The Pervasive Stupidity

Decisions are being made that are wrecking US infrastructure.  Expert warnings are everywhere.  Decisionmakers remain oblivious.  People are drawing the obvious conclusions, and are hearing the voice of doom.  Charles Simic starts a recent essay by saying, "I can’t remember when I last heard someone genuinely optimistic about the future of this country."

A large number of financial experts are beside themselves.  There's Charles Johnson, former IMF official, professor of finance, co-author of 13 Bankers, in congressional testimony on TARP a couple of weeks ago:

the financial crisis produced a pattern of rapid economic decline and slow employment recovery quite unlike any post-war recession – it looks much more like a mini-depression of the kind the US economy used to experience in the 19th century.  In addition, the fiscal costs of the disaster in our banking system so far amount to roughly a 40 percentage point increase in net federal government debt held by the private sector, i.e., roughly a doubling of outstanding debt.

 Adjustments to our regulatory framework, including the Dodd-Frank financial reform legislation, have not fixed the core problems that brought us to bring of complete catastrophe in fall 2008.  Powerful people at the heart of our financial system still have the incentive and ability to take on large amounts of reckless risk – through borrowing large amounts relative to their equity.  When things go well, a few CEOs and a small number of others get huge upside.

Kid Gloves for Banks: the Opposite of a Stimulus

A central issue of the current financial period is whether the financial sector will manage to transfer all of its liabilities to the public sector and keep them there.  Many people have tied this issue to the Ireland crisis.  The Irish public sector is getting slashed not because it ran deficits before the crash, and then saw them become unsustainable, but because the Irish government became the guarantor of 100% of the liabilities of Irish banks. These liabilities far exceeded Irish gross domestic product, and they still do.

The Financial Times ran a good overview on November 17th about the growing isolation of Angela Merkel among European leaders on the debt question. Most commentary presents the German position as hostile austerity: force the Greek public to pay for their debt crimes with austerity and poverty for years to come. There's something to that - much of the German public seems to feel that they sacrificed themselves (with few if any wage increases and service cuts throughout the past ten years) while other countries like Greece did not.  But in fact the current German government is also trying to force private investors to share some of the cost.  This has been an enormous problem for Western societies, as the financial sector gets governments to pass on the cost of their mistakes to citizens, who pay several times over - actual money and guarantees, zero-cost access to funds for banks that prop restored profits, public service cuts, austerity-induced low growth, and reduced investment in innovation for the future.

Why Is Economic Policy so Dumb?

To understand what is going on in England, the U.S., and France, one has to get past the politicians' self-serving mythology that the popular majority is childishly refusing to face economic reality.

The French national daily Libération published a poll conducted October 14-15 that showed an incredible 79% in favor of the Sarkozy government reopening negotiations with the unions about raising the retirement age. (Sarkozy administration intends to raise the age for minimal retirement eligibility from 60 to 62, while also raising the age for full retirement benefits from 65 to 67.)   Nearly 2/3rds opposed Sarkozy's policy of "firmness" in refusing to negotiate, a policy which led to the passage of Sarkozy's changes "by force" on Friday night (by a vote of 177 to 153).  At the same time, only 43% supported the withdrawal of reforms, and only 36% favored its suspension and future resubmission.  In short, the majority does not in fact oppose change, even change that means a lower standard of living. But a 4/5s majority does opposed change imposed  by oligarchic decree. 

A hallmark of the French protests has been extraordinary participation of young people, who have  marched and shut down may high schools and unversities around the country.  What were the students’ doing out there with the middle-aged truckers and office workers?  Part of it was that the young want to retire older people so their jobs can be handed down in the normal manner - there was some self-interest (and economic rationality in the classic sense).  But like nearly all French people, the young oppose government by decree. They are also sick and tired of the general deterioration in the public sector that includes educational systems under constant, brainless pressure.  Victor Colombani, the president of the Union nationale Lycéenne (UNL), age 16, told Libération that high schools, the universities, public transport, the refineries, are all in the same mess.  The Sarkozy government, like most others in the West, is taking excellent care of its banks, major corporations, and high net worth individuals who dislike paying taxes, and doing as little as possible for everyone else.  French students marched about retirement because they don’t want what their elders are dishing out, which is a second-class deal for them.

