Commentary

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Controversial Economics

A number of us have grown tired of shouting – in my case endlessly repeating myself – about current economic policy. I am sure we have worn out our welcome. We sound shrill. We sound partisan. We risk making ourselves irrelevant because our repetition doesn’t seem to add to the debate. Indeed we appear to be destructive and not constructive critics as our elite and leadership struggle to steady the leaking boat that is our economy.

I do not apologize.

Not one bit.

I do not apologize because this is not some arcane bureaucratic squabble being played out in board rooms or the conference rooms of big businesses. Nor is it the polite, but nonetheless cutting, discourse within academia. It is the denouement of a movement. It is the end game of a clash begun in the height of the Great Depression, which like a dormant virus, has sprung back in a more virulent and potentially dangerous form.

Back during that time, in the 1930’s, the intellectual world was heavily engaged in practical politics. It was a time of momentous change, and depending on your point of view, either danger or opportunity. The collapse of western economics was a threat, not just to political stability, but to the theoretical framework that lent credence to the governing principles that fed into policy. Theory and practice were being tested. And when policy failed the need to articulate new theory became not just evident, but urgent.

It was within this heated forum that modern economics was formed. It may have taken a while for the various alternatives then developed to to be formally worked out – to reach their final specification – but the seeds were all sown. Everything that came later was an effort to clarify or to synthesize the ideas presented during those years.

Thus we recall the great arguments over the feasibility of central planning. We see for the first time the argument that economics is strictly interested in allocation. We see the Keynesian revolution and the emergence of uncertainty as crucial, and his use of aggregation in methodology. We see the beginnings of the modern Austrian school and its emphasis on entrepreneurialism. The list goes on. This was a high point for economic theorizing. The arguments were both public and severe. Great divides opened up that have never been bridged adequately despite the efforts in the post war era to accommodate pieces of Keynes within the classical project. The divisions were so deep that the landscape of the social sciences generally was re-written: sociology peeled away and reserved certain aspects of behavior, very often economic behavior, for itself.

This huge rewriting of what economics was and what its focus should be was the second such upheaval. The first being the so-called marginal revolution of the late 1800’s.

It is my belief that each of these two sea-changes were driven by political events and pressures as much as by developments within economics alone. The great marginalist thinkers sought to begin the cleaving of economics from its political economy roots. They wanted to make economics scientific. The great revolutions in hard science of the mid and late 19th century inspired them to establish economics in that same vein. But they were also reacting to the social upheavals of Europe. The revolutions and unrest of 1848 called forth the need for an economics based on more scientific, positive, precepts so that it could claim to be untainted by attachment to a political perspective. Even though it was.

In the 1930’s the same pressure built. The Depression brought capitalism to the brink of extinction. The rise of fascism and communism as apparently successful politico-economic alternatives, and the obvious destitution that laissez faire had brought to tens of millions of people, created the context for new ideas. Capitalism needed a defense. Just as in the marginal revolution economics rose to the challenge. It doubled down on its move into scientism in an effort to present itself as apolitical. It embraced mathematics even more than before to create a greater aura of rigor. It went to extraordinary lengths to make entrepreneurial activity not just important, but essential. These efforts fractured the subject in the way I described above. Different schools of thought emerged with an emphasis on different solutions and with different degrees of willingness to delineate themselves within the capitalist camp. All of them sought to avoid too much of a political taint. Even though they were so tainted.

Thus, in each great upheaval within economics one of the forces at work was to protect and carry forward the central belief in the efficacy of capitalism and its various intellectual core components. Each strand of thought had its own emphasis on those core components. Each had an attitude towards the state. Each adopted a view of individual behavior. Each incorporated more or less mathematics. Each varied in the space it gave to institutional structures. But underneath them all was the driving force that private enterprise was the essential engine upon which we should most rely for the generation of wealth.

I, of course, have done massive injustice to the history of economics in this highly simplified narrative. The divisions that carve economics apart are extraordinarily deep. But very often they are political in their origins. They creep into economics only after having been formed in politics. Economics is hopelessly ideological.

