Readers have been sending various Pangloss/Orwell sightings on a daily basis, with one’s take on whether they fall in the absurdist or merely creeping authoritarian camp depending on one’s degree of cynicism. I have only posed about 1/10th of them simply because it often takes a fair bit of parsing (headline v. meaningful comment close to the end that undercuts it). plus in many cases guest bloggers have already taken a cut at the topic (overly optimistic reports on employment data, for instance) so a piece on a paricular new item looked to be overkill.
Nevertheless. it has been noteworthy that some formerly more balanced outlets have swung to at least a high proportion of cheerleading headlines, in particular Bloomberg and the Financial Times (although with the FT, one might argue that it is attempting to cater to a US market).
But if one was paying only a teeny bit of attention, it would be hard to miss the persistent, nay insistent efforts of the officialdom to put the best possible spin on matters economic. The very fact that Geithner said not more than once that the stress tests were about restoring confidence was such a brazen admission as to be breathtaking. But on another level, it was spin within spin, since the idea that the authorities would openly talk of the tests as a ruse to restore confidence (which is what predetermining the answers, as Geithner also did) is tantamount to saying the skeptics are all wrong, and all we need to do is drown them out for saner heads to prevail.
While the “nary a bad word will be said”, or to the extent it is, it is countermanded by an even more positive take, has gotten some notice in the MSM. But I cannot recall anyone taking issue with it frontally. So an article today in the New York Times, “The Economy Is Still at the Brink” by Sandy Lewis and William Cohan, is a badly needed contirbution:
President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible…
Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.
Yves here. Put more simply, confidence is a necessary but not sufficient condition for recovery. Indeed, many readers have argued that boosterism will backfire when the policy measures come up short. This is, as we have said repeatedly, an effort to restore status quo ante rather than deal with serious, deeply rooted problems. Back to the article:
We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow’s swings are a fool’s game. (Disclosure: One of us, Mr. Lewis, was convicted on federal charges of stock manipulation in 1989, pardoned by President Bill Clinton in 2001 and had his lifetime trading ban overturned by the Securities and Exchange Commission in 2006; documents relating to the case can be found at sblewis.net.)
The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. At another fund-raising event, for Senator Harry Reid, President Obama said: “We didn’t ask for the challenges that we face. But we are determined to answer the call to meet those challenges, to cast aside the old arguments and overcome the stubborn divisions and move forward as one people and one nation …. It will take time but I promise you, I promise you, I’ll always tell you the truth about the challenges we face.”
Keeping that statement in mind — as well as an abiding faith in the importance of properly functioning capital markets — we have come up with a set of questions meant to challenge a popular president, with vast majorities in Congress, to find the flaws in the system, to figure out what’s being done to fix them and to get to the truth about the difficulties we face as we set out to restore the proper functioning of our markets and our standing in the world.
Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.
Yves here. Finally, someone besides folks like Willem Buiter, who is well respected but not widely read, is saying the obvious. Back to the story:
Instead of hauling out the new drywall to cover up the existing studs, let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors.
As a start, the best-compensated executives at the top of these big banks, hedge funds and private-equity firms should be treated like general partners of yore. If a firm takes prudent risks that pay off, this top layer of management should be well compensated. But if the risks these people take are imprudent and the losses grave, they should expect to lose their jobs. Instead of getting guaranteed salaries or huge bonuses, they should have the bulk of their net worth completely at risk for a long stretch of time — 10 years come to mind — for the decisions they make while in charge. This would go a long way toward re-aligning the interests of these firms with those of their shareholders and clients and the American people, who have been saddled with their risks and mistakes.
Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?
Confidence will return only when jobs can be found and mortgage payments are made. Even if Mr. Obama’s claim is true that his $780 billion stimulus package “saved or created” some 150,000 jobs, we seem a long way away from the point where those struggling to get by will feel like spending again. What happens when people buy a car once every 10 years instead of once every two or three, especially now that we taxpayers own such a big percentage of the American auto industry?
The story continues here.