One of the crucial facts of the post-2007 era is that market capitalism's social narrative now leads down instead of up.  The Reagan-Thatcher era, and its Giscard-Chiracian echo in France, promised wealth and health to regular people in exchange for abandoning the social democracy that had built their middle class societies and their own security within them.  When Thatcher sold Council housing to ordinary buyers, she was handing out public resources for the personal enrichment of les petits gens who had been given a decent life but never personal wealth by state-sponsored social development from the 1930s through the 1970s.  That would now change, in the Reagan-Thatcher narrative, as they borrowed against the rising value of their now-private home to buy a vacation condo in Spain, trips to Greece and Morocco on new low-cost nonunionized airlines, and grew their financial wealth through investment instruments like mutual funds that had barely existed in LBJ's Great Society.  But since 2007, Reagan and Thatcher's conservative (and centrist) descendants invoked market needs to continue to lower the standard of living of a majority already hammered by the loss of jobs, health insurance, and homes - nearly 3 million lost to foreclosure in the U.S. in 2009, and at least that many again in 2010.  We are looking at the ongoing shrinkage of the US middle class, typified by the continuing increase in home losses even during the "recovery" - up 25% from August 2009 to August of this year. Republicans are continuing to respond to asset deflation by wanting more cutting of taxes at the top.   Hello new dark pools of financial toxins, and ongoing non-punishment for banking fakery of various kinds.

Since they are now dishing out decline and decay, leaders in all three countries are struggling to muster approval ratings that stay above 33%, never mind achieving actual majority support.  Obama is still the strongest at 45%, though on a steady drift downward, according to Gallup.  Cameron's conservatives have a one-point vote advantage over Labour (at 41%) in a forced-choice party face-to-face that artificially inflates approval.  When people are asked about specific policies, he does worse. After he announced his massive cuts, Cameron's ratings fell 11% in one day;  Lord Browne's closely-aligned proposal to eliminate public funding for all non-science teaching in British universities got only 37% (still suprisingly high, since cheap higher ed is still the only reliable foundation of a majority middle-class society). France's Sarkozy fell below 30% for his  "firmness" in opposition to weeks of blockages and marches that brought millions of people into the streets. In California, Gov. Arnold Schwarzenegger held the state budget hostage -- furloughing tens of thousands of state workers and stopping payments to state vendors -- for 3 months late in order to force huge public pension concessions on top of his all-cuts budget policy, and earned himself record popularity lows - 23%, 17%, then 15% in mid September.

Major leaders are imposing economic policies that are frankly unpopular, and which don't actually work.   Dean Baker, Paul Krugman, Yves Smith, Simon Johnson - one can find a host of center-liberal economists denouncing the austerity "fad," as Krugman put it, as having "no basis in reality."  I used to liken Arnold Schwarzenegger to Herbert Hoover, but Hoover has now become the national metaphor for the death-trip financial policies the population is subjected to in Greece Spain, the U.K, the U.S., and elsewhere - or his Treasury Secretary Andrew "liquidate everything" Mellon, or the U.K's Snowden budget of 1931, which Krugman invokes.  And yet these leaders carry on - socialist governments in Greece and Spain alongside conservative governments in the U.K., Italy, Germany and France.

Why do leaders persist with these stupid, self-destructive economic policies? Here's my list, prompted in part by reading a good piece by the not-so-capitalist conservative political economist John Gray.

