About Peter Radford

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Ruminations on The Election

This is a silly season in America. Sillier than even by our usually silly standards. We are mired in one of the most peculiar political processes ever. The Republican party is deeply divided between far right social conservatives who want to undo the entire post war era – especially women’s rights, economic conservatives who want to undo the entire social safety net and throw us all to the wolves of market magic, libertarians who simply want to undo America as we now it and re-knit what’s left into a micro-local-Randian-polis style survival of the fittest landscape, and elderly white males who are aghast that the country is becoming more diverse than they are and that even a black person can be president. This toxic brew has served up some of the least fit presidential candidates ever, and has exposed the core of the GOP as being so far to the right that even Reagan and Nixon no longer qualify to serve under its banner.

It is a party committed to obstruction – it won’t even tolerate the benign appointment of Federal judges, and is salivating at undoing all Obama’s efforts no matter how half hearted people like myself find them.

It is hard to describe to anyone not living here just how far to the right our politics have shifted. We live in an era of demonization, cultural division, and outright lunacy. Ignorance is lauded: it was not for nothing that Rick Santorum could say with a straight face that encouraging people to go to college was a bad idea. The far right sees education as its enemy. Education, after all, is likely to lift the veil on the paternalism, authoritarianism, outmoded thinking, and prejudice that haunts great swathes of America. This remains a very parochial electorate where the assertion that is America’s right to consume the world’s resources at an inordinate pace despite the wishes of the rest of the planet garners widespread support. Going to college may expose our young to views from around the globe. That may produce a tolerance for foreigners and foreign things. This in turn may dilute the American Way. And the American Way is not just perfect, it is God given and perfect. To dilute it it is to offend the Almighty as well as to be unpatriotic.

Great chunks of this country live firmly in a time warp. The dissonance is extraordinary. Modernity creeps in everywhere. It is both embraced and is the cause of unease. Technology brings the “other” into every living room where it can be accused of being the cause of all ills. The relative decline of America is overblown by a right wing media in order to stir up political opposition to Obama, but serves also to fuel a desire to reject all things modern. This section of America has not been well served by globalization. It is isolated from the world and wants to stay that way. It wants to retreat in order to recapture the hey day of American unilateral power. It wants to re-embrace Reaganite homilies and simple thinking. It wants to resort to an uncomplicated era when American power was absolute, America made and enforced the rules, and American wealth was sufficient proof that the American Way was also the best way.

This was always an illusion of course. Empires always fade under the weight of their own force. They enfeeble themselves in the name of asserting power, and then scream bloody murder when the walls cave in. It must be someone else’s fault when the end comes. And a prolonged period of internal discussion about whose fault it was inevitably leads to deep and possibly irreparable damage. America can no longer afford it enormous offensive – in every sense of that word – capability, yet is scared of retrenchment. Cutting military spending is viewed as unpatriotic. This is in a country whose longest political tradition was to avoid foreign entanglements and to keep a minimal full time military. How the delusions of empire have twisted America’s view of its own past. At the opposite end of the spectrum there are many who still revile the entire edifice of the New Deal – they see it as an imposition by a tyrannical central authority on the supposed free will of the rugged individuals who founded this place.

Everyone seems to be looking backward. The only question is how far back they want to go.

To have an election in the midst of this brooding self-regarding petulant outburst is never a good idea. The far right always comes out ahead. The progressive wing in our politics has been unable to articulate a globally connected version of the American Way capable of countering the urge to plunge backwards. The Democrats have, by and large, looked weak and divided even whilst holding total control of Congress. The American political system was never established to accommodate deeply divided parliamentary style politics. It assumed a banal centralist consensus held together by common cause – a few white male landowners with similar interests if different views was all we needed to take into account. So watering down central power and preventing the emergence of a bloc capable of dominating politics was essential. Then we could all revert back to the more important business of running our plantations and farmsteads safe in the knowledge that no tyrant would interrupt our sober paternalistic way of life.