Thus the Austrian school agrees with the neoclassical camp that government intervention in an economy is almost always a negative effect. The Keynesians adamantly disagree.

But the Austrians also embrace uncertainty. That splits them part from the neoclassicists who build their theories on presumptions of varying degrees of certainty. The Keynesians have uncertainty at the core of their ideas, so they agree on this with the Austrians.

Money disappears from neoclassicism which is, essentially, a theory of barter, while Keynes brings money into the center. But he, rather curiously, ignores banks.

The Austrians, via Hayek, have a great deal to say about the centrality of knowledge and its evolution which makes them close to evolutionary economics and more comfortable with behavioral economics, yet they have a naive view of production and entrepreneurial activity which means they fall short of embracing complexity and thus have nothing much to say about the modern firm.

Which is odd, since institutions play a greater role in Austrian theory than in either Keynes or neoclassicism. This leaves new institutional economics straddling the gap between neoclassicism and the Austrian school.

Confused?

Of course you are.

Within this enormous range of thought are the seeds of a more comprehensive synthesis, but none has emerged.

The really strange aspect to these controversies is that it was the school with the least relationship to actual economic activity – the neoclassical school – that dominated recent history. Perhaps this was inevitable. Perhaps it was precisely because the neoclassicists ignored vast swathes of reality and adopted an extraordinarily narrow view of human behavior that they were able to keep up some momentum and rise to the top. Everyone else was bogged down in the complexity of actual economies. The neoclassicists carried on in a series of ever decreasing circles, narrowing down their borders rather than tackling the tough issues. Eventually they could claim to have resolved everything. Of course they had, their goals were so limited, and their assumptions so ascetic and restrictive, they had assured themselves of success. They created a great big tautology. If you make a series of pro-market asumptions, sooner or later your theory will claim markets are magical. The simple world described by neoclassical economics bears no relation to the world you and I inhabit. Yet they presume to transfer what they glean from their models and provide advice to policy makers everywhere.

Their work has a strangely supernatural air to it. It vaults over problems and establishes itself midair. Where it cannot explain, it assumes. Where it meets complexity, it simplifies. It makes the uncertain certain and the irrational rational. It eliminates time. It ignores space. It floats free of geography and is utterly bereft of cultural and institutional differences. It tolerates no power structures, and eliminates social constructs. It is neutral. It is positive. It is free.

And by so being it is inevitably ideological.

Which brings me back to the beginning.

This orthodox economics set out to be the most apolitical ever devised. It was simply the study of how a certain kind of system allocates resources efficiently. To an Austrian, Keynesian, or any other kind of economist, practically every word in that sentence: “system”, “allocates”, “resources”, “efficiently” are contentious. They are laden with preconceptions of the world and values that cannot be left aside. To pretend that these words are value free, and that economics has this arrived at an apolitical nirvana, that its theorizing can be teased apart totally from politics, is just nonsense. It denies reality. It denies humanity. Worse: to define them antiseptically as if they can be cleansed of ideology is to treat reality with contempt.

An economic system is not just a piece of machinery humming away. It is seething mass of humanity. It is a collective enterprise. It is the outcome of millions, billions, of individual actions every moment of every day. It is in ceaseless motion. It is intractable and opaque. That it may or may not allocate efficiently is happenstance. That it effects every one of us is undeniable. That it consists of us, variously competing and cooperating, as we try to match our ever changing means against equally volatile ends, implies that it is irrevocably political. Choice can never be perfectly value free.

So here we are in the midst of our crisis once again confronted by the question: if all economics is inherently political, whose interest does orthodoxy serve? After all it provided the core of thought behind the shareholder value based method as taught at our business schools; it informs the models used by the banks to manage risk; it is the essence of the argument presented by some to dismantle the New Deal; it is the basis upon which profits are protected over to wages; it is the underpinning for deregulation and the shrinkage of government; it is used to justify austerity to protect creditors; it also justifies the reduction of wages as the palliative for recession; it advocates that all unemployment is voluntary; and it calls for tight money in the face of incipient inflation even during a period of high unemployment.

