The Right Questions
Thomas Pynchon said something like: if they get you asking the wrong questions, they don't need to worry about the answers.
With so many aspects of our current economy in trouble, we find ourselves back in the midst of that great debate over government's role in the economy. The problem is, we risk answering the wrong questions. Or, to be more precise, we risk not going nearly far enough in probing what's right and wrong with the American economy.
It is widely agreed that the pendulum has swung too far toward deregulated market fundamentalism. Market failures abound, and enough people have a sense that these failures are connected to their current stressors, from job losses to gas prices, that the status quo is under the microscope, if not on the run.
President Bush, a fierce adherent of YOYO (you're on your own) for the masses, socialism for the rich, is about to sign the new housing bill, with all its market corrections, including a taxpayer funded lifeline to Fannie and Freddie (if they turn out to need a solvency infusion). Hank Paulson, the Treasury Secretary, has been advocating for more market interventions than a rabid Keynesian. The FDIC is spending its weekends arranging takeovers of failed banks, and the Federal Reserve, when they're busy with their own takeover matchmaking, is inventing new government-backed funding tools well beyond anything they've undertaken in the past.
The reaction to all this by the chattering classes, including yours truly, has been interesting as well. Bob Davis et al at the WSJ provide a useful overview, but it's in the opinion writing that you get the real sense of unease caused by all this market intervention. There may be a few true Milton Freidmanites out there ready to let even the alleged "too big to fail" institutions go down, but there are mostly nervous middle-grounders and faux fundamentalists.
The latter talk the anti-interventionist talk, but when the chips are down, they call for a lifeline from the government. I debate them on CNBC with great regularity. They endlessly tout the virtues of unfettered markets, demand endless deregulation, while constantly nudging the Fed to lean one way or the other, insisting that the government to "support the dollar" (see Wall St. Journal oped page), and, most recently, reluctantly agree to the taxpayer funded bail outs.
The nervous middle-grounders, like Roger Lowenstein over at the Times today, agree that we maybe need some new rules, but worry that as long as the government is underwriting risky investors, those investors will escape the market discipline so fundamental to the system.
That sounds reasonable, but doesn't really help anyone draw the line. All economies, advanced or otherwise, will experience market failures, and government will be tapped to offset them, which is as it should be. Lowenstein writes "The government should get out of the business of assuming risk..." But, as Peter Gosselin writes in his must-read new book, High Wire, government at its best has assumed all kinds of risk, from pension risk (Social Security), to market risk (SEC, Federal Reserve, FDIC), to medical risk (Medicare), to environmental risk. Government at its worst has ignored (most recently, market risks) or exacerbating these risks (environmental).
Obviously it's a balancing act, but instead of complaining about vagaries, we need deeper thoughts about what went wrong and what it will take to reset the balance between government and market risk. As I said in this space last week, the time to worry about moral hazard is not the weekend when the bank is failing. It's now, when many in the public, along with policy makers from both sides of the aisle are connecting the dots between failing markets and the economic pain caused by job and wage losses, the housing bust, the energy crunch, and the financial market turmoil.
In testimony last week, I ticked off a bunch of ideas -- not all my own by any means; most of this is conventional wisdom -- to re-regulate financial markets, and these ideas were well received by the members of Congress on the Joint Economic Committee. But, having read a bunch of the analysis, including my own, I have a nagging feeling that we're missing the big picture.
We're arguing about slight moves down a continuum, necessary moves designed to offset the bubble and bust economy of the past few cycles, and inject some overdue oversight needed to ratchet down obvious excesses, like the trashy loan practices in the subprime housing market, or the off-balance-sheet entities held by investment banks. It's a measure to just how limited our debate has become that even these moves bring cries of "French socialism," the end of Reaganism, with accompanying visions of the invisible hand in shackles.
All that any of this re-regulation will do, if it works, is to diminish damaging excess. If it prevents bubbles from inflating, it will keep the macro-economy more on track. These rules might prevent some bank failures and unscrupulous lending; they might provide some transparency that investors need to price risk.