The system we have is unsuited to the politics we have. There is no loyal opposition. There is simply obstruction and venom. There is no alternative policy preparation. There is only destructive denial and nihilistic argument. There is no common set of facts subject to different interpretation – there are different facts created to support pre-existing ideas. Most of all there is no common vision of America. Modern and pre-modern are in calamitous conflict. Obama’s election was not a decisive moment of racial healing and social construction. It was a moment of crisis for pre-modern America. It was the moment at which all the sundry aspects of American modernization came together in opposition to America’s darkest past. That it came at a moment of great economic crisis also heightened the threat it represented. A fevered backlash was inevitable. We have lived through almost four years of ugly resurfacing of prejudice, repressed anger, fear, and hatred of advancement.

The result is that the Republican party is now the party of the white working class and the Democrats, by and large, represent those who have benefitted from progress – women, minorities, and the more educated.

It is this decoupling of the mass working class from the progressive cause that is the most disturbing. They are the ones most hurt by the global connection of the economy, their skills, or lack thereof, are the least required. And they are the least easily adapted. Their standard of living has declined relative to those propelled forward by the progressive movement of the 1960’s and then again by the deregulatory impulse of the 1980’s and 1990’s.

This is why, in many ways, the old world division of society – and economics – into classes aligned along labor versus capital versus landownership are ever less relevant or explanatory. Knowledge, education, information flows, and access to a global community are much more explanatory of the way in which American politics has morphed in the last thirty years. Unfortunately our theoretical constructs are still stuck in an industrial world circa mid 1800’s.

There is nothing in our debate this year that suggests we will resolve any of this. Indeed it is almost certain that whoever is elected president in November will face an intractable political system bent on continued obstruction, delay, and regressive argument. Neither major party seems able to modernize sufficiently to develop a global message. Retreat is still the order of the day. The economy is still stuck as a result – we cannot arrive at a consensus on what to do until we have agreed what ails us. The malaise will linger. At the current rate of inadequate progress, and given our mediocre policy responses, our economy will only arrive at a full recovery – defined as full employment – after many more years. That is a hopeless response. Hopeless. It will make politics more acidic and hate filled. It will open up more avenues for extremism. We can expect more Santorum like figures not fewer.

This is not bleak but real. It requires leadership. It requires those currently invested in the success of a globally connected economy to spread the wealth and to understand the pain connection has caused. It requires and acceptance of responsibility rather than a absentee rent seeking on the part of the intelligentsia – in politics, in business, and in academia. It requires continuation towards and not away from modernity. It requires the articulation of a vision of what the new American Way might offer to those currently disenfranchised by progress. For such progress is no progress at all. And that realization is the biggest threat to America.

This is a country founded on progressive ideals. For it to become persistently regressive is not only dangerous to its own historical trajectory, but to people everywhere. For if America can deny its own past and turn on itself, who else could progress? And where else could a similar liberal project succeed?

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Inequality, Rationality, and Other Annoying Things

Forgive me. My ‘grandmother quotient’ is running at danger levels.

Frequent readers will know the special place my grandmother has in my development. In just a few sharp phrases she influenced me far more than anyone else. One of those phrases grates on me: “Remember, Peter” she said one day “They can always take it away from you.”

Quite why a young boy needed to know this, and who the “they” or the “them” was I never have figured out. But somehow her words resonated and I have been on the side of equal opportunity and other progressive causes ever since. She meant something. She had lived through the fight to level, at least somewhat, the gross inequalities that mar nineteenth century British development, and she emerged a hardened warrior for the underprivileged everywhere. In her own way of course. Always in her own way.

I mention this because I find myself reflecting on her words more frequently nowadays. That’s what I mean by my grandmother quotient. There is a direct relationship between my such reflection and my perception of the state of the economy. I don’t really care how well the economy is doing, so much as I am concerned by how well people are doing.

And therein lies the tale.