1.  frozen market ideology.  Gray identifies two ideas ruling the Cameron-Clegg coalition.  First, government reduces freedom while market increase it ("Both Cameron and Clegg have insisted that moving away from state provision is not just a matter of saving money: the result, they say, will be services that are more responsive to personal choice.) Second and more importantly, "there is no standard of fairness independent of the market."  Bailing out banks while firing hundreds of thousands of state workers isn't what it seems to be at first -- running society for the benefit of the economic top 1% or 0.1% of it -- but means stabilizing the market forces that liberate people to create new value, rather than helping the public employees who impede it.  Ideology is never undermined simply by its surreal irrelevance to  economic outcomes past and present.
2. Small elites in mass societies.  Gray observes, "As in the 18th-century elite politics analysed by Lewis Namier, British politics today is shaped by a handful of closely related people."   Political parties in the US, France, the UK, and most other Western democracies have become duocracies of center-left/center-right parties controlled by fairly small circles of people. Note the history of the Democrat party under Clinton or New Labour under Blair.  As modern societies have become larger and radically more diverse, their ruling groups have paradoxically become more self-regarding and self-contained.  (See Blair's accounts of his oddly isolating rituals of political reflection at the link above).
3. The God that Failed.  Political leaders have a natural investment in believing that they have healed market capitalism, but it remains in crisis.  It continues to rest on government life support - nearly-free money for guaranteed loan spreads, fictional "mark-to-mythology" accounting on toxic instruments that pospones lossses, and endless forgiveness for the most basic corrupt errors like the failure to verify forceclosure documents that has called the whole mortgage industry into question in the US - if anyone in government cared to question, which in Obama's case it does not.  It is to be expected that in the midst of confusion, leaders cling to familiar ideas, even as they continue to fail.
4. A Radioactive Media.  The major media routinely bombards any heterodoxic interpretation with fata doses of scorn when it mentions them at all.  The result is that novel accounts are defined in advance for the viewer as marginal, biased, and self-interested, the view of someone who has a particular ax to grind.  Even orthodox views that counter the conventional wisdom, like those of the NYU business school professor Nouriel Roubini before the crash, based on intelligent pro-market skepticism about the valuations of complex securities, were shunned until it was too late, and now identified with Roubini as an individual celebrity, a kind of novelty show.  Regular coverage remains captured by a combination of economic orthodoxy and panic politics. The latter is instanced by the apparent influence of the clearly incoherent and unstable rantings of Glenn Beck.   Much has been written about the tight  grip of the boardroom over major media, largely owned or controlled by billionaire friends of Nicholas Sarkozy in France and by Fortune 500 corporations in America, to say nothing of Rupert Murdoch's global empire, who likened  the Tories's 20% one-year cuts in government to adults administering medicine to children.  The main point here is that the flourishing of diverse opinions on the Internet does not counter the narrowness of the major media, for  the Internet is cast in the role of the permanent opposition, always outside looking in, an accumulation of minority voices easily branded in any given case as extreme. The media famously does not support the kind of public sphere that allows ruling opinions to be debated and changed.  Change is possible, and there is no shortage of good ideas, but in this system, change may be delayed indefinitely, and to the point where it comes too late - as for millions of owners of overpriced homes.
5. Military Dominance.  During the Bush Jr. Administration, the War on Terror successfully replaced the Cold War as the justification for both continuous international intervention and unlimited military spending.  Military spending doubled in the U.S. in constant dollars in the 2000s.  The economist Joseph Stiglitz has revised his estimates of the costs of the Iraq and Afghanistan wars from $3 trillion to something like $4-6 trillion.  This spending on the control of perpetual threats is making social spending impossible, including the basic infrastructural renewal on which U.S. market capitalism in fact depends.  One of Obama's central failures has been his continuation of the instruments, the goals, and the spending that goes with the War on Terror. Under these irrational conditions, scial stagnation is the best case scenario. 
6. Adherence to Minority Rule.  For me, this is the key ingredient of the whole paralytic system.  Reagan and Thatcher were appalled by the challenges to traditional rule posed by antiwar protests, civil rights movements, and the rise of visible cultural minorities be they punk rockers in Birmingham or Jamaician construction workers in East London.  They and their descendents have worked tirelessly to insure that the political majority would never again have the economic independence to support such widespread dissent. They noticed that many of the protesters came from prosperous families, were in good universities, and were forming alliances with the less fortunate, as with for example the college "Freedom Riders" who went to help Black churches and other groups with voting rights and desegregation in the US South. Ronald Reagan kicked off his 1980 presidential campaign in Philadelphia, Mississippi, the county seat near where three of these Northern civil rights workers -- one black, two white -- were murdered in 1964.  Reagan praised "states rights," which was a synonym not only for racial segregation but for minority rule. Desegregation ended this most famous version of minority rule. The Right has been working steadily to replace it ever since.  
7. Upward Redistribution of Wealth.  The inequality boom has expressed minority rule on the level of economics.  There are numerous studies that show the same shift of wealth from bottom and middle to the top - especially the very top (0.1%, 0.01%). Wolff has one good paper, Saez, often working with Piketty, has another, and the Associated Press had a nice overview a while back.  A Pew-Brookings study in 2008 found that the wages of males are now about 12% lower than they were for their fathers a generation earlier, taking an obvious bite out of ordinary people's economic independence.  The Supreme Court decision taking limits off political spending has forged a direct short circuit between extraordinary wealth and political control. 

In short, the economic decline were are facing is a sign of ideological disarray in a political world controlled by conservative ideology for two generations, but it is also programmed within modern conservatism.  Cameron and Osborne inherent this from Reagan and Thatcher.  Governments have no idea how to stimulate innovation and growth.  That would require two things -- some kind of industrial policy if not actually state capitalism Chinese style (the model that did best during the crisis), and a redistribution of wealth back downward, in the name of efficiency, to the people who largely created it in the first place.

The slow impoverishing of the economic majority has been going on for thirty years, and it has become cultural common sense even for its victims.  It has now reached the turning point, a moment of acceleration in which a return to prosperity becomes increasingly difficult.  The only bright spot is that an increasing number of commentators are starting  to trace the unjust and also grotesquely inefficient boom in inequality to a deliberate strateg (e.g. James Kwak at the Baseline Scenario's  good recent entry on the 1970s. But given what I believe to be the profound ambivalence of political and business leaders towards mass prosperity, I see little in established opinion that will convince them to work consistently towards a broad-based recovery. Where is the great economic majority, demanding that politics serve majoritarian economic interests?

This is really too bad for Obama personally, since he hitched his fortunes to that Democratic assumption of the greater good, so often honored in the breach.  This is what Republicans are calling "socialist" in this fairly conservative pro-bank president: the very idea of mass benefit, one so broad as to only be possible through government-led development.

