what was necessary to save the dollar as reserve currency.

On taking office, Volcker bluntly announced, "the standard of living for the average American has to decline." He was Rockefeller’s hand-picked choice to save the New York financial markets and the dollar at the expense of the nation’s welfare.

In a 1988 book, Secrets of the Temple: How the Federal Reserve Runs the Country, William Grieder revealed how Volcker deliberately pushed the Unites States onto the path of having the economy increasingly under control of Wall Street. Under the Keynesian full-employment policies that the U.S. followed after emerging from World War 2, the Fed’s approach to controlling inflation was limited almost entirely to its manipulation of monetary aggregates. The longest-serving Fed chairman to date has been William McChesney Martin, Jr., who served from 1951 to 1970. His replacement, selected by Richard Nixon, was Arthur Burns, whose macroeconomic analysis had greatly influenced Milton Friedman’s work, as reflected in Friedman’s and co-author Anna Schwartz's massive tome A Monetary History of the United States, 1867–1960. The great irony is that under Burns, the Fed’s focus on inflation changed to a “cost-push” interpretation: the basic problem that needed to be addressed was the inflationary impact of increasing wages.

Yet further irony – Nixon believed he had lost the 1960 election because of the Fed’s monetary tightening, which caused a recession that year. When Nixon appointed Burns chairman, he made very clear to Burns that he expected the Fed to flow “easy credit” into the economy to pave the way for Nixon’s reelection in1972. When there were signs that Burns might resist, articles appeared in the U.S. media suggesting that new legislation was required to diminish the Fed’s power and authority. As a result, according to the Fed Board of Governors meeting minutes of November 1970, Burns believed that:

...prospects were dim for any easing of the cost-push inflation generated by union demands. However, the Federal Reserve could not do anything about those influences except to impose monetary restraint, and he did not believe the country was willing to accept for any long period an unemployment rate in the area of 6 percent.

It is in this context that Volcker first enters our notice, as Undersecretary of the Treasury for International Affairs. As Engdahl relates, in this position, Volcker played a key role in convincing Nixon to stave off the growing international crisis of confidence in the U.S. economy and the dollar by the simple expedient of changing the rules -- ending convertibility of the dollar into gold at the $35 an ounce established in the Bretton Woods agreement. This completelt destroyed the post-World War Two international monetary order, and it is arguably the first and most important step in financial deregulation, and creating the conditions in which financial derivatives and speculation could flourish. Adding to these problems, of course, was the burden of paying for the Vietnam War, which both Lyndon Johnson and Nixon tried to do by borrowing.

The 1973 Oil Embargo was the next nasty shock to the U.S. economy. Here, instead of beginning a serious national effort to find an alternative to an industrial economy based on fossil fuels, the policy became that of a “post-industrial” society, with secret arrangements made for the massive amounts of dollars being pumped into the Middle East and the Persian Gulf to be recycled back into the United States, creating a debt bubble that would paper over the reality of how the U.S. industrial economy was being wrecked. The specific “petro-dollar” agreements that accomplished this are covered by John Perkins in his book, Confessions of an Economic Hit Man.

These are not sound policies, at least, not if you’re interested in maintaining an industrial economy and preserving the post-war gains of the middle and working classes. By the late 1970s, the U.S. economy was beset with stagflation, a condition which mainstream economics had never thought possible. Probably because mainstream economics was still thinking in terms of a functioning industrial economy. So, when Volcker became Fed chairman in August 1979, a number of basic U.S. industries were in bad shape, particularly the bedrock industries: automobiles, steel, and machine tools. One of the Big Three car makers, Chrysler, was near bankruptcy. At the same time, the Hunt brothers had attempt to corner the market for silver, but had failed and were failing to meet margin calls. What Grieder details in his book is how Volcker confirmed the fundamental shift in Federal Reserve policy of Burns, by choosing to help the Hunt brothers, while letting Chrysler twist slowly in the wind. (Congress soon afterwards arranged an emergency loan for Chrysler). As Engdahl notes in his recent piece, Volcker had fundamentally altered the rules of the game: it was now "What's good for Wall Street is good for the country." And the real, physical economy could go to hell -- and it has, taking millions of decent paying jobs and much of American prosperity with it.

In his review of Greider’s Secrets of the Temple, Alan S. Murray, who met with Volcker twice, wrote in the January 1988 Washington Monthly

Volcker also represents what is most troubling about the Federal Reserve. Like his institution, he is aloof and disdainful of the messy ways of democratic government. He always operated in secret, and he was proud of his ability to give evasive answers that obscured the central bank's most important actions, even when those actions were sending shock waves through the lives of every American. In response to a reporter's question, Volcker once said gruffly: "We did what we did, we didn't do what we didn't do, and the result was what happened." The response typified his attitude towards an informed public. . . .