And this is apolitical? It is scientific? It is positive, not normative?

And when I argue against this I am introducing politics? I am biased in some way and they are not?

The last two great convulsions in economics sought to eliminate politics in order to create a theory that was immune to the charge of ideological bias. That effort failed. It failed totally. It failed predictably.

Perhaps this third convulsion will set us on a different course: the reversion back to a more comprehensive social science that accounts for all the features of the social activity that is economic transacting within a cultural, geographical, institutional, epistemological, technological, and, yes, political context.

Pure economics is a failure. Long live political/social/cultural/economics.

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Are Utopian Dreams Going Pop?

That sound you hear is my muffled shout of exasperation. There are signs, few but significant, that the penny is slowly dropping. Our economy has been driven onto the rocks, where it remains firmly stuck. Some of us have been talking ourselves hoarse about this for what feels like a lifetime. Others have blithely gone about their business as if the crisis was a million years ago and was not that significant either. They believe that with one more deregulatory heave we will all be on our way.

I have, for some time, been trying to understand why it is that many of my friends and practically everyone in our leadership – in both the public and private sectors – seem bemused by our economic blues. To me the reason surely screams: after thirty years of relentless deregulation and denigration of government, and after serial attacks on our fiscal security by right wing zealots, we have exhausted the utopian dream. All that remains is the debris the social re-engineering unleashed by Reagan and his followers created, and the shell of a middle class that the zealots have now denuded of wealth and income to the extent that is a lifeless anchor rather than an energetic driver of growth.

You see, when you set out to unfetter free markets it is almost inevitable, in this harsh and uneven world, that some will win and some will lose. It is even more likely that the winners will steadily acquire the power to accumulate ever more power and hence ever more wealth. The end result of this process of accumulation is that a few will own most of the assets, and the many will be left to share a much diminished portion. Right wingers applaud this. They see it as unleashing the individual to rise to whatever level their abilities allow them too. The more extreme libertarians amongst us focus only on what they call liberty. By which they really mean the ability of the powerful to do as they please. The gathering of wealth by the few is simply a demonstration of the superior effort and ability. The rest should try harder. The poor are poor only because they are lazy. The weak are weak and should heal themselves. The appropriation of taxes to alleviate poverty is an attack on liberty. This is the kernel of the right wing worldview we have acted upon since Reagan poured scorn on government intervention in the economy.

In this view, the last redoubt of the left wing citadel to be smashed consists of the New Deal and Great Society entitlement programs. Libertarians despise them as the most evil of all intrusions into their liberty. Let the sick be sick. Let the poor be poor. They have an opportunity to be otherwise. If they choose not to act on that opportunity, so be it. Others, the libertarians argue, should not pay for the errors and laziness of the indigent.

It may be that I paint the libertarians with a more vivid brush than they would like. But they must take responsibility for their position. They despise society. They call for a small scale, local, messy democracy by way of hiding their innate hatred of collective, cooperative, or community action. In their world there can be no entitlements because there would never be a state large enough to support them. Their message reached the absurd in yesterday’s effort to undo the Federal law banning those old lightbulbs we all grew up with. Apparently the libertarians want us to continue to waste energy. Better to be free than have energy or save money. The wild eyed pursuit of liberty trumps sanity at every turn. So an attempt to nudge society towards a sensible use of small things like energy efficient light bulbs becomes translated as a massive example of authoritarian state intrusion into private life. Reach for the guns everyone! Big brother is coming for our light bulbs.

This is nuts.

Tea Party nuts. Libertarian nuts. But as their hero Hayek always preached: the slope down towards tyranny begins with little things like state control of our light bulbs. His basic idea was that there is no society, just a bunch of individuals. To think otherwise was to commit what Whitehead called a fallacy of misplaced concreteness: to treat an abstraction as a reality. So society is abstract and only the individual is real. We delude ourselves when we speak of society acting as if it were real. And any attempt to act collectively is therefore, necessarily, to do harm to the only true reality: the individual.