Obama's only chance to succeed is to give a major speech in the next two weeks.  The speech would have to take on the charge of socialism, and say yes, social democracy built our prosperous Western societies (along with much less savory forces), and now my opponents have come to take all that away from you.   He would have to point out that the Right  replaced prosperity rooted in general provision -- low fees in publicly-funded universities, for example -- with prosperity rooted in private property ownership -- that they replaced a grounding in government with a grounding in market-based exchange values. As a result, he would point out, asset inflation and personal debt have become the two pillars of middle-class living after broad improvement in wages ended, coincidentally enough, around 1980.  In addition, the ground rules of this prosperity are now controlled not by elected leaders but by an opaque labyrinth of banking and quasi-banking institutions, from mutual funds to mainline banks to hedge funds. Obama would have to say that even specialists know little about the condition of this system at any given moment, for its essential nature is to be proprietary, to hoard information, and to create losers in every transaction by selling at an advantage.  He would have to say that political leaders have no independence from this system, that his own failure to stimulate anything except banking has abundantly shown this.

Obama would have to make an updated class argument - and a plain argument for democracy-based intervention in the economy.  That is the sole means through which he can save the U.S. from a Republican 2010-12 that will accelerate the disaster, reach out to desperate Tea Partiers, and help people believe that their ideas about a better economic system might actually matter. It is the U.S.'s only chance for short-term public economic intelligence. 

But what, short of a sudden meltdown in the markets, would get Obama to do this?  What would get him to call out his own economic majority?

The Crash Was the Best Thing for Finance Ever

Simon Johnson quantifies the benefit of the crash to the ones who caused it:

the purely fiscal damage wrecked by big banks – apparent in 2008 but building for longer – will end up increasing our net government debt held by the private sector by around 40 percentage points of GDP.  . . . Around half of our existing government debt burden and much of our continuing fiscal vulnerability is due to the dangers posed by unreformed big banks.

There's the direct benefit to private financial interest of the bailout with public money.  There's the indirect benefit of crippling the public sector and lowering its tax costs to corporations and wealthy individuals.  This is the only agenda of the California Republican party, whose social vision consists in its entirety of blocking tax increases on large incomes, this year by gutting the pensions of public employees.

This has already happened in Illinois, and click here to hear Arnold Schwarzenegger's spokesperson repeatedly saying that the state budget deficit makes public pensions unaffordable. In America, saying something again and again makes it true.  Another guest pointed out that state employees get 2% of their salary as a pension for every year worked, so after 30 years they get 60% of their final few years averaged salary, and the average is $24,000 a year.  Apparently this is too much money for someone who worked for the public for 30 years, compared to the enormous piles both needed and deserved by wealthy investors.

The banks are continuing on much as they were: too big to fail will survive the reforms,  along with the banks' first lien on all national wealth.  Derivatives trading will carry on with small changes.  The only tools at ordinary folks' disposal - disclosure, data, discussion- will remain unavailable (see Morgenson's summary).   The economic leadership's silent passion for impoverishment means that people are still losing their houses even with loan modification programs. In the California counties of the new middle class of the 2000s -- around 1 in 100 houses received a forelosure notice just in the month of May 2010.

This system is grossly unjust and inefficient - inefficient like baronial 18th century French agriculture. Inefficient like Greece agreeing to austerity and paying even more for credit than before. Inefficient like families having no place to live. Inefficient like a third depression.   Inefficient like today's college-age adults being less well educated than their parents.

What amount of decline is going to upset the middle classes enough to fight for their jobs and their homes?

Democracy vs. Finance, Governments vs. Progress

Markets are supposed to create rigor and discipline, to reflect economic reality.  In this standard view,  the public is seen as self-serving and self-deluded about economic reality.  Governments that reflect the wishes of their majorities are almost by definition going to impose inefficient, nostalgic policies suited to a bygone age that discourage their population from adapting to the economic needs of today.  Democratic governments are seen as dangerous for the economy.  This is why "central bank independence," which is seen as the prerequisite to central bank reliability, means independence from both popular desires and from democratic representatives like the U.S. Congress.

Is this how things really work?  The economist Mark Weisbrot has a nice summary of the European crisis that suggests not.  First on markets:

"the markets" can't seem to decide what they want from these governments in order to love them again. Two weeks ago the euro was plummeting because the financial markets wanted more blood: they wanted Greece, Spain, Portugal, and the other currently victimised countries of Europe (Italy and Ireland) to commit to more spending cuts and tax increases. Then they got what they wanted, and within a day or two, the euro started crashing again because "the markets" discovered that these pro-cyclical policies would actually make things worse in the countries that adopted them, and reduce growth in the whole eurozone.

Markets are pushed by investing institutions, which are fairly close to a global monoculture of neoclassical economic orthodoxy.  So austerity is always job 1.  But orthodoxy recognizes contraction and that austerity policies can make contraction worse.  Markets are ruled by an economic orthodoxy that is contradictory and pushes investors in different directions.

Similarly, here's Weisbrot on governments:

Unfortunately the European authorities – especially the European Central Bank – are even worse than the markets. They are less ambivalent and more committed to punishing the weaker economies by having them cut spending even if it causes or deepens recession and mass unemployment (over 20% in Spain).  . . .

