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A Helluva Read

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August 31, 2009

We are constantly being bombarded with predictions and opinions about where the economy is headed.  Since last fall’s financial crisis, people have seen their home values reduced to shocking levels; they’ve seen their investments take a nosedive and they’ve watched our government attempt to respond to crises on several fronts.  There have been numerous programs including TARP, TALF, PPIP and quantitative easing, that some of us have tried to understand and that others find too overwhelming to approach.  When one attempts to gain an appreciation of what caused this crisis, it quickly becomes apparent that there are a number of different theories being espoused, depending upon which pundit is doing the talking.  One of my favorite explanations of what caused the financial crisis came from William K. Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City School of Law.  In his lecture:  The Great American Bank Robbery (which can be seen here) Black explains that we have a culture of corruption at the highest levels of our government, which, combined with ineptitude, allowed some of the sleaziest people on Wall Street to nearly destroy our entire financial system.

William Black recently participated in a conference with a group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy.  The panel included authorities from all over the world and met in Paris on June 15 – 16.  A report on the meeting was prepared by Professor James K. Galbraith and was published by The Levy Economics Institute of Bard College.  The paper, entitled Financial and Monetary Issues as the Crisis Unfolds, is available here.  At 16 pages, the document goes into great detail about what has been going wrong and how to address it, in terms that are understandable to the layperson.  Here’s how the report was summarized in the Preface:

Despite some success in averting a catastrophic collapse of liquidity and a decline in output, the group was pessimistic that there would be sustained economic recovery and a return of high employment.  There was general consensus among the group that the pre-crisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.

As to the question of where we are now, at the current stage of the economic crisis, Professor Galbraith recalled one panel member’s analogy to the eye of a hurricane:

The first wall of the storm has passed over us:  the collapse of the banking system, which engendered panic and a massive public sector rescue effort.  At rest in the eye, we face the second:  the bankruptcy of states, provinces, cities, and even some national governments, from California, USA, to Belgium.  Since this is a slower process involving weaker players, complicated questions of politics, fairness, and solidarity, and more diffused system risk, there is no assurance that the response by capable actors at the national or transnational level will be either timely or sufficient, either in the United States or in Europe.

There is plenty to quote from in this document, especially in light of the fact that it provides a good deal of sound, constructive criticism of our government’s response to the crisis.  Additionally, the panel offered solutions you’re not likely to hear from politicians, most of whom are in the habit of repeating talking points, written by lobbyists.

Focusing on the situation here in the United States, the report gave us some refreshing criticism, especially in the current climate where commentators are stumbling over each other to congratulate Ben Bernanke on his nomination to a second term as Federal Reserve chairman:

American participants were almost equally skeptical of the effectiveness of the U.S.approach to date.  As one put it, “Diabetes is a metabolic disease.”  Elements of a metabolic disease can be treated (here, “stimulus” plays the role of insulin), but the key to success is to deal with the underlying metabolic problem.  In the economic sphere, that problem lies essentially with the transfer of resources and power to the top and the dismantling of effective taxing power over those at the top of the system.  (The speaker noted that the effective corporate tax rate for the top 20 firms in the United States is under 2 percent.)  The effect of this is to create a “trained professional class of retainers” who devote themselves to preserving the existing (unstable) system.  Further, there were massive frauds in the origination of mortgages, in the ratings processes that led to securitization, and in the credit default swaps that were supposed to insure against loss.  In the policy approach so far, there is a consistent failure to address,                 analyze, remedy, and prosecute these frauds.

*   *   *

Meanwhile, major legislation from health care to bank reform continues to be written in consultation with the lobbies; as one speaker noted, legislation on credit default swaps was being prepared by “Jamie Dimon and his lobbyists.”

One of the gravest dangers to economic recovery, finally, lies precisely in the crisis-fatigue of the political classes, in their lack of patience with a deep and intractable problem, and with their inflexible commitment to the preceding economic order.  This feeds denial of the problem, a deep desire to move back to familiar rhetorical and political ground, and the urge to declare victory, groundlessly and prematurely.  As one speaker argued, the U.S.discussion of  “green shoots” amounts to little more than politically inspired wishful thinking — a substitute for action, at least so far as hopes for the recovery of employment are concerned.

Lest I go on, quoting the whole damned thing, I’ll simply urge you to take a look at it.  At the conclusion of the paper was the unpleasant point that some of the damage from this crisis has been irreversible.  There was an admonition that before undertaking reconstruction of the damage, some careful planning should be done, inclusive of the necessary safeguards to make it possible to move forward.

Whether or not anyone in Washington will pay serious attention to these findings is another issue altogether.  Our system of legalized graft in the form of lobbying and campaign contributions, guarantees an uphill battle for anyone attempting to change the status quo.