"Neither Congress nor the White House . . . could affect private lives with the immediacy and universal reach of the Federal Reserve's power, its ability to send instant signals rippling through every family's financial decisions, to change the incentives in virtually every business transaction," Greider writes. "The paradox for democracy was obvious: the Washington institution that was most intimately influential in the lives of ordinary citizens was the one they least understood, the one most securely shielded from popular control."

In another review of Grieder’s Secrets of the Temple, Steve Badrich is wonderfully concise and perfectly encapsulates the problem with BondDad’s diary:

The press commonly kowtows to Fed members as dispassionate wizards, whose decisions are based on technical criteria lying outside (or above) politics. Long-time Fed chairman Paul Volcker was often portrayed as the father who saved his children (us) from self- indulgence and 70s inflation.

Greider's contrary view is as simple as his arguments for it are longwinded. He sees the Fed as a racket designed to insulate crucial economic decisions from popular control. The Fed's propaganda war against "inflation" justifies the high interest rates that have wrecked the economy, while providing mega-payoffs to the superrich. Such populism is anathema to the respectable press . . .

I had read Greider’s book, many, many years ago, and I had grown up in the 1970s, so I knew that Bonddad’s praise of Volcker was unmerited. I found the above excerpts in just a few minutes of Google searches. But, over 300 DailyKos readers gave Bonddad’s posting a recommend, and left over 200 comments, more than 10 to one favorable. If so many progressives are that uninformed about economics and finance, then . . . then . . . hell, what’s the use? Vote Democratic, vote Republican – it’s not going to make a bit of difference to “the economic crowd.”

O wretched countrymen! What fury reigns? What more than madness has possess'd your brains?

Post this on DailyKos in a few more hours, at the beginning of a new day in America?
. Yes 77%
. No 0%
. Doesn't matter - we're all screwed. 22%

Votes: 22
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But it is very late here, and I must crawl off to sleep a few winks. Ciao!
by NBBooks on Mon Feb 4th, 2008 at 02:01:18 AM EST
Timeo Danaos et dona ferentes...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Mon Feb 4th, 2008 at 04:48:27 AM EST
Presumably Hillary would also implement Rubinomics in one form or another since she's going to pretty much inherint her husband's policy apparatus. Right?

We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Mon Feb 4th, 2008 at 04:54:43 AM EST
Yes, I think that is pretty much a foregone conclusion, given whom she has surrounded herself with. So also my reply to An American in London (below) assessing Obama. So I am not very happy with what appear to be the two final choices on the Democratic side, though I think there is a better chance with Obama of actually getting real change.
by NBBooks on Tue Feb 5th, 2008 at 10:25:15 AM EST
[ Parent ]
I couldn't agree with you more. People like Bonddad and the Daily Kos crowd giving him kudos are well intentioned people who believe in the false premise in which unregulated capitalism and social justice can co-exist.

I have met many 'Clintonian' Democrats in London who are yuppies more concerned with their ability to explain how wonderful their proposed solutions will be for the US and the electorate but will not require any sacrifices or changing of consumer lifestyles which they are supremely representative of.

A total disconnect between the Bonddads of the world, who seem to think if they give props to cretins like Volker; they will somehow be admitted to the 'the establishment' of academics, players etc. who ironically are responsible for the destruction of the middle class of the US, the most important accomplishment of the American experience.

Great diary-please keep on writing

by An American in London on Mon Feb 4th, 2008 at 06:24:48 AM EST
This was my reaction to bonddad's post as well. The irony was I had just watched Michelle Obama speak at UCLA, where she attacked the economic policies of the last 30 years that had led to the underfunding of public education and health care and the destruction of the American middle class through massive debts and the loss of high-wage manufacturing jobs.

So to come to dKos last night and see this stuff about Volcker and bonddad's hope that Volcker would be part of Obama's economic team was rather disturbing, to put it mildly.

And the world will live as one

by Montereyan (robert at calitics dot com) on Mon Feb 4th, 2008 at 11:00:15 AM EST
... Blog, so what should I say?

I have a bit of time to spend on the task, thanks to the combination of the ongoing US recession eliminating the days I am called in to the warehouse, and the suspension of the Edwards campaign.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Feb 4th, 2008 at 11:45:12 AM EST
I did find the article on Huffpost. In reading it I did see a somewhat different attitude than you report. It seemed that Bonddad was simply saying that the endorsement by Volcker would carry weight in certain segments of the population. In fact Bonddad noted that Volcker's interest rate rise to squelch inflation in the early 1980s caused 'double-dip' recession (which was only one factor).