Economists are notorious for trying to eliminate people from their theories. That way they can pretend to be scientific in the grand manner of physics and mathematics, rather than in the manner of biology, history, and other subjects rooted firmly in evolution, and, especially, time. Economists use jarring words like ‘agents’ and ‘units’ to strip away humanity and to avoid having to face the consequences of their allocative mechanisms. They make things impersonal so they don’t have to look unemployed people in the eye and explain to them that unemployment is always voluntary – in theory. I imagine they fear they might be punched by the voluntarily unemployed. Sometimes I want to punch them myself. Especially those who are tenured whilst explaining the evils of tampering with free labor markets.

Inequality seems to fall into this same category.

Hey, the economists say, that’s just tough. Stuff happens. But our theories tell us exactly what the right answer is if we all want the most efficient allocation of resources. Right? Those hifalutin equations give us such exact answers. Just look at the decimal points. Such precision is hard won. And worthy of many, many, Nobel prizes. That some folk win, while some folk lose, is just not important. Not at all. What’s important is the efficient of the outcome, and the elegance of the reasoning. Elegance is particularly important in the rarified world of economic theorizing. The fine tuning is nicely balanced. Elegance makes it ever more so.

Perhaps it’s the astonishing capacity of orthodox economists to conduct a conversation with themselves as if they were engaging something else that mystifies me most. They really don’t get out much. Anyone intruding is laughed at as being an amateur. And we all know how simple and naive amateurs can be. After all they never paid their dues to join the club. Within the professional cloisters jargon hangs heavy and the total irrelevance of the conversation to the real economy is itself irrelevant. Economists, as I have shouted out many times, don’t talk about the real economy. They discuss their own imaginary one.

In there, agents patrol endlessly, tirelessly digesting infinite streams of data, calculating at universally unattainable speeds, knowing all, and arriving instantaneously at perfect answers. All in the name of efficiency and allocative maximization. This parallel universe actually parallels nothing. It vectored off a long time ago. There is probably a non-Euclidean geometry to describe the warp into which economics has ventured, but I am unaware of which it is.

Consider this: you are one of those agents.

Think about that. You and your fellow 6.8 billion humans are the stuff of economic theorizing. Or at least the outcomes of what we do every day are. How many economic transactions do we all make a day? Fifty? One hundred? More? Apparently there is a giant hidden hand ensuring that all those transactions – 6.8 billion to the nth power – mesh seamlessly into one gigantic computation that ends up establishing the correct order we know as an equilibrium. Amazing. Death defying. Indifferent to time. Indifferent to uncertainty. Indifferent to any gritty nonsense at all. The miracle of the price mechanism ensures, with unnerving accuracy, that those equations so elegant bring us to the nirvana so longed for by us all. That is the happy place where none of us, not one of those 6.8 billion souls, can change a single thing without setting someone else back.

Wow. That’s quite some trick. I need to meet this price mechanism one day.

Because the one I come across on my daily walks around New York City seems to produce something a little different. Like homelessness. Like inequality. Like a whole lot of things that someone – one of our fellow agents – would like to change, and which probably wouldn’t wreck anything at all for anyone else anywhere.

Meanwhile I have a favor to ask: I am trying to do my best by this rational expectations thing. It’s very difficult. I am worrying endlessly nowadays about the enormous increases in taxes that are inevitable to pay off the needless and thoroughly useless stimulus. Since the stimulus was financed with debt, I am aware of the trajectory of future taxes and need to plan accordingly. I need, in order to maintain my status as a true denizen of orthodox theory’s world, to adjust my current spending. But I have run into some embarrassing issues. Like I have no idea of what those future tax rates might be. And like that fact that my spending bumps along the boundaries of sufficiency, so to reduce it seems likely to inflict quite a bit of near term pain. Then there’s the problem faced by my grandson. He, taking the long view, needs to know crop prices – he lives on a farm – in 2053. After all he is rational. His expectations need to be brought into line. I realize he’s a bit young, but he doesn’t want to tamper with elegance.