So we have lived. For three or more decades. Policy has been deployed to free up business and individuals from the evil that is state intrusion into our lives. We have stripped the government of operational efficiency, of revenue, and of respect. The defunding by Bush was just one more wave in the relentless war on the state. But something odd happened along the way. The consequences of all this unleashing of private liberty have accumulated and produced the economy we now live with.

As Martin Wolf argued in this morning’s Financial Times the utopian dreamscapes of the right wing social engineers have clattered unceremoniously into reality. The libertarian utopian zealots want to double down. They want to eradicate the last vestiges of authoritarianism: Medicare and Social Security. They want to complete the Reagan revolution. If they have to tear down the United States itself do accomplish their dreams, that is just too bad. Zealotry is always blinded by its own affirmation of its undoubted righteousness. Just one more attack and they are sure they can complete the destruction of the evil that infests Washington. Burn the village, we can always rebuild it after the cleansing is complete.

Why has all this been triggered in my mind? Why am I so exasperated?

The hints are emerging that within the utopian bubble, where the Republican social engineers worry over which programs to cut next, reality is biting. Badly biting.

The economy is not acting liker a great big pile of happily liberated individuals just raring to go once the government is finally destroyed. On the contrary it is acting exactly in the way that that ultimate evil doer – Keynes – said it would. It is stuck. Royally and totally stuck. Worse it is stuck in a special way: it is mired in an enormous debt de-leveraging. We are suffering a classic balance sheet recession. Households are still in shell shock from the collapse of their asset base. Their liabilities are out of balance with that diminished asset base. So, naturally, they are trying to get back into balance. That means savings. It means not spending. It means taking all those tax cuts and saving them. This is why I argued against using tax cuts as part of any stimulus. People would act rationally: they would not spend.

Worse: the pursuit of the utopian dream had the direct consequence of undoing the post war contract. Productivity gains went to profit instead of wages. I have said all this before, but apparently the Republicans are just now discovering what they have wrought: when you asymmetrically distribute wealth to just a very few, as their policies have deliberately done through their emphasis on free markets, you leave the mass, what we used to call the middle class, incapable of providing the impetus behind growth. Remember: it was the middle class that led the surge in growth during the 1950’s and 1960’s. Their rising spending power allowed them to set in motion the virtuous cycle of spending through profit, to rising wages, to more spending, that drove America forward. That drive was underpinned by the New Deal programs that allowed the mass of households to spend nearer to the peak of their incomes safe that a retirement awaited them. Their lifetime financial risk was reduced by the safety net. They could thus afford to be more aggressive in their spending. They reacted accordingly. As soon as corporations started to act out according to the utopia driven financial and management theories that have dominated since the late 1970’s that risk protection was eroded. Wages were sacrificed to build shareholder value. Pensions were switched from defined benefits to defined contributions. The middle class found itself shouldering more of their lifetime financial risk, but were never rewarded for accepting that risk. The rising wages that would have been the textbook offset never materialized. That wealth went to shareholders as short term profit. And shares are disproportionately owned by the few. A historic and deliberate shift in wealth was underway. The only way our middle class could pay for a rising standard of living was to borrow. We now know how that turned out.

None of this should be a surprise.

But the Republicans and their right wing media supporters are only now waking up to it. All of a sudden people like Orrin Hatch are noticing that a majority of citizens are too poor to pay income tax. How, he asks, did that happen? It means we have to tax the upper class a great deal. That, he argues, is unfair. Which is why he opposes the elimination of the Bush tax cuts for the upper earners: they already shoulder the burden, they should not be asked to pay more. After all, he even said, $200,000 a year is not that much any more.

