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It’s the end of a long and busy week. I have been less involved in the latest economic news largely because of other commitments. Plus everything seems to have reached an impasse.

For instance, our banks have managed to escape serious punishment for the disaster they foisted on us. Some of you are skeptics and wonder how they got away with it. My response is simple: they didn’t actually break that law. They were simply grossly – monstrously – unethical. That’s the way it is in a deregulated society. It’s what the voters kept asking for. No one seriously described the potential outcome. Had they done so, I doubt the voters would have changed their minds. After all, we are living through a period of intense political divide within which sensible voices are easily crowded out by hysteria and outright lying.

So as deregulation took hold the banks found they had more and more latitude to gamble. The conditions favored them. They went for broke. And went broke.

Unfortunately those who pressed for deregulation gave no coherent thought to the possibility of an unpleasant aftermath. So convinced were they by the market magic mythology that they felt no need to plan for any nastiness. The market could, and would, deal with it all. Policy making became faith based. It was an act of faith, rather than a reasoned approach, that markets would deal with all our problems.

Poppycock some of us said at the time. Neanderthal we were called. Markets fail with such monotonous regularity I wonder how the myth survives. But it does. Worse: it still infest out textbooks on economics. While this lamentable gap between what is taught and what we experience exists we are simply training more generations of policy makers to inflict more pain on future workers.

I have said it so many times: banking is inherently unstable. This is not, as some of you argue, because bankers are all nuts. It is because uncertainty pervades our world. There are things no one can predict. Those things have a particularly aggravated effect on banks whose business is unusually balanced on a knife’s edge at the best of times. I am not apologizing for bankers, I no longer have any attachment to my old world, but sometimes they are simply stupid and not criminal.

A few years back they were monumentally stupid. They deserve to be laughed at. They cannot be taken seriously until they clearly demonstrate they learned. Which they haven’t.

Or, perhaps, they learned too well. They learned, for instance, that the US will not take harsh remedial actions to fix its banking system. It apparently likes being beholden to the big banks. They throw nice parties and give generously at election time. I wish I could be described as being unduly cynical, but I can’t. The fact is that the banks wield an incontestable influence. To rein them in will take time and persistence. And another crisis or two.

One area where such a crisis could erupt is in sovereign debt.

Banks are large holders of sovereign debt, so they are naturally big advocates of austerity programs designed to prop up the value of the bonds they own. It is the potential damage that a default could do to its banks that has impelled Germany to tolerate Greek inaction. I have to say that Greece is the only true basket case of the often mentioned bad economies in Europe. It clearly has a credibility problem. It clearly should not be part of the Euro zone until it has learned to manage its affairs in a modern way. From a distance the Greek population seem to look at their government as a source of favors and side deals. It is analogous to 1600’s France where acquiring rent seeking opportunities were the great attraction of power. In contemporary Greece, cheating the government is applauded and so embedded in the national psyche, that any accounts the government publishes have to be treated with the utmost suspicion.

Why do I mention this? Because the interest rate on Greek debt is rising rapidly. The bluff is being called. Sooner or later the Greeks will default. They might be forced out of the Euro zone. The alternative is unpalatable to German voters: the dreaded fiscal union within the Euro zone and thus constant transfers of capital from Germany to Greece. That would save the German banks who own a lot of Greek debt, but would annoy German voters. Once again voters would be asked to remunerate banks for the risks they took. Only this time the connection is rather vague and German politicians have been relatively quiet about why they persist in bailing out Europe’s periphery.

Perhaps Spain is a better example. Prior to the collapse, Spain ran an exemplary budget. Its crisis was not the result of bad government, it was the result of the inflow of tons of German cash driving up Spanish wages and eroding competitiveness. Had Spain its own currency this would be no problem: it could simply allow its currency to devalue to offset the wage inflation. But it is tethered to the Euro. Which, in turn, reflects German activity. So in order to get back into a competitive position Spain has only one route, vicious deflation and high unemployment. The German voters look at this as Spanish failure. They do not see the complicity of their own banks.