Anyway any help you can all provide will be most welcome. We would hate that it were our family to ruin the machinery of equilibrium.

My grandmother would probably look at orthodox economists as being part of the reviled “them”. In their zeal to defend markets from the presumed tampering of the central authorities they managed to provide ideological cover for those who are strong enough to tip the balance in their own favor. Orthodox theory is not neutral. It is biased. Even its axiomatic base is carefully established to ensure the proper outcome. I call it a GIPO system of thought in honor of Milton Friedman who notoriously fended off criticism of orthodoxy’s bizarre assumptions by arguing that those assumptions can be as crazy as all heck as long as the outcome of the theory that rests on them is “correct”. Where correct means that markets are good and governments are bad. Friedman was a libertarian and it was merely coincidence that his scientific enquiries ended up this way. It could have been the other way round. Honestly. By the way: GIPO stands for Garbage In, Perfection Out.

Orthodox economics is GIPO economics.

My grandmother would probably have a few choice words for Thomas Sargent too. He won the Nobel prize recently for his work on rational expectations. Which is why it’s a little odd that he would co-author, with William Silber, an op-ed piece in the Financial Times talking about the problems with the Federal Reserve Board’s attempt to be transparent in its rate setting policies. What’s to discuss? It doesn’t matter what the Fed does. In a rational world we all know, and have taken those policies into account. Indeed we all know exactly what’s going on inside Bernanke’s head. So why discuss? Why comment? Is he disavowing his own Nobel worthy work? Or is he just talking out of both … no surely not.

Oh. Wait. The entire comment was about monetary policy and the evils of quantitative easing, the hyperinflation it will inevitably unleash, and all the other detritus of orthodox theory. It’s that whole “democracy tampers with efficient capitalistic outcomes” thing.

That naughty government. It always manages to muck up sensible, scientific, economies.

I wonder whether my grandmother included the government as part of “them”.

No. Of course not. She quite liked democracy. More than capitalism any day.

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Odds and Ends

The economy has hit one of those dull patches where all we can say is that it appears to be growing, that growth is steady rather than spectacular, and that we all should go about our business and check back later to see if it has been blown off course.

In view of this I think we ought to reflect on some other things.

Like Martin Feldstein’s evident confusion.

He, in true economic guru style, muddles ideology with economic analysis. In today’s Financial Times he sets out to disparage Obama’s impending tax increase. This, it turns out, is the Bush tax increase that has been kicked down the road a couple of years because we all know that such a thing would be hugely counter-productive in the midst of a recession. Only now we are supposed to be recovering so further delay is beginning to look less problematic. Right wingers like Feldstein love to pin the problem on Obama and neatly forget that the issue of whether to implement the planned reversion to Clinton era tax rates was embedded in the 2011 and 2003 tax cuts. Back then the trickery was that in order to avoid the tax cuts looking like they blew up the Federal budget – which they did and were intended to – they had top appear “temporary”. Permanent cuts would have triggered a debate about how to re-balance the budget by slashing spending, and since the Republicans, then in power, wanted to avoid such a conversation, they hid behind the fiction that the cuts were not permanent. The other neat trick was to ensure that any debate took place after George Bush left office. presumably he didn’t want to have to deal with the mess he was making.

So here we are, predictably, with a right winger pinning the blame for an imminent tax increase on Obama, when the entire problem stems from a flawed piece of Republican legislation.

Anyway. According to Feldstein implementing the Bush law would destroy our recovery and thus we ought to avoid, at all costs, re-electing Obama. This is the intent of his article. There is no analysis. There is no justification of keeping taxes at these low levels on the basis of some new economic insight. It is simply Feldstein shilling for Romney. Perhaps he is tired of teaching at Harvard and wants another go at being a policy maker in Washington.

In any case his article is not economics. It is politics.

