naked capitalism

The defenders of the economic orthodoxy have gotten much more shrill of late. In a perverse way, this is probably a positive sign: they might be feeling a tad worried that they are starting to lose their hold over consensus reality. But given how quick various media outlets are to pick up and amplify their messages, it would be more than a tad premature to say that the prevailing belief system is threatened.

It may be sample bias, but I’ve noticed two patterns. The first is a sharp uptick in criticism of “populism” or better yet, “populist anger”, which then serves as the basis for arguing that efforts to rein in the financial services industry are overdone. Now usually there is a wrapper around it, like “mistakes were made” or another not-very-convincing bit of crowd pleasing pablum to acknowledge that maybe some change might be warranted, but nothing approaching what those enraged savages want.

Second is a new meme, that of arguing that Congress is really at fault, that they (or “the regulators”) failed to curb excesses in the financial services industry (and you will no doubt see similar arguments surface regarding the Horizon Deepwater disaster). This is a staple of the sort of thing you see from Cato and the American Enterprise Institute, and once in a while gets picked up by the MSM, but we’ve had a positive outburst in the last few weeks (it seems to have coincided with the SEC and Senate salvos against Goldman. The furious pushback seems to result from the panicked recognition that if a firm that gives as much and is as well connected as Goldman is not able to “insure” its way out of trouble, then no one in the executive suite can rest easy).

Notice that arguments one and two are contradictory. The first presupposes that not much more in the way of regulation/oversight is in order (otherwise, those horrid populists might have a legitimate axe to grind) while the second is a tacit admission that tougher rules are needed, but endeavors to shift the blame away from the industry and on to regulators, and more recently, Congress. And ironically, the argument then becomes, “well they botched it, didn’t they, so it’s silly to let them have a second go at it.” That’s simply disingenuous. “Congress” is not static; its membership turns over, its party weights change, its posture adapts to changed moods and conditions. Similarly, the people in regulatory agencies change over time, and they can be emboldened or neutered by their leaders.

To widen the frame further, there has been a concerted forty year push by business interests to deregulate (this is not a mere assertion; I have an entire chapter on this, extensively footnoted, in ECONNED). If you succeed in carrying out the vision of Grover Norquist, to make government so small that you can “drown it in a bathtub”, it won’t be able to rein in private sector interests of any size. That push resulted in reducing both the number of rules and the effectiveness of oversight.

Let’s give a little example: Arthur Levitt at the SEC. I have no way of knowing for sure, but Levitt bears all the hallmarks of an appointee who was expected to give the industry a free pass: he was a former industry exec from a second tier firm and had headed the American Stock Exchange (importantly, he was the first SEC head in a very long time who had not been a lawyer).

Now Levitt was willing to give the industry its head as far as big institutional customers were concerned. In the wake of large scale derivatives losses in 1994 (bigger in aggregate than the 1987 crash), he beat back meaningful regulations, and similarly sided with Greenspan, Rubin, and Summers to ride Brooksley Born out of town on a rail when she tried to regulate credit default swaps. But Levitt was very serious about trying to protect the retail investor. His not very aggressive initiatives were beaten back by Congress, particularly Joe Lieberman (the Senator from Hedgistan). Their big threat was to cut the SEC’s budget, which meant reduced enforcement. So even if he won (sticking to exercising his authority under existing legislation), he’d lose (being denied the budget to do his job, and running the risk of having the SEC’s scope cut back by new legislation).

Now before some readers chime in, “But see, it really was Congress’ fault”, ahem, you need to widen the frame. Regulation, until the banking industry blew up the global economy, was a dirty word. It wasn’t all that long ago that being a senior regulator was prestigious, if not terribly well paid, and most did it for its own sake, not as a stepping stone to big ticket private sector jobs. The line that was sold very effectively, was that regulation simply reduced efficiency and impeded innovation, if we got rid of those pesky rules, the economy could grow faster and we’d all be better off.