There is a class dimension to all of this, with the EU authorities and the bankers united in wanting to balance the books on the backs of the workers – and adopt "labour market reforms" that will weaken labour and redistribute income upward for generations to come. The EU authorities and financiers believe that real wages must fall quite sharply in these countries in order to make them internationally competitive – but the protesters are responding with a fiscal version of "No justice, no peace".

In short, "markets"  change their minds every few days about the necessary medicine because they really have no idea how to develop economies.  Governments are now devoted to de-developing their populations: lower wages is a euphemism for increased poverty.

Economists aren't doing much better, for the most part.  Writing in the Financial Times on June 1, the prescient critic of finance Nouriel Roubini contradictorily calls  for "radical reform of finance" and for Europe to "deregulate" and "liberalise."  And Weisbrot calls for an end to the Euro so that countries like Greece can rebalance by deflating a national currency, rather than calling for EU-based economic re-development.

The only way out is to start by recognizing that markets seek to make money for the people who invest in markets, and do not seek to develop economies. This will help keep governments from catering to them, and impoverishing their populations in the process.  It will also relegitimize popular economic demands, which are in fact closer to developmental wisdom than are the self-serving calculations of investors and the central banks who set things up for them.

Democratic theory presumes the long-term wisdom of the deliberative majority. Finance -- via its economic theorists -- has declared itself to be the great exception to democracy, and remains the area in public life where frankly anti-democratic, elitist  theory flourishes.  It drags public policy in its wake, and in spite of lucid mass hostility to banks, has intimidated and paralyzed the popular reimagination of economics.  This has set up a kind of ancien regime within democracy as such. In the arena of financial capitalism, democracy has been effectively canceled.

Either we democratize finance with a basis in a coordinated retheorization of it or Europe and the US will keeping heading straight the poorhouse.

Falling Ideology?

In addition to running good steady commentary on the banking reform legislation (e.g here), Simon Johnson remarks on the Baseline Scenario that "the ideology of unfettered finance is crumbling."  Clearly top Obama economics advisor Larry Summers hasn't heard. It's worth watching the clip to see the weird blasé attitude towards "things that happen on Wall Street" - the tone is more important than the words.  I'm not feeling the shift yet but he's there and I'm not so here's hoping.

Long Slide in the Post-Crisis

Some good books on the financial crisis have come out in the past month, including two I've bought but am still waiting to get time to read. One is 13 Bankers, by Simon Johnson and James Kwak (who also run the blog Baseline Scenario, an excellent source for blow-by-blow commentary on the ongoing struggle for a soupçon of financial reform. Another is Econed, by the author of the blog Naked Capitalism, which details the intellectual failures of doctrinal US economics and their real world impact.

Kwak has a good review of another of the good recent books, The Big Short by Michael Lewis.  Kwak gets at the crucial problem with the financial system in general, which is that the supposedly iron logic of objective market forces to which financial players are all subject in fact masks rules made up by a fairly small number of insiders to maximize their take.  Here's just a taste:

The problem was that the banks, as the swap dealers, got to decide what the swaps were worth. So, for example, Charlie Ledley bought an illiquid CDS on a particular CDO from Morgan Stanley. Five days later, in February 2007, the banks started trading an index of CDOs that promptly lost half its value. But, as Lewis writes, “With one hand the Wall Street firms were selling low interest rate-bearing double-A-rated CDOs at par, or 100; with the other they were trading this index composed of those very same bonds for 49 cents on the dollar” (p. 162).* That is, the market price of the already-issued CDOs didn’t affect the sale price of new CDOs. And what’s more, Ledley’s broker insisted that the price of his CDS (which should have soared as the index of CDOs fell) had not changed. Here you see the banks simultaneously ignoring a market price in two separate ways: once so they can continue selling new assets that are extremely similar — worse, if anything — to assets that they are trading as garbage; and again so they can avoid sending collateral to their hedge fund client.

Got that?  It's people making stuff up, and making a pile of dough as a result. This is finance that has nothing to do with investment, productive or otherwise. Its only impact on society is to damage it.  The rest of us are supposed to believe in its objectivity and defer to the outcome.  How far along are we in knowing enough to think otherwise?

We're looking as usual at a huge gap between the insight of experts and that of the general public.  A sign of where the public discussion is can be found in Jane Hamsher's comment on the its basic non-existence.

The social damage continues to spread. People are looking at Portugal next, and even the best financial commentators, like Simon Johnson, counsel cuts and austerity till the end of financial time.

For example, just to keep its debt stock constant and pay annual interest on debt at an optimistic 5 percent interest rate, the country would need to run a primary surplus of 5.4 percent of G.D.P. by 2012.  With a planned primary deficit of 5.2 percent of G.D.P. this year (i.e., a budget surplus, excluding interest payments), it needs roughly 10 percent of G.D.P. in fiscal tightening.