Only to someone in a utopian bubble. Libertarian and neoclassical dreamers are befuddled: it doesn’t happen this way in their dream worlds. It cannot be that their dreams are wrong. It must be something else. No it isn’t.Only someone totally unaware, or indifferent, to the consequences of unfettered free markets in an inherently unfair, uncertain, and uneven world could talk that way. When their are no institutions to protect the weak from the predation of the powerful, or to ensure a more balanced distribution of wealth, or to mitigate the wrong footing caused by uncertainty, it is inevitable – inevitable – that society edges towards where ours is today. It will always end up with a bifurcated distribution of wealth. What was the middle class will always melt away.

Our economy’s engine will be diminished. Hence our inability to crank that engine and power our way out of the mess we are in.

They did this to us. On purpose. In pursuit of their dreams.

This is all a direct consequence, and a predictable one, of decision making – both public and private – over last thirty years.

The whole social re-enginering enterprise was underpinned by a combination of two utopian visions. Those of the libertarians and their economic fellow travelers. They designed this society. They designed the decline of middle America. This is what they wanted. They built their theories in mid air. When they fall to ground they should be blamed. Perhaps ridiculed. Their economics is built mid air because it relies at its heart on presumptions that have no contact with solid ground.It is are supported by absurd and naive ideas of how people act. It is based on ideas appropriate in pre-industrial villages. It includes the world views of men who grew up in Central European imperial monarchies in terminal decline and threatened on all sides by totalitarian dictatorships. Nowhere in it is there space for the modern corporation, for the complexities of modern production, for the effects of elective democracy, or for the limitations of the human capacity to make rational decisions. It is a set of ideas based on late 1800 sensibilities and experiences. It is as if the entire twentieth century never happened.

This out-datedness gives it a simplistic sepia tinted appeal. It gives off an aura of a lost golden era, an innocence based on the days before the rise of the big governments around us today. It attracts support from those who want to cut through the complexity and restore a simpler, smaller, more romanticized way of life. My libertarian and neoclassical friends are stuck with this inheritance. They live in the utopian bubble too.

But you can ignore reality only just so long. And we have reached the end of the dream. The right wingers and their social theories have come face to face with the end point of their constructs. This is their economy. They built it. It was their experiment. And they seem bemused that the reality out there in middle America doesn’t match their dreamscape designs.

Yes, Orrin, there are poor people who don’t pay tax. That shouldn’t shock you. You and your theorist buddies made it that way. They are enfeebled by design. Your design.

If you want your richer friends not to shoulder so much of the burden, perhaps you should add to their ranks. Spread the wealth a bit. Re-build the middle class. Or does that offend your libertarian feelings too much? After all, it smacks of big government safety nets.

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Republican Collapse?

Never say never.

But I have never seen anything quite like this. The Republican leadership is in disarray over the debt ceiling limit issue and the related deficit cutting exercise. Today’s events have been extraordinary. They reveal the GOP not only to be deeply divided – to the extent that they cannot hold together on any policy of consequence – but they they are on the verge of an epic policy defeat.

Go back three days.

At that point Obama had put a plan on the table that included deep cuts to entitlement programs, but which also included some tax increases, mostly via the back door of eliminating tax loopholes. The total reduction was $4 trillion. He had, in the process, caused an open revolt in left of center ranks, and received quite a bit of stick – not least from me.

Up until that point the main GOP plan was to tie any increase in the debt ceiling to an equivalent cut in spending. Since the general agreement was to allow a debt increase sufficient to cover the next two years, and thus to punt the next debate on debt into the next presidency in 2013, the amount needed was about $2 trillion. Smaller than the Obama proposal, and therefore less appetizing for the extreme right wing of the Republican party, who began to grumble out loud that maybe default was better anyway.

There was a major flaw in this GOP position, even at this stage. Eric Cantor, who was leading this particular charge, could never get agreement from within his own ranks on what that $2 trillion in cuts should consist of. So the Republicans themselves couldn’t find enough cuts for their own lesser proposal. Yet they kept up the anti-anything Obama says rhetoric as if they were united.

