Silly ideas of the day, Dylan Ratigan edition

By Felix Salmon
January 11, 2012
Noam Scheiber is raving about Dylan Ratigan's new book, giving it his highest praise: he calls it "sensible".

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Noam Scheiber is raving about Dylan Ratigan’s new book, giving it his highest praise: he calls it “sensible”. Which is maybe not obvious from the title, Greedy Bastards: How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry.

He’s wrong. It isn’t sensible at all. Scheiber says that “one of the more intriguing ideas” in the book comes from Dick Grasso, of all people, who wants to classify a large part of the CDS market as “online gaming” and therefore “null and void”. Which sounds like one of those ideas which sounds great in the middle of your third bottle of wine.

But giving Scheiber (and Grasso, I guess) the benefit of the doubt, I had a look at the page of the book in question. Here it is, page 54, in full:

We must require not only that banks retain more capital but also that when they place bad bets, they pay the price for their losing bets themselves. Otherwise we are stuck with the worst of two economic systems: like a capitalist country, we have private banks that keep their profits. But like a communist country, we have a system where banking losses are charged to the government. Only when we end this corporate communism will we realign the interests of the banks with the investors they serve. The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it.

As we have already seen, a swap can either be an insurance policy that helps to lower long-term costs for a business or a bet by an outsider on whether a given company or country will succeed or fail. Putting swaps on a public exchange would create the visibility for all to see the difference between commodity insurance that is critical to the economy and speculative bets that are not much different from gambling. In fact, Richard Grasso, former chairman of the New York Stock Exchange, suggested to me in a personal interview that the speculative bets that fueled the financial crisis could be reclassified legally as online gaming — and then cancelled. His technical explanation: “I believe regulators should require the product to be registered with a central clearing agent (like an exchange) and thus able to be monitored globally to prevent contracts being written in excess of the debt obligations they are designed to insure (corporate or sovereign). This is easily accomplished by [regulators] and Treasury issuing a cross-markets rule adopted by non-US counterparts. Any contracts written outside these requirements would be deemed null and void by regulators as simply online gaming.”

This is exactly the kind of thing we need much less of, at least in book form. It’s fine if you’re just shooting the breeze with a bunch of financially-illiterate friends, but it really doesn’t belong in a volume which aspires to present “smart policy” prescriptions.

I mean, we start off OK, with a standard-issue broadside about privatized profits and socialized losses. Got that. But what on earth is this supposed to mean?

The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it.

I’ve spent the best part of a day trying to work out what on earth Ratigan might be driving at here, and I’ve come to the conclusion that he was probably just high. Never mind the fact that he doesn’t bother to identify which debt he wants reduced or canceled; just admire the elegant way that he proves that debt cancellation is somehow the equal and opposite action to printing money. (In reality, of course, printing money is a way of canceling debts, by inflating them away.)

Even more admirable, in a sense, is the way that Ratigan throws in his “let’s just delete some zeros” idea and then jumps straight to something completely unrelated — the idea of putting all derivatives on exchanges. I mean, it’s not as though deleting zeros willy-nilly would destroy the fundamental nature of capitalism as we know it, and might therefore be worthy of, oh, another sentence or two. We’ve got Grasso to get to!

Of course, we’re not going to get into any nitty-gritty here about the difference between exchanges and clearinghouses, despite the fact that Ratigan’s talking about the former, Grasso’s talking about the latter, and the two are not at all the same thing. And we’ll not spend much time either on the silly idea that anything interesting or systemically important happens at the point at which the notional value of derivatives contracts exceeds the amount of the underlying. (It doesn’t.)

Because even putting those points aside, what Grasso is suggesting here doesn’t stand up to the scrutiny of sober thought. (Especially if debt obligations — the underlying bonds being insured — can simply be reduced or canceled by deleting zeros.)

The way that markets and exchanges work, there’s no way that a clearinghouse would ever be able to know whether the counterparties to a derivatives contract had some kind of insurable interest in the underlying. Grasso’s proposal wouldn’t put an end to what Scheiber calls “naked bets”, it would just allow speculators to crowd out genuine hedgers, to the point at which people who did have an insurable interest wouldn’t be able to do any hedging, because the speculators would have got there first and written contracts up to the maximum allowable limit.