I agree completely with your critique of Volcker and his tenure. I agree substantially with your critique of Bonddad's writings. Just thought that I'd note my sense of the article.

One particular - Bonddad does seem to credit Volcker with an enduring effect on the rate of inflation in the U.S. To that, I say this:

Greenspan had his hand in the matter, too, of course. At the time it was primarily to change the method of reporting CPI.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Mon Feb 4th, 2008 at 12:02:10 PM EST
If you could provide a source for that graph (preferably one that explains how the alternative CPI is computed and how this differs from the official CPI), I would be mucho grateful.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 4th, 2008 at 02:03:40 PM EST
[ Parent ]
The graph comes from  http://www.shadowstats.com  , but the actual analysis can only be accessed by subscribers (I am a subscriber).

I wrote an article about inflation on DailyKos last year sometime that gives my take and includes some references to the shadowstats analysis. If you run Search at DKos, go to 'Diaries by', and put in 'paul spencer'. You can find it fairly easily, since I only have a few diaries there.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Mon Feb 4th, 2008 at 02:41:50 PM EST
[ Parent ]

I'd have liked more detail, but being a cheapskate I suppose I'll have to live with not knowing. Makes it less useful, though - without knowing what goes into the numbers and why, I have no way of knowing whether they're just making stuff up as they go along, as the Fed seems to be doing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 5th, 2008 at 01:20:29 AM EST
[ Parent ]
has been changed very substantially over the years since about Lyndon Johnson's time. There were two particular changes - one in 1982-83 and another in approximately 1993 - that had the strongest effects on the metric.

Main changes:

  1. the 'basket of goods' was redefined to remove the 'volatile' elements of food and fuel;
  2. the idea of 'substitution' was introduced via a kind of geometric 'weighting' maneuver (the usual joke about it is that, if steak is too expensive, the consumer can go to hamburger; if hamburger is too expensive, the consumer can go to dogfood); and
  3. a concept called 'hedonics' was employed in an essentially arbitrary manipulation of some of the data by the 'expert' statisticians at the BLS. They don't even try to justify quantification of this last bit; they just do it - by magic, I guess.

paul spencer
by paul spencer (paulgspencer@gmail.com) on Tue Feb 5th, 2008 at 10:44:32 AM EST
[ Parent ]
In other words, they're full of shit. Thanks for the clarification.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 5th, 2008 at 11:14:03 AM EST
[ Parent ]
If you post this on kos, link to it here and I'll recommend.

I saw this by bonddad, and didn't take this the same way as you, because he's admittedly a so-called "centrist" which, in econ speak in the US, seems to me to mean a neo-liberal with a more conservative approach to monetary policy than the free money borrow-and-spenders which are the GOP.

The trojan horse in the US is the leadership of the Democratic party - bonddad is simply a reflection of economically dominant faction in that party - as you describe, the Rubinesque (no pun intended) wing.
Which is why, on economic matters, despite the good intentions of a minority of Democrats in Congress, there has been no effective opposition in the US for a couple of decades and running.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Mon Feb 4th, 2008 at 01:42:41 PM EST
I am a European in a relationship with an American and we are both to the left of both our continents' political systems.  But these notions of left or right are different depending if you look at it from an American point of view or from a European view point.  American and European political traditions are radically different. Only the most progressive of Liberals in the US would recognize our Social Democratic ideals as also theirs. While their mainstream Liberal brethren seek out the middle ground of politics. A political center that has steadily been drifting to the right by the beyond awful Republican Administration and Congress.  Both Clinton and Obama are products of this centrist school of thought and with their economic policies, plans for health care reform, etc. they find much support among DailyKos readership that is mostly like them.  By the often adverse reactions to some of Jerome's diaries it is clear for me that the majority on DK is not yet ready for a true Social Democratic (European style) discourse.  I consider Bonddad to be a good writer and keen observer, I often read and recommend his diaries.  However I do realize that he is not a progressive, rather a DLC type...but calling him out as a "trojan horse" is way out of line IMHO.   He's an adept economics writer and of those we have too few already.

Bought (and read) the Secrets of the Temple back in the eighties and its about time to give it another read.


by oceanspray on Mon Feb 4th, 2008 at 03:36:15 PM EST
...but calling him out as a "trojan horse" is way out of line IMHO.