Next, yesterday, Boehner recognized how hopeless it was to unite the GOP. So he folded his hand and declared that the debt ceiling problem was Obama’s alone, and if the President wanted Republican help he should lay his cards on the table. Boehner was thus showboating knowing full well that the President had done exactly that, and it was a Republican split preventing progress, not Democratic obduracy.

As that split became more obvious it was Mitch McConnell’s turn to throw in the towel, which he duly did today. His suggestion was that the Republicans should simply step back and allow Obama to raise the debt ceiling unopposed, in the hope, presumably, that the voters would be so incensed that the President could be tarred as a typical “tax and spend” Democrat in next year’s election. The only problem with this is that it completely upends any chance the Republicans have of using the crisis as cover for their small government crusade. Next year the Democrats will be able to go to voters having defended Medicare and Social Security – the two most popular programs in America – and will be free of having to be concerned about the debt ceiling. In other words McConnell is proposing to surrender his biggest and perhaps only bargaining chip in his war on the New Deal.

The backlash from the extreme right wingers and libertarians has been astonishing.

McConnell is being called a traitor to the cause – and worse. More astonishing still, and under-reported so far, is the news that Grover Norquist is backing McConnell. This is a major coup for Obama. Remember that it was Norquist who orchestrated the origin of the “starve the beast” theory of governance. It was his notion to focus on tax cutting as the only economic policy worth pursuing by the right. He was the cheerleader for the Bush tax cuts and the devastating loss of revenue they implied. His was the vision that the extremists now want acted out. And here he is abandoning it during the end game of discussions. He caved in to reality at the very moment he needed to face the true consequences of his long advocated plan. Perhaps I misunderstand what he said. But if he did, indeed, back down, that is an epic defeat for the cause of extremist right wingers. No wonder the right wing blogosphere has exploded in an outrageous fit. The expletives are flying and the divisions within the Republicans are totally exposed.

As of this evening the Republicans are in full retreat. They are in open civil war. They are contradicting each other. They are leaderless. As a fighting force they are finished.

Let me recap:

Boehner quit the argument because he, above everyone else, realizes he cannot get his caucus to hold together on any sensible response to the Obama plan. So he claims that Obama doesn’t have a plan despite having been discussing it not twenty four hours earlier. That’s embarrassing.

Next McConnell backs away and leaves the field. His attempt to cover his retreat by casting Obama as solely responsible for upcoming higher debt is sneaky but throws away what many of his extreme followers see as a once in a lifetime opportunity to get rid of the New Deal. The opprobrium being heaped on him is not from Democrats, it is from his furious and betrayed caucus. That’s even more embarrassing.

Lastly there is Cantor. He has tried vainly to set himself up as the hardliner most likely to make Obama blink. It is his idea to tie the debt ceiling increase to a similar amount of spending cuts. But he cannot get agreement on sufficient cuts to follow through on his own plan. He is stuck without anything of consequence to say. That caps it all.

When we pull the curtain back on Republican policy we find only confusion, bluster, and division. There isn’t a policy at all. At least nothing resembling coherence. Other, of course, than the pro-dafault apocalypse being advocated by the libertarians and Tea Party.

Never say never.

In the whacky and bankrupt world of American politics this could all change tomorrow. At the moment there is no effective opposition to Obama. He could muck it up. His record isn’t very good, and he has a disappointing ability to negotiate with himself and thus compromise when he doesn’t need to. He is probably stunned by the way in which the Republicans have collapsed under the duress of actually having to legislate rather than simply saying no.

But collapse they have.

I am not sure I have ever seen such a turn of events

The next step is surely a cloud of dust and a great deal of noise to avert our eyes. Beyond that: do the Republicans have a policy? Or are they all vapor? Has their moment gone?

And does Obama have the backbone to complete the victory?

Stay tuned. We are just getting started.

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Bankruptcy At The Top

One of the more difficult aspects of our crisis to digest is the manifest bankruptcy displayed by our various elites. Intellectual and moral bankruptcy that is, since as far as I can tell they have all done rather well financially.