They won't reconnect the living standards of the middle class to the growth in the economy. They won't reverse the slide in health and pension coverage. They won't lift the bargaining power of workers unable to claim their fair share of growth they themselves are creating. They won't get us any closer to the investments we need to make in our children, our environment, our public infrastructure. They won't rebalance the risk shift that underlies much of today's economic insecurity.
They'll make the gears deep inside the machine of capitalism turn more smoothly, and that is a good thing. But the question is, what comes next? Once we get a little common sense back into the system and hopefully shut down the bubble machine that's characterized the last few cycles, will we take the steps to craft the economy we want? Will we do everything we can to ensure the occurrance of that which has eluded too many for too long: broadly shared opportunity and ultimately, prosperity?
These are the questions we should be asking McCain and Obama over the next few months. And the one with the right answers deserves first, your vote, and second, your scrutiny to make sure they walk the walk once they win.
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Thanks Jared!
The first hurdle we have to get over is that government is bad, but we have to work for more transparency in government, which means lots of citizen participation.
The second hurdle we have to get over is that taxes are bad. Taxes are good. We need taxes to run our civil institutions.
Capitalism is good as long as we have some regulations to smooth out the harsh edges.
The ideal situation is a mixed economy, mostly capitalism with some social programs.
We need to change the dialogue to get the ball rolling. Taxes are good. It is patriotic to pay taxes. Many people from foreign countries want to come here and would be thrilled to pay taxes for the privelege.
Repeat after me. Taxes are good. Taxes are necessary. Taxes are good.
After that we need a jobs program.
Two words for you, pal - Fascism Forever!! Government IS bad; perhaps, in some ideal world, not so, but even there it will become so. The reason is ....(drum roll).... human nature. Humans are selfish first. Some expand their self-interest to include family, fewer still can embrace a clan, fewer still a tribe, on up the social scale. But when push comes to shove, self-interest prevails! Taxes are GOOD??? Perhaps necessary but never good. And in that ideal world , taxes wouldn't be necessary - everyone would willingly contribute for the common good. A far cry from HRC's "we're going to take things from you for the common good". Who decides? Any economic system is capable of being corrupted as long as the people aren't: 1.) equally intelligent, 2.) equally educated, and 3.) equally ambitious. For as we know, ambition leads to competition and we're right back where we started. The flawed idea amongst Neo-Liberals and their left-wing companions is that men are inherently good. It's believing that falsehood that allows them to be led around by the nose by the likes of Rousseau, Robespierre, Wilson, Mussolini, Marx, Lenin, Hitler, Mao, FDR, HRC, and B. Hussein. They've been conned by ego-maniacs, and they're too foolish, ignorant, and silly to realize that the "leader" is looking out for him/her self first - their well being is of minor concern. There's a word for folks like that - sucker!
Humans are not naturally selfish. We are taught to be untrusting and to hoard by the fearful among us.
- Victory, Anyone?
“Professor, our Iraq adventure has been called a war, which it is not. Then, we pour more soldiers and build huge walls around some Baghdad neighborhoods leading to less violence and we call it a victory. Can you explain?”
“A matter of using ‘resounding phrases’ that have more appeal to the media and to the public. As long as the Iraq adventure is called a "war" and not what it is, an invasion or even a "policing action" our administration will continue to pull the wool over people's eyes. They state that we can ‘win this war’, ‘accomplish the mission’, ‘declare victory’ and ‘fulfill a mandate’. What we are fighting in Iraq has many names and as many fronts; all deadly to our soldiers and the Iraqis. Rivalry among the tribes, families, factions and militias is as old as the sands around the Euphrates. AlQaida, took advantage of the invasion to set up operations in a place where he had lots of infidels in uniform handy.”
“In other words, professor, we are spinning our wheels. Is that it?”
:You said it. If there ever was a military action devoid of reason and common sense, this is it.”
And just how, Dear Sir, do you propose to reverse [that's reverse, not slow] the steady accumulation of wealth in the hands of the few? The growing disparity between rich and poor?