I find it interesting that the few statistics he gives us in his ideological argument are those of the total revenues of the Federal government. He tells us that, were taxes raise according to the Bush plan, government revenues would rise from 15.8% of GDP all the way to 18.7% in 2013, to 19.8% in 1014, and then stay around 20% for a decade or so. What he avoids telling us that this is comparable to the levels during the Reagan administration when Feldstein was a key policy advisor. Apparently government revenues of around 18% – 19% are deeply threatening to the American way of life in 2013, whereas back in 1987, when they were 18.4% they were no such threat.

Oh. And nor does he mention that revenues hovered at those levels all through the Clinton era – peaking at just over 20% – even while the economy boomed.

Some facts are just too inconvenient to mention.

The problem with an economist being a political shill is that they tend to use facts very selectively and to deploy only those aspects of theory useful to their argument. Other bits, and lost of history, are left out.

Feldsetin is adding nothing to our debate over fiscal policy other than to give color to Republican extremism and its attempt to defund entitlement programs – he comments very briefly that we need a serious debate about how to rein in entitlement spending but glosses over what that might mean. No. His thrust is simply to fire off a salvo about the putative Bush Obama tax increase, and how awful it would be.

If only we were all sensible and elected Republicans, just like Professor Feldstein, academic and impartial as ever, suggests is best given the science of economics upon which he bases his utterly neutral comments.

Sure.

Then there’s the Economist.

I feel sorry for the people there. They want to stay close to economic orthodoxy and preach the gospel of free markets, but every so often it gets in the way of making a sensible comment.

This week they are focused on the returns on equity. In particular they point out the the so-called traditional premium due to equity investment, over safer investments like government bonds, is an illusion. Stocks have underperformed bonds for a decade. This has all sorts of nasty ramifications.

For one ting it helps explain why businesses are slow to invest the mountains of cash they have. The return is there. They’d be giving up on a nice steady income from their investments in bonds. Shareholders who base their long term plans around receiving an equity premium are deluding themselves. This probably is not a great issue to any of us, were it not for the fact that most pension funds base their contributions and pay-outs exactly on earning such a premium. If the equity premium isn’t there, pension funds are left scrambling to earn a return from other sources in order to meet their pension obligations.

So it does matter.

And the Economist chose this week to talk about it.

The real nugget though is hidden from view. What they don’t want to mention too clearly is that this lack of equity premium is a major reason why privatizing Social Security was such a rotten and toxic idea.

Recall that a major plank upon which privatization is based is that the current return on the Social Security fund is tethered to US bonds. It thus doesn’t get that elusive equity premium. So advocates of privatization wave the supposed higher return someone could get from equities and argue that they are forgoing riches untold. Were someone, the story goes, able to untether themselves and play the market, they could dive into that stream that the equity premium provides and retire a whole lot better off than the way the stuffy Social Security system allows. The equity premium is a vein of gold denied to retirees by the government. So: we ought to privatize.

The argument sounds good.

It ignores all the risks associated with equity investment. And it ignores all the fees associated with running a private portfolio. I fact it pretty much ignores all financial theory. But it sounds good.

Until we realize that there is no equity premium. And that we are deluded when we refer to it because it may have been an aberration rather than the norm.

Worse: another thing the Economist touches upon lightly so as not to embarrass the privatization folks is the old supply and emend problem. Were we to privatize and pour more money into the stock market in search of the equity premium chimera, we would assure it’s nonexistence. All that money would drive returns down.

Lastly, we are told that because the premium doesn’t really exist we all should plan to save more in order to beef up our retirement. This would drain spending out of the economy in the short term, drive down returns to business, and make them yearn for the safety of their bond portfolios even more.

And, as Professor Feldstein argues, uncertainty over those returns stops our loyal businesses from investing even though they are flush with cash. So he would probably want a tax cut for business to give them an incentive. But that would imply we need steep cuts in entitlements. Menaing we all would have to save more. Which means that returns would fall more. Which means …

That it must be the government’s fault. Just like erstwhile scientists like Feldstein wanted it to be all along.

Phew.

Ain’t economics grand?