It is nearly impossible to do this in a fixed exchange-rate regime — i.e., the euro zone — without vast unemployment.  The government can expect several years of high unemployment and tough politics, even if it is to extract itself from this mess.

Neither Greek nor Portuguese political leaders are prepared to make the needed cuts.

Greece's crisis has settled into semi-permanence in the style that is becoming typical of our new post-crisis era: permanent low-level anxiety, permanent austerity, and permanent stagnation in wages. All of this is imposed with a financial logic of inevitability. The continuous message is that there is no escape.  Greece is looking at a lost decade for its society. The West is dealing with a crisis caused by its small, arrogant, uncaring, incredibly rich financial sector by downgrading the resources and the vision of its societies.  After ten more years of this, what visions and aspirations will be left?

Financial Crisis as Mental Problem

The financial crisis continues to foreground a crisis of knowledge: what are people allowed to know? When is what they know allowed to be true?

The financial industry has never faced the extent to which its analyses are skewed by its own financial interests, or how completely the uses of bailout money remain secret.  AIG remains a black box, and more generally we have no idea what any of it is worth once semi-detached from the government guarantees that float it now, and sink the rest of us.

Anne Enright has a nice piece in the London Review of Books on the universal mental unreality.  Called "Sinking by Inches," she writes about Ireland's meltdown as caused in part by Ireland's mental paralysis.

I can understand the denial at the end of the boom; what worries me is the denial that made it. From 2001 to 2007 it was not possible to be off-message about the Irish economy or, especially, about the housing market. You would barely be published. . . . It was no fun being informed, either then or later. People don’t like you for it, and why should they?
One of the strangest feelings, living through a housing boom, is that you are rich or poor not because of the money you earn, but the year you started earning it. It is not a question of effort, but of luck. This was part of the impotence and panic that drove Irish people to buy overvalued houses towards the end of the boom; it was the feeling that we were running up a down escalator and had to grab hold of whatever we could, to stop being swept away. . .
Telling the truth was, in the circumstances, not just boring, it was also unlucky, hexed, taboo. It might even be unclean. Careless talk costs jobs. If the bubble burst it would be your fault for calling it a bubble, because, at the end of the day, it’s not an economy, it’s a mood.

 This is still where the U.S. leadership seems to be, new bank tax or not.  Its main goal is to make the mistakes of the past into something bearable - at least for them.  While they continue to foucs on this, the country as a whole won't be able to tell the truth because it is still afraid of making it all worse.   And so we'll stay stuck with the combination of "impotence and panic" that got us where we are.

Ye Olde Split Between Top and MIddle

"Top" here means the White House and the Congressional leadership, whom Krugman describes as being pulled away from job creation and other recovery politics by the banks, who in a growing number of accounts have conquered the U.S. Government.   Max Keiser's "Goldman Sachs are scum . .. they've basically coopted the US Government, the US Treasury Department, the US Federal Reserve functionality, they've coopted Barack Obama" -the second part, about banker cooptation, apprears on the pages of many daily newspapers.

The middle - here rank-and-file Congressional Dems - rebelled a bit.  They passed a measure in the House Finance Committee requiring an audit of the Fed's many enormous bailouts of insolvent banks, whose sums and recipients remain undisclosed. They passed the measure over the opposition of House Finance Committee Chair Barney Frank.

There are lots of good ideas around about how to fix things.  One of many examples is Dean Baker's idea of how to actually go about revaluing the Chinese yuan. The problem isn't that nobody knows what to do, that it's all so complicated. The problem is that the top doesn't want to do the things that could be done to fix things.  These things would cost them money.  

The outcome is the sort of phony helplessness that now pervades US policy in finance, job creation, higher education - take your pick.  It only works on the assumption that most of us are pretty dumb.

Dismal Dems

Driving the point home about the failing Democrats, John Nichols blogs in the Nation that Obama and the Congressional Dims "continue to make the mistake of treating unemployment as an afterthought rather than the most serious issue facing the nation."  Writing about last week's Republican victories, he points out that " in New Jersey and especially in Virginia, where Republican candidates in high-profile races focused tightly on economic issues and job creation, they won." And Fr. Frank's Sunday sermon notes,

The system is going back to the way it was with a vengeance, against a backdrop of despair. As the unemployment rate crossed the 10 percent threshold at week’s end, we learned that bankers were helping themselves not just to bonuses as large as those at the bubble’s peak but to early allotments of H1N1 vaccine.  . . . both parties have their own delusions, not the least of which is the Republicans’ conviction that Tuesday was a referendum on what Obama has done so far. If anything, it was a judgment on just how much he has not.