Ratigan has a bully pulpit on the television, and his heart is pretty much in the right place. I can see why he’d want to publish a book where he can tease out his policy ideas in detail, while keeping them accessible to his television audience. But it’s irresponsible to boil complex issues down into a simplistic world of good and evil, complete with simplistic solutions (cancel debt! outlaw speculative gambling!). If anything, it plays right into the rhetoric of the Tea Party, which Ratigan hates.

There are big and hugely important issues to be addressed in the global economy; the least we can do is take them seriously. And stop pretending that being harsh on a coterie of banksters would be both necessary and sufficient to solve all our problems.

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Comments
14 comments so far

Go have a look at Steve Keen’s work, Felix.. Or Michael Hudson’s, or David Graeber’s recent (and fantastic) book Debt: The First 5000 years. It may well be that Ratigan’s presentation isn’t the most sophisticated, but now you’re dismissing the message because you think too little of the messenger.

Posted by Foppe | Report as abusive

(See for a short intro this interview with Keen at BBC HardTalk: http://www.youtube.com/watch?feature=pla yer_embedded&v=rGkmgnprrIU#! )

Posted by Foppe | Report as abusive

All you have to do is look at the book jacket, Felix, to realize that Ratigan simply isn’t (capable of being) serious. It’s designed to compete for attention with People magazine. Sometimes you *can* judge a book by its cover.

Posted by EpicureanDeal | Report as abusive

Odd that a man writing for finances on Reuters, or that E.D. would find Ratigan’s ideas unacceptable. They worked fine for Argentina and Ecuador, however.

Posted by Dollared | Report as abusive

Are you drinking the third bottle of wine at 3AM your freshman year of college?

Posted by dWj | Report as abusive

Ratigan was a certified loud mouth at Bloomberg and CNBC. For an air-head he got a big chip on his shoulder and very little to say beyond parroting the talking points of the discredited “jurnolistas” whose talking points are fed to him daily, to make him look “a bright person” . He is one more reason why for me MSNBC does not exist. Between Ms. Madow, Colonel Schultz and Chris Mathew, this barker is a fine addition to a team of raving clowns who fell off the bed of a truck.

Posted by redwood509 | Report as abusive

Great post, Felix. I wrote a post myself piggybacking off of this: http://thedollargame.wordpress.com/2012/ 01/12/does-dylan-ratigan-want-to-end-the -fed/.

Posted by TheDollarGame | Report as abusive

Felix, fractional reserve banking creates money, which is different than printing money.

Say I have money M, which I deposit in a bank. The bank lends out M-r (where r is some small reserve). Now a lender has M-r to spend, and I still have M to spend with my debit card, so the money supply has gone from M to (2M-r). This is fairly simple econ.

I doubt that the derivatives can so cleanly be canceled, but that’s the real problem with derivatives. We now have more than enough fiddly derivative contracts to keep every lawyer in the world arguing until the sun burns out, and the volumes are so huge (hundreds of trillions to quadrillions of dollars) that even in 99% of it nets to zero, the remainder is still enormous.

Posted by JayCM | Report as abusive

Bravo, Felix, for recognizing the issues with these ideas. Ratigan’s idea on debt cancellation sounds like one of Chavez’s rants.

Posted by realist50 | Report as abusive

“I’ve spent the best part of a day trying to work out what on earth Ratigan might be driving at here”

The sentence is logical. But it loses all meaning when viewed with even 1 minute of common sense. Ideas that are simply nonsense need to be called out. Respect.

Posted by BidnisMan | Report as abusive

Dollared, I assume you haven’t checked what Ecuador has to pay – and do – to get a loan.

Foppe, I read exactly three things that Graeber has said and all were clearly and obviously incorrect – being the origin of the word for debt in the various different languages in which the world’s major religions were originally written in, that Apple was founded by some ex-IBMers guys working in a garage on their laptops and how the Fed works. So if by “fantastic”, you mean can’t get the indisuptable stuff even vaguely correct then you are spot on.

Posted by Danny_Black | Report as abusive

Oh, you poor Danny boy. So intent on not learning anything whilst “trashing” your “opponents”. You simply must be an Obama voter.

Felix? Are you really happy to have intellectual lightweights like Danny commenting (and apparently agreeing with what you write) regularly? Lord knows it would put me off.

Posted by Foppe | Report as abusive

Foppe, I guess dealing with facts is beneath you right? Especially as they seem to regularly get in the way of your opinions. No wonder you were such a fan of Graeber.

Posted by Danny_Black | Report as abusive
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