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Goldman Sachs and Bank Pollution

By now most of you will be aware of the letter/op-ed article written by a disgruntled Goldman Sachs executive. He is resigning, and on the way out he is taking the time to lambast the firm’s culture. Rightly so. It is anti-client and, more importantly, anti-social.

As I have said repeatedly: I have no problem with business being anti-social provided that society maintains the means to correct that behavior and to keep it within bounds. This is why I am both pro-business and pro-regulation. I see no contradiction in being an advocate of a strong profit motive and an advocate of a strong regulatory regime at the same time. Capitalism is inherently an anti-social activity – by definition is is designed to accrue wealth to individuals who innovate or exploit opportunities. This means it flies in the face of democracy which is a system designed to provide equal opportunities with the hope that outcomes are less unequal, and that all of us share in the wealth being created because no individual is so isolated from society that he or she can truly be said to innovate independent of us all. All healthy societies are a complex mix of competitive and cooperative urges. The trick is to maintain a balance to extract the benefits from both and to live with the ensuing tension.

And it is exactly the unbalancing of the two that undergirds our current malaise.

By mistakenly imagining that the profit motive alone is necessary for wealth generation we have ignored its anti-social side effects, and have lost the strength that cooperation – usually as expressed through collective action – brings as a counterweight. In economics this shows up in an unhealthy bias – which I regard as ideologically driven rather than as scientifically derived – towards entrepreneurial activity or support of unfettered free markets. Neither are phenomena that thrive outside of a systemic setting that provides conditions allowing them to flourish.

So the proper discussion, in my mind, is about where to strike the balance between the conflicting demands of capitalism and democracy. Or, in business, between the opportunity for profit and the interests of other “stakeholders” particularly clients or customers on whose goodwill the business relies for sustainable profit streams.

Goldman Sachs has fallen prey to the virulence of pure profit. This is not threatening to the firm in the short term, indeed it creates the illusion of benefit since profits rise when any discussion of mitigation in support of stakeholders is taken off the table. It is the longer term impact that our disgruntled executive is pointing to.

Sooner or later clients realize that they are being exploited. They start to look for alternatives. And even in our highly concentrated banking industry where competition is way too concentrated there are alternatives. Eventually the short term relentless exploitation of clients transforms into an equally relentless undermining of the longer term credibility of the firm. This is an example of where a market can correct behavior. It is also why I advocate the break-up of our mega-banks in order to ensure more alternatives.

At one point in the distant past I tried to get my employer to use Goldman Sachs. It was clear to me that they were the best, their service was superior and their employees by far the brightest, attentive, and most innovative. I was overruled because of internal politics. That was over two decades ago. I doubt I would make the same decision again. The firm has become unmoored from the concept of client service. Its reputation is one of rapacious self-interest rather than of enlightened self-interest. The difference is enormous.

Getting back to my point that competition ought to offer a correction. This only stands if the culture at Goldman is unique and that alternative choices exist. It isn’t. They don’t. The cultural shift in the US economy has been towards an over emphasis on capitalism to the detriment of democracy. Our collective aspirations have been subordinated to such a degree that many claim that they don’t exist. Instead they imagine that the economic whole is simply the sum of its parts. They deny any result of interaction. They deny any concept of shared investment or shared outcome. They deny the existence of the “commons”.

When the idea of community is shoved so violently to the back seat, the stage is set for the antics and behavior that Goldman exhibited in the run up to the crisis. It also lays the groundwork for anti-social policy making, the disregard of environmental damage, and all sorts of other activities that would be limited in a less individualistic or atomistic culture.

The models and theories that embolden or give credibility to such behavior are both naive and artificial. They ignore the deep complexity of everything around us and the consequent interrelated nature of all activity. It is simply not possible for even the most brilliant entrepreneur to innovate in the absence of a multitude of prior existing and socially created knowledge. It is impossible for even the purest market to operate without a set of socially established rules to eliminate cheating and other sources of dysfunction. The existence of society and its accumulated knowledge, technology, infrastructure, institutions, social networks, and culture are what enables an economy to function. They are what enables a business firm to function. They are what allows an individual to earn a living. Privileging the individual, or the firm, to the extent that these resources are abused, denigrated, and eventually dissipated, will inevitably undermine the sustainability of the wealth that individual or firm hopes to extract.