Now the bit about regulation impeding innovation is actually false (regulation can spur innovation, as it has with mandates to improve fuel efficiency; moreover, the companies that fought for deregulation were the big boys who had never had had a track record of being innovative; further in the 1970s, they tried talking up an “innovation gap” which did not exist, as in the data actually proved the reverse regarding US innovation; the Carter administration tacitly admitted that by talking up a “perceived innovation gap”). So the real question, that was pushed aside, was, “what is the right balance between safety and efficiency?” There might indeed be cases in which regulations were misguided and called for excessive levels of safety, or were simply bureaucratic and outdated. But the fight to pull down all regulations, willy nilly, left industry to its own devices in a lot of areas as far as safety was concerned. We are now reaping the bitter harvest of taking an idea that might have had some merit well beyond its point of maximum advantage.

But let’s return to the “populism” attack, which sticks in my craw. It’s a not-very-subtle way of denying the legitimacy of the populace’s anger. The taxpayers have just been the victims of the greatest looting of the public purse, and the perps have the nerve to lecture them about their anger?

Two sightings illustrate the arrogance. One is an Financial Times comment “A boot on the throat is no way to do business,” by David Rothkopf. Some key bits:

Admittedly, business is not exactly blameless here. Mistakes have been made. Really big ones. But to respond to the culture of excess and recklessness on Wall Street with a culture of regulatory excess and recklessness in Washington is hardly the answer.

Yves here. This is an insulting straw man argument. Regulatory excesses and recklessness? We have “reform” regulation that is so watered down that it will do perilous little to avert future crises. But corporate leaders have gotten so used to getting everything they ask for that even pesky restrictions are fought tooth and nail. Next bit:

At a time when the business and economic challenges facing the US are dauntingly complex, what is really needed is a dose of humility. That is particularly the case when there are barely a handful of US senators who have even a basic understanding of the markets they seek to regulate. In such an environment, adversarial relationships are in no one’s interest.

Yves here. Humility? Spare me. The ones who OUGHT to be humble, as in begging for forgiveness, are the executives and producers who created such havoc. Instead, they’ve refused to make any pro-active suggestions; worse, they thumbed their noses at the taxpayers who rescued them at colossal cost by paying themselves record compensation in 2009. The right response to that is most assuredly NOT humility; it’s a swift and hard kick in the ass.

I could go on, but you get the drift. Readers with strong stomachs are encouraged to read this piece in its entirety. Its arrogance and dishonesty is striking.

The other sighting was similarly troubling, but in a more subtle way. Jeff Immelt, GE’s CEO, has closed ranks with the banksters. This isn’t surprising, given that GE is heavily a financial services company and would have been in extremely hot water had it not availed itself of some of the rescue programs on offer during the crisis. His remarks, per the Financial Times:

Goldman Sachs has been a partner for GE for a long time. We trust them, they have done great work for us … damning Wall Street isn’t good for the American economy….People need to tone down the rhetoric around financial services and stop the populism and act like adults.

Yves here. The finger-shaking at supposed children is overbearing and authoritarian, and amounts to a blanket refusal to deal with the substance of the bill of particulars against the financial services industry. But the part of his formula that is more revealing is his argument that the interests of Wall Street and “the economy” are aligned, and everyone needs to shut up and get with the program, since hurting the economy will be very bad for them.

But this is bogus. The economy we now have has increasingly shunted the benefits of production to the top 1%. In the 1960s, it was accepted that increases in productivity would be shared between corporations and workers. No more. We’ve seen a persistent gap rise between wage growth and productivity growth, so the gains in employee output have been siphoned off to the managerial elite and investors.

So these populists, despite the hectoring, aren’t stupid or emotional. Quite the reverse. They’ve been snookered by the system one time too many, and have had enough. Primates as well as people are willing to take losses to punish cheaters, and this is deeply rooted, instinctive behavior for a good reason: you need some measure of fairness for societies to function.

It’s the people at the top of the food chain who are wildly misguided. They seem to think if they posture well enough in public, they can restore the order that served them so well. But the hoi polloi understand better that the old paradigm is broken and are demanding new approaches. Ignoring and demeaning their demands isn’t sage and sober; its reckless and wanton. It will take a continued show of resolve to penetrate the orthodoxy’s defenses.