And dear sir, how do you propose to cure our obsession with how much money other people have?
Because dear sir, we were created to do away with the ruling, wealthy, royal class... as a democracy cannot stand when a slim few hold all the cards, all the power, all the wealth...so obsess we must
When my annual salary (which is pretty decent) is the same amount of money as that person spent on a stupid watch, it matters.
When there are people out there who are staving and someone else decides to use the money that could feed them for a year on a new collection of Prada handbags, it matters.
When the government uses someone's hard earned tax dollars (which they could use to keep from losing their home instead) and gives it to immoral bankers who helped put them in that position, it REALLY matters. Especially when they are the ones who get left out on the cold.
Shall I go on?
Why of course
with Mr. Horace B. Smith and his friend
Daniel Wesson
A free-market for republicans works until democrats failed to regulate.
Pardon, but that is obtuse logic.
A free-market for republicans worked BECAUSE democrats failed to regulate. FYI, it didn't work for long.
Now the market is broken for at least another 5 years, and nobody wins except the fat cats who have enough in the bank to weather it out.
In what way is it broken? Also, please explain how it is in any sense a "free" market.
I want to ask Jared Bernstein, if the top 1% of the American population owns 50% of America's assets, why can't they loan (donate) the country $10 trillion dollars over a period of 10 years to fix the nation's infrastructure, increase mass transit, create "community" schools in impoverished areas with quality teachers, create universal health care and support energy alternatives R&D. It would not bankrupt them and it might end up being a good investment.
They would - if there's a profit in it! Remember Rule #1 - men are selfish. And that means ALL men!
Laissez faire capitalism does not work in practice. Business is incapable of policing itself. Greed trumps all, even the blatant hypocrisy of deregulation proponents. As Bernstein points out, if a business flourishes, then they scream loud for no Federal regulation. But if business fails, they are the first to line up at the Federal feeding trough. Business wants it both ways: ignore the middle class during up times by not sharing profits in a equitable manner; stick the middle class with the tax bill during the down times of government buyouts.
It gets better. Business wants tariff protection from cheaper imports. Yet U.S. businesses are encouraged to move U.S. factories abroad to take advantage of lower costs, and they incorporate their company headquarter in Bermuda to escape repressive U.S. corporate taxes. Net effect: no U.S. jobs, no sharing of company profits, no collection of corporate tax, price protection from real foreign competition, government guarantees of a bailout.
There must be a better, fairer way.
spot on and succinctly put....
There is: teach your children not to be greedy and materialistic.
Socialize risk, privatise profit, it''s the neo-con way!
Wow, have you applied for a job on the Obama cabinate? You should. Sounds like you have a good big picture of this issue.
I think I'll print this. It helps organize my thoughts when arguing with my free market fundamentalist relatives. You've basically summarized the changes in our economy over the last 30 years in two small paragraphs.
Substantive change is painful. Moving from a rural, agrarian society in the last centure and, now, in this century moving from a fossil fuel dependent society brings real risks and real rewards. Those who've made money in the old ways fear the new. It's why we need new leadership in government and industry. People who are excited by change, not afraid of it.
How do we abolish the Federal Reserve if we don't own it?
pass a law allowing it.
God almighty, READ THE CONSTITUTION. The CONGRESS shall have the power to print currency, not a Private Cartel of Banks calling themselves the " Federal " Reserve. The Fed is an unconstitutional usurpation of Congressional power. They have no more " Right " to print currency than they do to sit on the Supreme Court. Simply take away the power to print currency and instruct the Marines to demand they return the trillions they stole from the American people between 1913 -2008. Your family should get a nice rebate check for about $ 400,000.