In short: Goldman is on a self-destructive path. So is banking in general if it continues to ignore its clients and its proper situation within society at large.

This is why I support regulation. We need to place limits on what appears to be a highly toxic culture.

I don’t care whether Goldman destroys itself. I care whether it takes society down with it. And, as the crisis has shown, an unregulated banking system has the capability of damaging us all.

Banking pollutes in a very nasty way. We need to clean it up. As our disgruntled ex-executive is highlighting.

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Banking’s Naked Emperors

This is truly annoying.

We have been treated in recent weeks to a barrage from the banking industry’s multitude of apologists and hanger-on about how enfeebling the proposed capital rules are. Those rules will, we are assured, ruin the recovery by forcing our dear banks to set aside a stash of money just in case their assets are not worth what they think they are.

Of course such an event can never happen. Our bankers are way too savvy, smart, and genius-like to book assets that are not worth a hundred cents on the dollar. So prescient and brilliant is the corps of US banking that any attempt to hedge them in with silly rules is an affront to their, well let me say it again, genius.

No it could never happen.

It never has.

And if it did, it was the government’s fault for interfering in the natural workings of the supremely efficient all-encompassing, uber-calculating, and ever correct machinations of the free market place.

Which, in case you missed my point, is bursting with genius.

In order to unleash said stellar talent what we need, in the aftermath of that little blip you may call a crisis but we cognoscenti of the financial markets call a correction, is to unfetter even more our heroes of the trading desks and allow them to roam across the economy adjusting inefficiencies and allocating capital with their accustomed aplomb.

It is important to remember, although it appears one or two of you seem to have forgotten, that our heroes never make mistakes. Their adroit tactics and savvy strategies are what underpins the supremacy of the US economy. Domination of world trade, unsurpassed job creation, rising wages, and all the other great benefits of our capitalist system would not be safe without the attendant ability to shift trillions of dollars at a mere click of a computer key to distant lands in search of that last one thousandth of a percent.

Besides there are quarterly profit and monthly bonus targets to be met.

Yes the boys and girls are back. En masse. And as completely dumb as ever.

Sigh.

We learned nothing from the crisis other than how powerful the banking lobby is, and how completely upfront it is with its willingness to distort and bully. We reformed nothing of substance. We meddled mightily with the fine print of banking. We managed to publish a piece of legal obfuscation that promises huge fees for consultants and has been a boon to the legal industry in general but little else. The Dodd Frank so-called reform act weighs in at nearly 900 pages of scarcely intelligible mumbo jumbo. It acts as a fine door stop. It does nothing credible to prevent us being pillaged again by the dinosaurs of Wall Street.

Our problem is that we live in an intensely bureaucratic era. We mistake reform for endless meddling with words and the microscopic parsing of paragraph long sentences. We feel gratified if we end up with pages of fine print that cover every contingency we could think of as we debated around mahogany conference tables and were plied bottomless supplies of rotten coffee.

Somewhere we forgot that reform is just that: change. Not just in the sequence of words on a very long page, but in behavior. Out there in the real world and not sequestered in the comfortable world of consulting presentations. For reform to be reform something done yesterday is no longer done today. Or something that existed yesterday is gone today. That’s reform.

That they banks have managed to beat back any reform of true value is testimony to two things: one is their political muscle; the other is the fear that politicians have of mucking around in finance: if they screw up banking they screw up the economy. Given this fear it is better, from a politician’s perspective to allow the bankers to screw things up. At least we all know how to fix that: we write big checks so that the banking monster goes away for a while until it needs feeding again.

Meanwhile the spoiled brats that run our banks are obsessed over all the wrong things.