What about our debt crisis? There isn’t one. US bond rates are low and staying there. This is odd given the heated rhetoric spilling about in Washington. It looks very much as if we will not get a sensible budget plan without a crisis simply because the ideological divide is too wide to establish any bridges. The Republicans have it their heads to get rid of our safety net programs. They are driven by an extraordinary combination of libertarian fervor and a near religious faith in market magic. This is despite the recent evidence that markets fail. Complicating this is the clear division within their ranks. Once the Ryan plan was exposed as deeply flawed and nothing but a front for an attack on those safety net programs, some GOP hopefuls started to walk away from it. Were they to be explicit during an election they would surely lose, given the voters love affair with Medicare in particular. So their only way forward is to precipitate a crisis within which they can argue we can no longer afford the price of these things.

The Democrats would like a crisis too. Within the storm they can point out the real Republican purpose and attempt to use to for political advantage. Besides Democrats must surely relish the confusion the Ryan plan has created in GOP ranks.

All of this, of course, presumes that the debt is really an issue. As you know I don’t think it is. Bond markets serve a useful purpose in allowing us to mange our national cash flow. They also serve as a source of safe investments for our retirees. Amidst all the huffing and puffing we should not forget that the majority of US debt is held by US citizens. And most of that is in retirement accounts where it provides a safe source of income. Basically we owe ourselves a lot of money. We could get around this all by simply printing enough money so we don’t nee to borrow anything at all. But that would force all those retirees into riskier investments. So I think the jury is out on that more extreme approach. Meanwhile the notion that there is an imminent bond market revolt is simply not supported by any fact that I know of. The entire debt crisis is a charade created to mask the ideological intent of the right wingers. Let’s call them on it and flush them out so they can be honest about their goal. At least that would be an honest debate.

Lastly.

All this market magic stuff annoys me. There is a whole group of economists who think in terms of equilibrium. They take it seriously. I am not sure they mean it literally, but they appear to believe that there is a tendency in a market towards equilibrium. That is if it is left alone. So the magic is not just the mechanism, but the result: a nirvana where we all glory in the best possible allocation of our resources. Frankly we have never arrived at such a place. So this tendency is either very tenuous, slow moving, or non-existent. To me an economy is a rambunctious, tumultuous, and uncertain place. It is never still. Every single moment is different. With each such moment being a new configuration, or outcome, of ongoing processes and relationships. It will never arrive anywhere let alone at an equilibrium. As David Bohm explained we are in a constant state of becoming, not being.

So why do these economists persist in such silliness?

Because it allows them to examine the properties of nirvana and compare them to where we actually are. Those differences then become the basis for their policy advice. Their argument is simply that if we get rid of the impediments to nirvana we will all be better off.

Rubbish.

We could just as easily, and possibly ought to, reverse the comparison.

We ought to assume that economies tend towards utter chaos and failure. Once we comprehend that awful outcome, and the harm it would do to us all, we can then study what institutions, laws, ethics, norms, restraints and regulations are necessary to prevent mayhem. I think that, since the world is awash with such devices, the evidence supports my alternative view. For exhibit A look no further than the recent banking crisis.

So. If you are empirically driven and seek to understand the world around you, the goal should be to examine the ways that markets can be boxed in so they don’t fail. If you are ideologically driven and seek to understand how to establish your preferred vision of economic nirvana here on earth, you assume markets are perfect, and that any interference is an impediment to your vision.

One is fact based. The other faith based.

How odd that the faith based version dominates the textbooks.

Not so odd if you are a banker who wants to profit from gambling.

But that’s where I started …

I’m bored with debt defaults. No one seems to worry about them, so I won’t.

How about insider trading? That sounds like fun.

The much heralded Galleon case and the guilty finding against a well respected money manger has confused Wall Street. The boys and girls down there are throwing a hissy fit. How can someone with a little bit of information not be expected to try to make a buck? After all the whole point of getting those special hints, clues, and facts is to end run the market, make a fortune, preen in fancy restaurants, and retire early in order to serve the public as an official in the Treasury Department. Well, maybe not that last bit.

The point is information is the grist that makes the market work. So he, or she, who has information, has a nugget worth a great deal. Since sharing is not a gene found in these folk’s DNA, they naturally like to hoard and then deploy these nuggets to their own advantage.

This game is time honored. It’s the way the world works.

Enter the heavy hand of government and its apparent infinite desire to screw up the happy lives of these hard working people. Some bureaucrat somewhere decided that the boys and girls should share. This is being seen as both ridiculous and an invasion of civil liberties.

The reason I am thinking about this is that today’s FT has a letter from two professors: Robert McGee, a professor of accounting, and Yeomin Yoon, a professor of finance and international business. The letter gives a very spirited defense of insider trading. It is, the professors say, beneficial for markets.