This is an excellent article and I commend you for asking the "right question." It is a problem which concerns me because it involves a radical shift from our past economic model and is one which will greatly influence the lives of my children and grandchildren. Consumption can no longer be the driver of our economy or if it is it can no longer be natural resource based. If we continue upon our current path the human race will literally consume itself into extinction. Second, growth that is measured on a quarterly basis, should be redefined as meaningless and earnings should be one of many factors in measuring growth. Third, the total cost of extracting raw materials should be expensed. For example, if a mountain is leveled when extracting coal, the entire cost for the loss of a mountain including the added pollution, aesthetic value, diversion of streams and rivers, etc. would be expensed. Fourth, growth should not be a high priority for the economy. Finally, education and infrastructure should be our nations' highest priority while defense should be substantially reduced.
What I hope would happen as a result is more revenue being directed towards our own citizens with an emphasis on quality rather than quantity; where extracting natural resources is more expensive than creating alternatives and growth is less important than discovery.
When an economic or political theory is considered an ontological truth as opposed to an approximation, all sorts of stupdity follows.
"we're nuts to let corporations anywheres near our democracy" rfk jr.
Thank you. That's the most insightful comment I've heard in a while. We might start by changing their legal status as persons or whatever it is.
Excellent column - for too long we've allowed excess to reign supreme in the economic system. Oversight, while not necessarily welcome by any capitalist, is tantamount to stabilizing an economy that has grown and sunk by trying to balance itself on the bubble principle. No, this has not been intentional, but a deregulated market lends itself to these kinds of trends.
I also like that you mentioned the need for government to regulate, not only economic but, evironmental and medical, etc. I don't understand why those with democratic principles allow for the rhetoric of conservatives to talk, so freely, out of both sides of their mouths. The "if needed" help for Fannie and Freddie should have drawn much more attention and bruhaha towards the "flip-floppiness" of conservatives that invades this country.
An unregulated machine eventually burns itself out. Unregulated growth of cells is called cancer.
Ditto for an unregulated government!!
Bush promised us an Ownership Society. And we have it. We have a few owners, and a lot of ownies.
Bush likes to make things up as he goes along.
1-20-09!
LOL! I also remember GWB boasting not too long ago about how many more Merkans were fulfilling the Merkan dream by being able to buy homes (he didn't mention the part about bad loans)...
We are a "borrowship" society. We borrow money for our houses, our cars, toys for the kids, you name it. We even borrow to buy $4 a gallon gasoline. We can't even afford a cheap stereo without putting it on the card. The correction that looms in our future will be jaw-dropping.
And now China and Saudi Arabia own the society.
Good column. This is exactly the limitation of an Obama administration -- If current trends are any indication, incrementalism rather that dramatic change will be its hallmark. It may not be enough to have some modest successes when times are dire.
Stabilize, then privatize. The government shouldn't be in the mortgage business anyway. Nor should they be making equity investments in these companies, or bailing out the stockholders of these companies.
The problems at Fannie and Freddie are due in large part to failures in regulatory oversight, the politicization of these firms, and the political meddling with their charters. The robber barons in this story are folks like Franklin Rains and other political insiders who collected exorbitant salaries while manipulating the books to reap maximum compensation for themselves. How is re-regulation going to fundamentally change the situation? Or are we just deluding ourselves into more of the same, and fine tuning their operations with another political money wrench?
I say put these companies on sound financial footing, then sever their ties to the government. Let them thrive on their own merits and not depend on that implicit government guarantee.
This "privatize 'em" advice is precisely the reason they are in the shape they're in. The Reagan administration's call for "deregulation" led to exactly the same kind of thing with the Savings & Loans, and a similar "deregulatory" urge led to Enron gaming California's energy "crisis," ginned up in the name of profits.
LBJ already took FNMA and FHLMC private to pay for the Viet Nam war, and they've been vulnerable to gaming for private profit ever since.
The problem livewire19 and his fellow free market idolators have is that there really is no substitute for intelligent regulation, just as there is no substitute for honest referees.
livewire and your fellow acolytes, I urge you to tear yourselves away from the shrine of "free markets solve all problems" and smell the coffee...
