Five Years and Counting Stuck

Depending on when you think the crisis started its fifth anniversary is either here now or about to be upon us. This is not the same, by the way, as fixing a date for the problem[s] that caused the crisis: they go way back, variously, to the election of Reagan and the victory of orthodox economics before that. Well, that’s my opinion anyway.

So here we are. About five years in. The crisis has obviously abated. The fever broke a long time ago, but the patient is still weak, and nowhere near returning to the kind of vigor we all use to recognize as “normal”.

Why not?

Reagan and orthodox economics. You didn’t expect me to say anything else did you?

Of the two I have more sympathy for Reagan. Yes that’s right. I consider him misguided, foolish, elitist, racist, and overly attached to a non-existent nostalgia filled dreamworld of America’s past. Orthodox economics is simply risible. The one was a liar on many things, the other is simply a lie.

Both are dangerous and intensely anti-social.

Reaganism – let’s be honest he didn’t invent anything, but he certainly personified something – was, and remains, a strange brew of free-market worship, rugged individualism, militarism, corporatism and wealthy class driven redistributive activism, cobbled together with a populist religious message that contradicts some of the above. Reagan talked about small government whilst overseeing a build up of government. He talked fiscal rectitude whilst being fiscally irresponsible. He cut taxes only to increase them. He paid for a massive re-militarization of America by borrowing. He lied about welfare for the poor, but lauded it for big business. His legacy is larger than life precisely because he could act and smile.

And his legacy haunts us today.

He set in motion the disastrous economic policies that unleashed modern financial capitalism. This is the system within which we still live. We remain beholden to the big banks. Nothing has changed during these past five years except the passage of modest and still not implemented bank “reform”. Reform, that is, if we mean that word to define a move from utter recklessness to merely ordinary recklessness. Consider that banks have managed to buy enough influence to prevent the imposition of conservative capital standards. In the aftermath of a crisis that had debt and rotten over-indebted banking at its epicenter, it ought to have been easy to get tougher bank capital standards passed. It hasn’t. What small increase in bank capital is now being called for is laughable. It means that our large banks can sustain a shift in conditions against them of a whole whopping  2% before they are upended. A shift of 5% would destroy them completely. These are not exactly huge shifts. Indeed in the turbulence that the banks churn up in their lust after profit such shifts are common. The period of modern bank deregulation – and let’s not forget that Clinton and his team of Rubin and Summers are very much involved in this tale – has been characterized by a series of asset bubbles. Commercial real estate in the late 1980’s, the dot-com mess, and the more recent residential real estate disaster are our local ones. There have been others: the Asian debt crisis amongst them. All these have one thing in common: they are enabled by loose banking regulation. Loose banking along with easy capital movements and toxic “innovation” within the banking industry that produced a succession of socially useless but profitable things banks could sell each other whilst imagining they were managing risk.

The entire deregulatory impulse was designed to inject dynamism into what was perceived to be a slowing and turgid economy. Recall that Reagan rose to power as a result, in large part, of the stagflation of the late 1970’s. Instead of a recharged dynamo we got all those bubbles and a frothy exterior to cover up the continued slow sideways march of wages and ordinary living standards. We created a glitz economy. We enabled financial wheeling and dealing not a rebirth of old fashioned finance. Our bankers became gamblers and the rest of us provided the chips. We also underwrote the losses. It became no-lose for finance, and no-win for workers generally.

The privilege accorded big business, banking, and profits is the hallmark of the Reagan era that spans his ascension and the subsequent regimes of Bush the Elder, Clinton, Bush the Younger, and Obama. Yes, Obama, for our current president, reviled though he is on the right, has hardly dented the Reagan legacy and remains steadfastly attached to the wisdom of the elite – if that is not an oxymoron, what is? – that is itself rooted deeply in orthodox economics.

Oh there’s good economics out there. Way out there. But you won’t find it where it matters. In the Econ. 101 courses, the major textbooks, and the business schools that indoctrinate so many young people each year into the magic of the marketplace. We have an entire profession of economists busily proselytizing the right wing message about market purity and producing new generations of young people who actually believe in the supremacy of price driven resource allocation and the evils of government interference. The irony is that these same young people then spend their adult business lives setting prices, and working within centrally planned, albeit privately owned, organizations, dedicated to defeating those very free market principles they espouse and purportedly believe. The paradox is exquisite. It would surely crush the cognitive capacity of anyone who realized it were it not for the pervasive hold orthodox economics has. Everyone believes it. Politicians do. Business managers do. Bankers do. Bank regulators do. And educated professionals outside of business do too. When you attempt to describe prices as administratively derived or socially constructed, as institutionally driven or culturally contrived, as subject to custom, legal practice, political pressure, as well as economic action you get a blank face. Or you get a quasi religious knee jerk reaction as if you’ve broken faith or cast aspersion on a deeply held belief.

John Kenneth Galbraith said exactly this:

“We are profoundly conditioned by the theology of the market … A price that is fixed by the seller, to a singular degree does not seem good. Accordingly, it takes a major will to think of price-fixing as both normal and having economic function. In fact, it is normal in all advanced industrial societies.”

Orthodox economics, as taught in textbooks and as taught to hundreds of thousands of students each year, is just such a theology. It grips us because, like all religions, it gives us beautifully simple answers to opaque and complicated questions. It is complete. It is coherent. It is elegant. And, above all else, it has a rich intellectual tradition that makes criticism seem churlish and foolish. How can so many brilliant minds be so wrong?

Apparently with ease and a contempt for reality that is quite numbing. Orthodoxy is not out of touch with reality. It is in denial of reality. There’s a big difference. It is a faith. It is rhetorical mastery of language and framing. It is a belief system. It is about what its believers would like the world to be, not what the world is about.

And because it is a belief is it hard to shake. Which is why our five year old crisis lingers on. True believers defy evidence. The evidence of the past five years demonstrates the failure of both Reaganism and orthodoxy, but they hang on to guide the actions of our leaders. It was what they were taught. It is what they know.

Five years and counting, we languish and our leaders are not learning. Instead they flounder and re-commit the same errors. Just ask the banks. Just look at our bank reform. When statics is re-packaged as dynamics we know we are stuck. As in five years and counting stuck.