There are four lines of defense for insider trading given in the letter:

1. Insider trading can be beneficial to markets
2. Not all insider trading cases are fraudulent
3. Insider trading can sometimes be seen as a “victimless” crime
4. If it is a crime at all, an argument can be made that the resources deployed to litigate it could be better deployed elsewhere

That’s it.

There is no evidence submitted to bolster these four points, so for our purposes we will call them assertions, not arguments.

Let’s start with assertion number 4.

One obvious so-called better deployment of resources would be in the addition of ethics classes to be taught alongside the good professors own classes in accounting and finance. Evidently the professors don’t see a public need to trust the markets. Or that excessive insider trading and the lack of transparency it implies undermines the workings of a market via the loss of trust between traders. I am not sure how the knowledge that someone could be trading with another on the basis of hidden knowledge helps a market become more efficient, or how it helps the allocation of resources. The notion that a market has an public or social element slips by the professors. They see a market as a sandbox for the boys and girls to play in any way they want. If some poor shareholder is ripped off in the rush for bonus money, then so be it. Tough. There is no obligation to share information that might alter the wealth of millions. Not if some smart trader can get there first. After all that’s why we call them smart. They have no qualms about cheating. Trust is so yesterday.

Take a look at assertion number 3. Insider trading is sometimes “victimless”. Really? How? So some trader makes a quick buck and buys a new Hamptons home. No one was hurt. It’s not like a robbery or anything. Right? This is absurd. Only a person so deeply mired in market ideology can overlook the small point that shareholders are a class of people. If one makes a gain disproportionately on the basis of hidden information, the others were precluded from so doing. They lost by inference. Theirs is a real loss of opportunity. Unless, of course you don’t believe in such things. Then again, if those silly fools over at the pension company weren’t smart enough to play racket ball with Joe from accounting at ABC Inc. why should they get the opportunity? They must be dumb. I love pampered prep school people making the rugged individual argument. It sounds so … well, authentic. No?

On to assertion number 2. Not all insider trading is fraudulent. No. Some is just cheating. Look: the point of getting rid of insider trading is to level the playing field, and thus to give everyone access to the best available information. This means that if a trader gets hold of relevant information that information should be shared as widely as possible. Not hoarded. And not focused exclusively on one small group of individuals for their own benefit. It is the exclusivity that makes insider trading unethical, not the potential for fraud.

And assertion number 1. This is just plainly ridiculous. Those professors should be disbarred, or drummed out of school. Here I was thinking that markets work on the basis of perfect information. All that wonderful information flying about the place, free, universal, available to all in a very 1960’s sort of way, this is the very heart and soul of free market theory. Any attempt to disrupt that freedom necessarily throws the entire market haywire. Quite how insider trading improves upon perfection I don’t know. Nor do the professors since they don’t articulate any such reason. They simply assert it as fact. I am not a huge fan of unadulterated markets. I think they fail. In fact I think all markets are destined to fail. But that’s just me. People who want to defend markets as the best places for the socially beneficial allocation of resources shouldn’t go around advocating limiting those markets, ignoring their public aspect, excusing cheating, and above all, calling the introduction of an imperfection helpful. It very odd to listen to a couple of pro-market guys argue that those wonderful markets could benefit from a little backdoor juicing now and again.

It make me want to scream.

Here we are then: two professors of finance or accounting willing to debase the very machinery they advocate in class. Either they don’t understand finance and accounting. Or they are confused. Or they are, perhaps, hypocritical. They certainly disregard the existence of a public interest in the workings of markets.

And that is the bigger message in their letter.

They encapsulate the reason we had the last financial crisis. The ethical basis of trading has collapsed. To the professors, to those they teach, and to the managers who manage the boys and girls of Wall Street, the market has become a game within which anything goes. Reputation means nothing. There is no fiduciary responsibility. Clients are fair game to be tricked out of their money. Information gained in one board room can be used to profit in another. Banks can bet against their own customers on the assumption that everyone is cheating so they should too. The entire point of deregulation appears to have been to open up the chance to cheat. Insider trading is a last vestige of the bulwark we had against massive cheating. The rest has been tossed overboard. And, if these two professors are anything to go by, we are teaching the next generation of traders that the anything goes philosophy is just fine.

How can you teach efficient market theory, and then advocate that inefficiency is sometimes a good thing?

Ugh. Now my head hurts. I think I’ll go back to pondering our debt default mess.