Exhibit 1: The politicians who are now ranting and raving about what they call the unsustainable and dangerous trajectory of the US budget and debt. Sprinkled liberally within those ranks are many who supported the Bush tax cuts and the various Bush wars that, in larger measure, contribute to that trajectory. I give credit to James Kwak for digging this up this morning. He surfaced a Congressional Budget report from 2000 the main subject matter of which was the huge financial problem facing the US. Was it debt? No. It was the surpluses being generated. The US was paying down its debt at a decent rate, which was giving it ever increasing flexibility were there a crisis to occur that needed short term financing. Those surpluses eventually would disappear according to the CBO because of the well known and thoroughly analyzed demographic shifts taking place in the later years of its forecast. In particular was the very clear problem presented by increasing health care spending as the population aged.

In response to this vista of surpluses, fiscal conservatism, and long term demographic shift, the CBO urged that Congress engage in a debate about how to use those surpluses so as to ensure a safe, secure, and stress free transition, whilst safeguarding the nation’s need to preserve fiscal flexibility in case of crisis.

As we know Congress tossed this all aside.

Instead it engaged in reckless tax cuts that blew a vast hole in the budget, reduced to zero our flexibility, and failed totally to address the long term issues. It also voted to increase health care spending without raising any revenue to cover that spending – spending which, by the way, benefitted the pharmaceutical industry more than the patients. Oh, and as I have mentioned, it also voted to start or support a series of wars funded entirely by debt.

So the fiscal probity of Congress is written into the recent history books. It is an ugly picture full of hypocrisy, greed, and short term thinking. As an exercise in budget destruction it would be hard to top.

Yet many of those who voted to go down this radical and reckless path are now lecturing all about how that path is unsustainable, and how we must all sacrifice in order to undo the very errors they committed.

Are they being held accountable? No.

Are they culpable? Yes.

The dishonesty, deceit, and downright venality of these people defies description.

They are assuredly bankrupt.

Exhibit 2: The banks. Specifically Citibank. Poor Phil Angelides worked himself up into a righteous lather in this morning’s Financial Times over the absurdity of the pay package Citibank has awarded its CEO, Vikram Pandit. Nowhere is there any sign of contrition about, or learning from, the crisis. Pandit was at the helm when Citibank’s yahoo traders rendered the bank a ward of the state. Taxpayers had to prop up the bank whilst those who ruined it were left with the various fortunes they had made along the way to that ruin. That story is well known. So well known that I would have thought the bank’s Board of Directors would have heard it. Apparently they haven’t. Nowhere in Pandit’s pay package is there a sign of such sentiment. He stands to reap massive reward for extremely modest success. In other words he scarcely has to break a sweat in order to earn pay that, more correctly, ought to reflect some hard work. Worse: were things to go belly up as a result of his decision making he gets to keep all this softly earned money. There is no clawback of past bonus pay out. So if his short term policy turns out to be a longer term error the shareholders don’t get their money back. Given Citi’s history of failure – it is a perennial loss maker deserving of being broken apart so it cannot hurt itself, or the taxpayers, any longer – this is an astonishing oversight.

This is, of course, not an isolated problem. As far as the eye can see banking has returned to the path it was on before it blew us all up back in 2007/2008. I fear that poor Hyman Minsky must be turning in his grave. Or possibly he is simply chuckling at the perpetual inanity of our financial elite, obsessed as it is with its own importance, skill, and ability to allocate capital efficiently.

Why the regulators allow these thing to occur befuddles me. They must be complicit.

Exhibit 3: Which brings me to the rating agencies. Why do we listen to these clowns? I am sick of their repeated warnings about debt ratings for places like Greece or Portugal. These are the fools who raked in fortunes during the real estate bubble by turning a blind eye to the scams being run by the big banks. They used market magic based excuses to create illusions so that they could profit from the deal flow that would not have flourished without their abetting it. They were never innocent or dispassionate bystanders. They were knee deep in the same mire as the traders who gambled us towards oblivion. And yet here they are, a few years later, acting as if they were pristine, independent, and knowledgeable. Were this a joke is would be considered sick. That it is not, is even sicker.