They argue that raising capital requirements will diminish their return on equity. Yes it might. Good. High ROE’s denote high risks. We want our banks to be nice and safe so that our payment system works smoothly and that credit flows reasonably into places where it can generate wealth. Ah, the bankers argue, it’s very hard to attract capital when ROE’s are low. No it’s not. This is a matter of perception. If banking is viewed as a high return gambling operation, then low ROE’s are anathema. If it is viewed as a lower risk mediating business best overshadowed by the production of actual things rather than zeroes on computers then low ROE’s are useful: they signal the reality. There are plenty of people who would like to find a safe reliable police to invest. Banks used to be safe. Now they are not. They need to be again.

But raising capital will syphon cash away from lending and leave it idle on the bank’s balance sheets. Good. In fact double good. It was the explosion of loose credit that caused our crisis. We just lived through what is called a balance sheet recession where the private sector had to disgorge vast amounts of debt. It had to re-establish a proper balance between debt and equity. And between debt and incomes. Rotten banking, high leverage, and the endless pursuit of excessive ROE’s fed a river of toxic debt into the economy and benefitted no one other then the dopes who traded in it. As an exercise in bonus production it was a brilliant scheme. As an exercise in capital allocation it was an unmitigated failure of historic proportions.

How can I say this more clearly: our banks failed us miserably. They cost us dearly. They demonstrated unequivocally that all they rather pompously preached before the crisis, was so much horse dung. They sold snake oil. They are revealed as such. They know nothing. They should be put firmly into a very small box and told in no uncertain terms never, ever, to do whatever they just did again. Or otherwise we ought to throw them in jail. They committed a great fraud on the public, only it wasn’t a fraud because they had bent the rules so that nefarious became clever or smart.

And now they bitch about higher capital.

Oh. Wait. And they also bitch about all the rules inhibiting the increase of dividend payouts.

Get this: the banks who scream that capital is idle credit and thus harmful to the recovery are simultaneously arguing that they should be allowed to pay out precious cash in the form of dividends. So cash paid out and thus not being lent cash is OK, but cash sitting as a buffer against losses is and thus not being lent cash harmful. Nice. It gets worse: the Bank for International Settlements, an industry group, argues that the prospect of higher capital levels was “destabilizing” because it “brought fears of a drop off in lending”. But paying out dividends and thus not deploying that cash as loans is presumably not destabilizing. No fear there. Just the cash register ringing.

This is just silly.

Cash paid out as dividends depletes capital. It reduces the buffer against losses. It also signals that the bank in question cannot find a better or more profitable investment opportunity. A bank paying out cash to its shareholders is tacitly admitting that it cannot invest the cash at a higher rate than its shareholders can. Let’s follow that logic through more thoroughly: does this not suggest that the bank is too large? Is the bank not saying, in a very public way, that it has overgrown its natural business and can no longer use the cash it is generating from its profits? I read that banks are now expected to pay out almost 50% of their profits as dividends. If this is true we are looking at a defeated business. Those massively rewarded executives are admitting their inability to absorb the cash profitably on behalf of their shareholders.

Were I a shareholder of one of these banks I would begin to question the skill of the bankers who I employ to manage my investment. If they are returning my cash, why do I need them? I gave them my money so that they could make a profit for me that I cannot make for myself. If they give it back, presumably they have failed.

Time to fire them?

Time to shrink the bank back to a profitable size?

Time to re-think the banking industry?

Naked emperors surround us. We need to laugh and scorn them. They have not reformed. They continue to threaten the economy with their blundering ineptitude. They remain dangerous.

Oh. And one more thing: I see that a couple of banks in the UK have raised mortgage lending rates due to “the increase in funding costs”. I also see that those self-same banks borrowed heavily from the European Central Bank’s long term facility at the heady rate of 1%. Double talk? Disingenuous nonsense?

No. Surely not. Not from a bank. Banks are the hallmark of probity and fiduciary responsibility. They don’t gamble or fib. Do they?

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