Both these institutions (and all banking) are currently regulated. We don't live in a free banking period. What you are concerned with are the regulations that we currently have. You think they are the wrong ones. Is your solution to just add more regulations hoping that somewhere in the mess we have the right ones? (Like maybe just bringing back all of Glass-Steagall).
The federal government should keep it simple. Just make sure that banks and individuals dealing with banks live up to their contracts and that no contract is enacted through fraud. They shouldn't be in the business of forcing the banks to make "good" business decisions. Because a "good" business decision to a politician is definitely not the same think as a good business decision to a business man.
“Intelligent regulation,” isn’t that an oxymoron? Where were these super regulators when Fannie and Freddie really needed them?
Something went dramatically off-course for these companies in the mid to late 1990s and continues to snowball. Even the Oracle of Omaha, sensing all was not right, bailed on his “permanent” Freddie holding between ’97 and ’98. The leverage these companies employ, given their low capital base, is truly frightening, and magnifies every mistake. Lack of proper oversight by regulators, Congress and the boards of directors, greedy executives and malleable accountants, and the over-politicization of these quasi-government entities are all contributing factors.
The debate should really be: does the economy of 2008 still needs these companies and why should they have ties to the US Government with taxpayer money on the line. Not how to give the patient CPR until the next life-threatening event comes along.
There is a capitalist hell. Enron went there pulling Arthur Andersen down with it.
I agree 100% with "privatizing" these firms (I guess they are technically private). They took on all this unwise risk specifically because of this implicit government guarantee (which just became explicit).
do you mean 'nationalizing' or 'privatizing?'
In other words, bail 'em out with taxpayer money and then let the "magic of the free unregulated market" take over.
Your cure? Same as the poison.
You can just hear the socialism-for-themselves-luvin' rich saying: "KAAA-CHINNNNG!!!"
LOLs. I love it. The only "KAAA-CHINNNNG!!!" I hear is from the short sellers. The politicians are scrambling to save their own butts and look like heroes, but their social engineering helped create the mess in the first place. The stockholders and bond holders are sweating it, worried about solvency and returns, whether it’s Ma and Pa living on Main St. USA, the Wall St banks or Sovereign Wealth Funds. The exec stock options should be worthless at current prices. The regulation of these entities has been a joke for decades. They’ve recently been authorized to increase their leverage and acquire more loans. And if they are deemed insolvent the taxpayer gets to foot the bill….. what a deal! Either nationalize or privatize; let’s get out of this in-between hell.
If these companies are truly bankrupt, they should be put into receivership like any bank and broken up. I think they’ve outlived their purpose anyway. I’ll be extremely disappointed if the US Government buys equity in these companies to keep them afloat. Then I’ll join you in calling this “socialism for the rich.”
7/27/08
8:38pm
University of Oregon
RE: "President Bush, a fierce adherent of YOYO (you're on your own) for the masses, socialism for the rich"
Nicely put. But why don't you worry about the masses a little more?
Priority #1 should be housing and feeding all US residents--not market intervention.
Unfortunately, without a market, there is no food nor houses.
Pigs get fat, hogs get slaughtered.
7/28/08
9:43am
University of Oregon
There were people who ate food and lived in houses before there were "markets."
And what have livestock got to do with this, genius?
The Milton Friedman/University of Chicago school of thought is finally being corrected. It's a market correction!
Paul Krugman's excellent "Peddling Prosperity" points out that Friedman-ism was abandoned in the first term of the Reagan administration. It didn't work then. Keynes did, and still does.
Lowering taxes on the wealthy, while quadrupling the doubly-regressive Social Security taxes has lead to stagnant real wages in the past 30 years while the top 0.01% of earners have received a 457% raise. I wish I was making this up.
In any case, consumer demand, the foundation of the U.S. economy, has been dependent on credit for some time now. The sub-prime mortgage crisis is the "last call" bell for this particular binge. Now comes the morning after.
Cute. But, a market correction is what is really needed here, and there can be no real correcton with this type of government medddling. All they are doing now is encouraging bad lending and bad borrowing. Let it crash and burn; we've had worse.
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