Bubble Brains

Robert Schiller has some interesting evidence that people haven't given up on huge coming profits on buying and selling houses. It confirms that pathetic story about Arizonans bankrupted by house flipping  trying to make it back by buying foreclosed houses in the hope of future flips.  As Schiller says in his understated way, "At the moment, it appears that the extreme ups and downs of the housing market have turned many Americans into housing speculators. Many people are still playing a leverage game," still hoping they can win by timing the market.

I would only add that people is dumb because a) dumbness used to pay, but also b) they don't have anywhere else to turn. Are they supposed to invest in the green economy?  Look for solid annual pay increases by reskilling for a job in the big new American industries that are coming on line? Take heart in the solid new economic strategies pondered in Washington? Trust their retirement to Wal-Mart?  

People don't in reality have any of these things to turn to, especially not new economic policy.  Bank regulation hasn't happened, and won't, as the foxes still manage the chicken coop, and policymakers, timidly caught by conventiontional deficit worries, are going to tighten money rather than dynamite their way to recovery with a stimulus so big it will actually allow the paying down of the future deficit.

People rely on bubbles because the American economy and its backward leaders still, over 2 years into the surfacing of the crisis in August of 2007, have nothing else to offer them.

Reforms that Weren't, Reforms to Come

President Obama's speech about reforms in the financial sector was disappointing, to put it mildly.  There were no plans for implementation and no ongoing developments that might actually change the system that blew things up. The consumer agency has nothing to do with stopping problems with overleveraging, opacity, internal fragility, and the unbelievable social costs of the extreme profits involved in financial speculation. Obama appears to be assuming a trickle-down recovery, although evidence at the state level is very much to the contrary. See California's tax revenue stream, for example:

I assume folks who track spreads in lending rates, loan volume and the like could clarify the "two economies" divergence that is crushing a lot of regular folks. You'd think Obama would at least have figured out that the backlash against his health care reforms are fueled by very reasonable economic fear and panic enabled by his non-existent financial reforms.

There's more hope in the report of the Stiglitz commission to the French government on moving from narrowly economic to broader measures of social progress.   See also the interesting papers on the commission's website.

It would be nice to be able to say at some point in my lifetime that the US was back on the front lines of economic thinking. That time still looks a long way off.

Krugman Softpedals the Woes of Economics

Paul Krugman has a lot of good moments in his big think piece on the many failures of the field of economics.  He sums up his thesis early on:

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

The blindness of a whole field was possible because of a wholesale "retreat from Keynesianism and a return to neoclassicism."  

There's some handy simplified intellectual history here, but the best feature of the piece is Krugman's linking of even those liberal economists who rejected hard core neoclassicism (and its key mathematical axiom, the efficient market hypothesis) to a debilitating consensus.

But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.

The lesson here is that moderation is blindness.  Moderation enforces the intellectual limits of the consensus.  In this case, "the New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed."

Then there's the not so good. The first weakness is the total lack of novelty in the critique of economics as delusionally neoclassical.  People outside economics have been saying this for years or decades.  They are often called sociologists or anthropologists, and have always thought that the models had lost touch with institutions, people, and also of course power and coercion, which played huge roles in setting up actual economies.  In addition to the recent book by Curious Capitalist Justin Fox, there is also Doug Henwood, longtime editor of Left Business Observer, whose classic 1996 book Wall Street offered a much more thorough intellectual history and critique than Krugman even hints at here. 

More importantly, Krugman blames "beauty" for leading economics astray.  He offers the philistine tag line, "As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."  In reality, economists mistook money for truth.   Models that made important people lots of money had to be true.  Krugman only superficially considers the possibility that financial incentives corrupted the heart and soul of the economics profession.  Some of this corruption was personal and some was collective - it's hard to argue with what seems to be success.  But economists are like all scholars in being paid to look past the surface of things to the real forces at work. They have flopped big time, and they

Finally, Krugman's cure is little more than a weaker form of the disease:

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

These are three ways of saying that economists have to admit that markets aren't perfect. This may well get them into a freshman sociology or culture or history course, but it won't get them to the point of explaining how our economies actually work or how to keep them from being giant factories of social inequality and environmental destruction.  Moderation is blindness, even when it comes from Krugman.

Even Economists Wonder: Is this NOT a Recovery?

Here's a doubting Stiglitz.  W-shapes, anyone?

There's some good stuff in this June piece by Marshall Auerback on why our bank bonanza isn't an economic bonanza, and will never be.

And here's a piece by one of my Supply Sider Pals on the "Non-Stimulating Stimulus." He, being a supply sider and a Poverty Denier, thinks the non-stimulus is good, because all government spending is by definition bad.  But his data is interesting - only 12% of the stimulus is going into new purchases of goods and services.  This helps explain the non-stimulus.