So there we have three examples of how our elite leadership: political, financial, and regulatory, are bankrupt.

Moreover their bankruptcy is far more dangerous to our long term safety and prosperity than that of the countless homeowners being hounded out of their homes; or the vast number of people who lose everything because they cannot afford health care expenses; or the teachers being asked to give back pensions contractually owed them; or any number of other ordinary citizens whose hands were not in the till during the years of the great illusion, but who are being asked to pay for the errors committed by others.

Those others being our bankrupt leadership.

We have a problem at the top.

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Battleground Economy

There is no surprise. None. Today’s news that a majority of Americans say they are worse off now than under the younger Bush sets the battleground for the next election. Obama had better hope he is running against one of the more extreme Republicans – that’s a relative term since most of them are very extreme nowadays – because his record on the economy won’t help much. In fact it will hurt him.

I have bashed away at him enough since 2009 not to have to repeat myself. His failure has been, and appears to continue to be, one of ordinariness, timidity, and half measures.

The crisis was epic. His response was small scale.

He thought himself hemmed in by politics. But leaders re-define politics.

His reform of banks and health care were laden with bureaucracy and impenetrable red tape. We needed clarity and action. We got committees and reports.

So here we are two long years later and the voters are annoyed that no one is doing much of anything. We are stuck in permanent political infighting with no imminent break out expected.

Just today the Fed released its updated forecast which is for moderate growth and no sign of real improvement in unemployment. And yet they also gave no indication of more policy support for the economy. This is despite the fact that Congress is hell bent on austerity and thus shrinkage. The Fed has given up. Congress adds fuel to the fire.

This is a mess folks. A real mess.

Our elite has taken leave of its senses. Or it has just taken leave. It has certainly abandoned the economy to its own fate. The impression emerging from Washington is that we have done all we could to heal the economy. Sticker shock has set in. Apparently no one realized how expensive fixing three decades of accumulated error would be. No one, that is, on the inside. Plenty out here did.

It has taken a very long time for our media, raised and fed as it is on free market dogma, to understand that this recovery was always going to be long, slow, and very difficult. It required strength, vision, and hard nosed policies to break out. Instead we slipped into a political quagmire.

How astonishing is it that the Republicans are now bashing Obama for running expensive wars? These are their wars. How odd is it that we are being spoon fed stories about the failure of the stimulus? Or that it was simply a “sugar rush” that produced no long term effects? This is from the party that created the largest ever peacetime deficits. This is from the party that gave us the worst ever decade for employment, wages, and economic activity.

How odd is it that the Republicans blame the Fed for printing excessive amounts of money and creating the recent rise in commodity prices – as if China and its rapid growth in demand didn’t exist – but ignore the real estate bubble that blew up on their watch and which continues to devastate the economy?

How odd indeed.

The world is upside down.

But voters are correct to assign blame to Obama. He is a failure.

His lack of direction and tenacity is astonishing. His willingness to accept half measures has come home to roost – as many of said it would.

He fought the great fire with a garden hose and then wonders why the flames still roar.

He didn’t fix the banks. He didn’t pump up demand. He allowed the Republicans to frame each and every debate.

So here we are talking about slashing all the most important middle class programs and yet we cannot get any sensible discussion about why that may be necessary. We are talking about a radical restructuring of American society, and yet Obama voice is drowned by the incessant chatter of his opponents. Does he have a view on what we should do? Who knows?

It appears that the extreme nihilism of the Republicans is working. They simply stall. They have learned how to fight Obama: just start off with a position way out on a limb, and he will climb out to meet you instead of cutting it off. His obsession with compromise and discussion has undermined his ability to fight back. For some reason he sees himself above the political fray. So the progressive cause is left leaderless.

There is, of course, a long way to go. He might yet pull it off. But it seems odd to rely on a stagnant economy as your primary weapon in an election.

The battleground is set. They have tanks. We have horses. This does not bode well.

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