The Art of Bankers and Economists

The big question, and one I have been asked several times this morning already, is this: does the good jobs report last week signal a major shift in the economy?

No.

Clearly the tone of things has changed, but there are still large reservoirs of under-used resources to be brought back on line before we can talk about a healthy economy. This entire recovery has been one characterized by baby steps. Our economy seems nowadays to be akin to a supertanker, lumbering, slow, making very long turgid moves, unable to make quick transitions. The days of fast recovery are a distant memory.

This, of course, is partly due to the nature of our recent crisis. The financial sector and the run up in household debt combined to undermine everything. Digging out from the catastrophe that our banks wrought is necessarily difficult. Particularly since they remain unchastened, under-capitalized, and way too large for our own good. Beware: the banks will be the cause of our next downturn.

Which leads me to a beef of mine, something that has dogged me throughout the crisis. I wish we could stop calling the yahoos who destroyed our economy ‘bankers’. In my day we referred to them as ‘traders’. Its a better description of what they do. They sit at desks and move mountains of money about. They do not do banking. They trade. Their incentives are built around rapid movement of bulk capital and cash in order to turn wafer thin spreads into huge profits. It is a volume business. It is largely self-contained. It has very little to do with banking.

Bankers take positions. They own the assets they create when they lend. They husband those assets when necessary. They are in contact with customers. They assist when credit weakens. They build reserves to offset losses. They stay very far away from speculative capital flows. They are the epitome of dull and boring.

We need bankers. We don’t need traders.

Our problem, which was emerging during my tenure in banking, is that our major banks are all run by traders. They have extremely short term decision horizons, and they believe they can fudge risk away by offloading it on other banks or by insuring against it. Every single bank seems to think it can accomplish this risk immunization. Hedging is everywhere. Structured finance sits precariously on top of a narrow foundation of basic assets that are not at all altered by the fun and games erected up above. The risk still exists, only it is masked behind accounting conventions and tricky book entries designed to fool regulators and shareholders into believing a 30:1 leverage ratio is not just sensible but is sound to boot.

I would laugh at this were it not so damn dangerous to you and I. These indescribably ignorant fools have the ability to ruin our economy. They will do so again. Soon.

Why?

Because we didn’t punish them. Nor did we have the courage to rid our politics of their influence. Their money still flows. So their games still continue. Until JP Morgan Chase, Citicorp, Wells Fargo, Bank of America, and the others are broken into little pieces, and until we have re-established a separation between banking and trading, our economy is not safe. It is as simple as that.

And we are not there yet.

So, while the economy may be turning around in its pondering way, we cannot be assured this recovery will last.

Further: we are now being treated to an object lesson in the irrelevancy of economics.

The good jobs news has brought to the fore the great divisions within economics. Those of you who are new to the subject might be forgiven if you imagine it to be a scientific pursuit laden with sage insights and bursting with solid advice. Not at all. It is an art. It is an adjunct to politics. It is full of ideological axiomatically driven bias. Its object is to discuss its own artifacts not those of a real economy. Thus it expends derisory amounts of time on a general equilibrium that no one, not once, has actually witnessed. It stylizes consumers as being automatons with inhuman cognitive capacities. And it flattens business firms into a ludicrous other wordily construct that no business person I know would recognize, let alone dignify as a grown up interpretation of what goes on. This is all done in order to pursue the holy grail of determining, definitively, that markets are more efficient than any other form of allocating mechanism – like the government for instance. At the end of all this its more honest adherents will admit the entire enterprise is disconnected from the real economy, while its more ardent defenders will argue this paraphernalia actually helps interpret the real world.

Quite how, I am at a loss to say. But there we are.

Meanwhile the more politically connected representatives of this melange of arts get involved in the debate about the jobs news.

One side, represented by the infamous Glenn Hubbard – of ‘Inside Job’ notoriety – says that the pick up in employment is despite Obama’s policies. The other side, represented ably by Larry Summers – the leader of bank deregulation amongst other oddities – says that the gain is entirely due to those self same policies.

Nothing could articulate for you the irrelevancy of economics more clearly. Which is it? Did those policies help or hinder? A scientist could answer that question. An artist can always paint a picture or tell a tale to defend whatever side needs a good story. Some people like abstract art. Some people find orthodox economic theory appealing. Whatever pleases your eye. And whatever plays into your preconceived views. Capitalism is great. Or it is an abomination. Economists have no idea which. But they can sure as heck talk about it. As artists they are unsurpassed. The stories they tell are riveting. The pictures are full of color and texture. Our walls and libraries are copiously equipped with the product of economic artistry.

The connection between bankers and economists, beyond their artistry, is that they have the power to be really dangerous. They both believe themselves in possession of magic that allows them to defy uncertainty. They have concocted recipes for brews and potions that addle the rest of us into thinking that we, too, are free from the ravages of uncertainty. Since that is so alluring, we were in their thrall.

Then they trashed the place.

Only to emerge as the people we turn to fix things. Now the bankers are called creditors. They’re the ones calling for wisdom and sacrifice on the part of the devastated economies. And the economists are the ones we turn for the wisdom and to organize the sacrifice in order that we all may return to our happy ways. So the economists negotiate with the bankers on our behalf in order to right the wrongs they wrote.

How did that happen?

I don’t know.

But it goes to show how relevant irrelevancy can be.

Alice in Wonderland?