I agree. Using such terms as "a Trojan Horse" could cause a backlash that ends up lessening the impact of  your message.  Use gentler words about this writer and save your harshest for those who have committed the greater sins. Let the message tell the story that reveals the truth and let readers arrive at their own conclusions.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears

by Gringo (stargazing camel at aoldotcom) on Mon Feb 4th, 2008 at 03:53:55 PM EST
[ Parent ]
. . . though I must admit the title made me think at first that you were talking about Barack Obama!  That particular "gift," however, is being presented to us by so many more dubious donors than just DailyKos.

The bonddad diary in question was one of the few of his I've seen at D-Kos that I didn't recommend.

by keikekaze on Mon Feb 4th, 2008 at 09:45:38 PM EST
The Trojan Horse could be Obama, actually...we don't really know what we're getting with this guy; his is all talk, and little substance, so far anyway. The fact that he is feared big time by the Republicans has me very uneasy.   He'd siphon off votes from them like there's no tomorrow, but why is that??   I think I know and it worries me.
by oceanspray on Tue Feb 5th, 2008 at 03:09:41 AM EST
Why do you think Obama would siphon votes off of the Republcans and that worries you? What worries me is the Republicans would just love to run against Obama because they realize there is a 8-10% rascism vote which does not show up in the polling and in the Repubs' eyes guarantee McCain the Presidency, who does scare me because he is totally contradictory in his thinking and deep down he strikes me as someone who could usher in fascism without realizing it because it would come wrapped in patriotism. Anotherwards he is an old fool.
by An American in London on Tue Feb 5th, 2008 at 05:33:52 AM EST
[ Parent ]
Have you seen any other discussion of a hidden racism vote? You concisely summarized a nagging fear in my mind.  

I'm not sure what to make of Obama himself. I am not happy with who he chose as an economic adviser, Austan Goolsbee from the University of Chicago, who penned an op-ed obituary of Milton Friedman in the New York Times. On the other hand, Obama was a street level political organizer in the slums of Chicago in the 1980s. On the other hand, Obama was the editor of the Harvard Law Review, an "establishment" position if ever there was one. One the other hand Obama has first hand experience with a struggling third world country. On the other hand . . .  you get the idea I hope.

And there is no doubt the man is an opportunist. How else explain his run for the Presidency? What are the implications of that for how, if actually elected, he handles the crumbling world financial system and a faltering economy? Will he grasp the historic opportunity to fundamentally alter the world's financial and monetary affairs for the better? Or will he reach for the massive inducements Wall Street will likely offer him to preserve their power and the status quo?

That is why I am so distraught at how much support Bonddad's diary received in the leading progressive blog in the U.S. Whoever become the next President is largely going to be the fulcrum in a struggle to either change financial and monetary affairs or try to preserve them. We roughly know how much weight will be applied to one end of the lever by Wall Street and its allies. How much countervailing weight can be applied by progressives and the population in general is an open question, making the incoherence of thinking on these issues very worrisome.

by NBBooks on Tue Feb 5th, 2008 at 10:20:18 AM EST
[ Parent ]
NBBooks, The rascism vote I allude to is from a practical example known as 'The Bradley effect' which I lived through in the early 80's. Tom Bradley was perceived to be very much like Obama is today. A man of stature and intelligence with a kind and open personality who was Mayor of Los Angeles running for Governor of California against a reactionary Republican. Four days before the election; Bradley was polling 5-6 points ahead by all the polls and ended up losing the election by 3 points.

California in 1982 was far more progressive than the US in 2008. The only counterbalance I see to the hidden rascism is if Obama can bring the many young and new people who are coming to his rallies to the voting booth.

Your worries about leverage against Wall Street are real but the US electorate will have to feel totally insecure in order to be part of the change necessary regardless of who the Democratic nominee is. Anotherwards, without a Depression-FDR would have never been the President he became and the US would have never had any of the safeguards which have now been revoked in the present day of capitalism unfettered.

by An American in London on Tue Feb 5th, 2008 at 12:22:41 PM EST
[ Parent ]
Thank you for this.  Whenever I am confronted with someone who is otherwise sane who goes on about the "great job" Paul Volcker did to destroy the beast if inflation, I get so angry I am reduced to sputtering.  I was there when it happened and consider Volcker a vicious thug.

So thank you for explaining why I should be having those feelings.  How a former bond salesman, easily the most reactionary job in all of Capitalism, gets to be the economic sage of Kos says much about how far to the right the Overton window has been pushed.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Tue Feb 5th, 2008 at 10:04:19 AM EST

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