Two Economies

It's not so nice to see that the crash that was driven by finance is now being covered up by a recovery that is limited entirely to . . finance. There's the "two economies" problem nicely explained by Max Fraad Wolff. One of my Capitalist Pals discusses the continuing wave of bank failures around the country, eclipsed by stories about Goldman Sachs's profits. Finance has managed to create multiple tiers even within itself, with the local banks dying along with the job base that top-tier banks have long invested in destroying. A slice of Mr. Gilani:

But now the originators of the leveraged-buyout business model want to control taxpayer-backed banks, to apply another round of leverage to already crippled banks in order to squeeze out all the profits possible. Although this comes at a cost to duped and already drained taxpayers, regulators, legislators and the American public would be foolish to expect anything else from the private equity crowd. If the FDIC thinks it has a problem now, wait until the next implosion of leveraged banks happens.

Absolute continuity with what got us here.

Kennedy against The Dumbness

Although I wasn't a huge fan of Ted Kennedy, I was quite moved by the two extraordinary clips that Amy Goodman has found of his comments on health care. The first reads in part:

The President’s program, as announced today as a national health partnership program, I believe is really a partnership program that will provide billions of dollars to the health insurance companies. It’s really a partnership between the administration and the insurance companies. It’s not a partnership between the patients and the doctors in this nation.

Amazingly, Kennedy was saying this about Richard Nixon, in 1971.

If we are exactly where we were nearly 40 years ago, are we too dumb to live? It's still my primal question about the current state of things.

Edward Kennedy, R.I.P.

Same as it ever was

I spent a lot of this August sitting there and looking at that. I did the same thing in August 2008 and August 2007: thank you Susan and Claude!

What I see is an agricultural landscape that France takes care of, and Charolais cows in the afternoon. What I see is the possibility of not destroying everything and not finding new ways to decline. I see from the chair the past, I see the future.

Above I see no Internet. I get none of the hallucinatory "we're on the mend" central banker crapola as in my Google news. I get no CEPR reality in the form of a continuing crunch. But do read this reality (and this). It fits with what I hear from folks like my commercial real estate developer Uncle Russ about enormous debt hangovers, lack of spending power, and other structural issues that will keep the economy from looking like 2006-07 for years to come.

Could we try something else now? Start with the picture.

Costs of the Current Stuckness

The New York Times notes with surprise the end of the time "when a company reporting a few billion in earnings could count its money while basking in polite, reverent applause." It announces "a widespread sense that winners in this economy are produced by a game that’s rigged."

If these companies can return to the festivities so quickly, were they really having the near-death experience they and the government claimed? And if taxpayers risked their money when they backstopped Wall Street’s misadventures, why aren’t they sharing in the upside now that the party has started again?

The best explanation of where GS got its new money is Matt Taibbi's spectacularly clear explication on Democracy Now, a summary of his "Inside the Great American Bubble Machine." My Capitalist Pals aren't happy either. One discovered a new kinship with Central Los Angeles Democrat Maxine Waters in agreeing that Collatoralized Debt Obligations should be outlawed (for five years). He goes on to note that

U.S. taxpayers are going to be called on to subsidize the very banks that got us into this mess – just so these institutions can continue to carry on as if it was still 2007 – then another expensive and damaging financial crash is almost certainly in the making.

There's also a good critique in this piece of CDOs' very existence. The basic point is that CDO holders have a structural interest in sinking companies and gaming markets. In other words, they push against constructive economic activity, and add nothing to it. It's amazing that while the US's industrial capacity is melting away, and crucial technologies like solar photovoltaics are starved for capital, the banks can carry on producing little more than massive economic inequality. In the case of Goldman's bonuses, they come to $700,000 per employee, or 14 times the average US household income.

Jon Stewart offered his less technical critique of Goldman Sachs, from which the graphic is taken. The point is simple: "I guess the bailouts are working . . for Goldman Sachs!"

How do we know rich bankers mean a worse society? There are lots of studies of inequality and how and why it has gotten worse over the past twenty years of financialization. But the evidence I've been experiencing is the meltdown of higher education in California. Here's one link, again made by Amy Goodman at Democracy Now:

While Goldman Sachs is making billions, the state of public higher education in California is in a state of crisis. The University of California Board of Regents is preparing to meet this week to discuss plans to implement widespread budget cuts after the state cut about 20 percent of its support for the university system, amounting to a $813 million deficit. On Friday, University of California President Mark Yudof proposed system-wide employee furloughs for most faculty and staff. Under the plan, workers would be forced to take as many as twenty-six unpaid days off or the equivalent of a ten percent salary reduction. Yudof has also proposed deferred hiring and cuts in academic programs. University of California, Davis, has already shut down its liver transplant program, and UC Santa Cruz has axed some science and music classes.

In the US we assume we could never turn into Russia, and that California will never be Mississippi or Brazil. But in fact our educational stats are Mississippian, or bond rating is worse than Mississippi, and our governments are still run by people who think markets make better decisions than governments except in some special cases. More to the point, Russia's social fabric was destroyed by deliberate shock therapy, and California's governer is administering the same shock treatment to California today, while Goldman Sachs and banking policy in general floats self-contentedly above the mess they have helped to make.