Obama

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Parbuckle Policy?

For those of you buried in your debt debacle, government shutdown, defund Obamacare bunker allow me to offer you an insight into effective activity: the parbuckling of the Costa Concordia. What a success. The operation to re-float the stricken cruise ship went without a hitch. It was the most complex and largest effort of its kind ever undertaken, costing around $800 million so far – more than the worth of the ship when it was in good shape – and occupied a motley crew of 500 engineers, salvage experts, divers, and ten biologists. The latter being there to oversee environmental concerns.

I had no clue what parbuckling was up until now, but clearly its a careful, well thought through, and cooperative effort, with the goal being the ultimate shunting off for scrap of the 114,000 gross tonnage monster stuck on the rocks just off a little Italian island. The statistics alone are awesome. Thirty thousand tons of steel were used in the operation. Huge sponsons were attached to the exposed side of the ship and then fifty-six chains, each fifty-eight meters in length and weighing about twenty-six tons, were used to winch the ship off the rocks so that seawater  could flood into the sponsons and act as a weight to pull it upright. Once accomplished, those same sponsons were then filled completely so that they weighed the ship down and settled it thirty meters deep onto a one hundred and fifty meter long platform atop an artificial seabed made up of sixteen thousand tons of fill. There the ship will sit throughout the winter while it is fitted and fixed enough to be floated and hauled away to the scrapyard.

Phew. well done everyone involved.

Now maybe we can employ a similar process to overhaul US economic policy.

Perhaps we can winch it upright and off the rocks. Let’s face it: policy has been stuck aground for a very long time. We have made no progress, but the damage has accumulated steadily as the natural course of the economy has corroded and scarred it deeply. Eventually, if we are very lucky, we could even tow our policy off to the scrapyard and build ourselves a shiny new one.

Well, I can dream. Parbuckling is much more interesting than economics on two fronts.

One is the tired and fruitless quasi debate within the economics profession itself. After years of crisis nothing substantial has changed, nor is there much prospect of change. The same players say the same things. Chastise each other the same way. And generally display a total disregard for the social damage they managed to inflict with their false theories. Not that anyone is admitting to falsehood. Economics has creaked to a halt. It hit the rocks sometime ago – I would argue about seventy years ago, but that’s just me – and since then has devolved into a massive game of he-said she-said mudslinging, fact avoidance, and dyspeptic repetition of increasingly politicized nostrums. I don’t think we should dignify the edifice it has become with the moniker of “theory” any more. It has been exposed as a set of opinions of varying complexity and varying degrees of irrelevance. That there is an economist to fit any political idea no matter how half baked or extreme tells you all you need to know about how “scientific” economics is. The profession, such as it is, needs a good parbuckling, but won’t get it from within the safety of academia where path dependence dominates and prevents concerted action.

The second is the continued anti-social rantings of the Republican party. It would be nice to have some serious right of center ideas being floated to spark sensible discussion about policy. Other, of course, than the ones that the Democrats float so that they can have a debate amongst themselves. Right now we do not have a loyal opposition. By that I mean we don’t have a right of center party responsible enough to compromise sufficiently to keep the wheels moving whilst expressing an alternative view. The modern Republicans cannot bring themselves to compromise on some topics while oppose on others. So they simply oppose. And thus grind everything to a halt.

I always get criticized for blaming everything on the Republicans. Why, I am asked, is it not reasonable to blame the Democrats and/or Obama for not compromising too? I can only shudder at the blindness implied by the question.

Blindness to the extraordinary right wing shift in America over the last four decades. The entire economic debate takes place on territory once thought of as right wing. Now it is considered centrist. The total triumph of right wing ideas back in the early 1980’s and cemented into place in the 1990’s even when a Democrat was in the White House, has left us a false sense of balance. There cannot be two sides to a discussion when all we are talking about are variations on a right wing theme. Or, put another way, how can the Democrats compromise when they have already conceded the big talking points? Asking them for more is asking for total capitulation of any long held loyalty to their core values. The shame is that some feel obliged to do that. Obama being one.

No one is fighting for the working family. Somewhere it became accepted that stagnant wages were not a political issue. Or that to speak of inequality was to be rude and offensive to those who have been lucky in life and  made a pot load of money. Or that unemployment of 6% to 7% was “normal”. Or that the salaries and bonuses of the elite – not just CEO’s but the entire corps of professionals that litter the top layers of  wage earning – were justified by their “contribution”. Whatever that is. And a contribution that hasn’t noticeably altered our economic competitiveness much if at all. Along the way it also became acceptable for banks to syphon off capital for their own use – aka gambling – rather than lending into the real economy. It also became normal for our corporations to be rewarded for undermining wages here by shipping jobs abroad. It became usual to discuss the impending doom of our social programs despite the lack of evidence that they were, in fact, doomed. And it became perfectly reasonable to funnel mountains of cash into our elections and thus corrupt democracy and hand control to the very rich.

Of course no one is fighting for the working family. They don’t count. Our elite is solving the problems that affect the elite. It isn’t leading the nation.

And this is why the entire impasse nowadays is so intractable. In economic terms, we have ended up as a right wing country far from the old centrist 1950’s and 1960’s. We will shift back, but right now there’s no room anymore to compromise from the left without giving up entirely on the concept of working families, middle class and other bedrock concepts of those centrist years.

The right has a similar problem, although as the active agent they are responsible for the next move. Having deregulated, favored profits, handed over power to big business, demeaned social programs, denounced government, undermined unions, and overseen the stagnation of wages, they have produced the modern economy. It is built in their image, whether they like or admit it or not. And it is stuck. Their trajectory is to go further to the right into extreme and uncharted territory. They criticize those of their own who falter at the prospect of this. They call them not conservative enough. They have had a forty year run of policy success, albeit sometimes from Democratic sources – Clinton is culpable for much financial deregulation. They have won the big battles and used up their old ideas. Any further victories have to come from ideas further afield. This implies a total break with the past. However good it may have been.

The point is that the right no longer about those bedrock concepts. It is obsessed with its idealist and ideologically extreme vision for America. In order to fulfill the goals of its more extreme members it has to careen along and undo all the post-war consensus. It has to plunge us back into the late 1800’s. That group of extremists is large enough to pull the entire Republican party along. It is not mainstream. It is not centrist. And it cannot abide compromise. Which is why it resorts to hostage style tactics when faced with opposition or failure. It cannot come back from the brink without admitting defeat and setting in motion a move back to the center. That would imply undoing some of the policy victories of the Reagan era – admitting that Obamacare is a good program is an obvious example. So it cannot admit that it lost the last election. It cannot countenance the onset of Obamacare, and it is willing to employ scorched earth or destructive tactics to force itself on the rest of us. It has nowhere to run.

So our economic policy is stuck on the rocks like the Costa Concordia, slowly rotting away, a hulk looming over what could otherwise be a pleasant and wealth making recovery.

It needs parbuckling. It needs salvage. But until the extremist stranglehold is broken the engineers cannot get to work.

Oh, and its only a couple of weeks until the debt ceiling crisis.

Back to the bunker.

 

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Summers Exits.

Good.

Summers was the White House favorite. Obama held him in high regard because of the supposedly good job he did in the dark days of 2009. Along with Tim Geithner – who Obama also sounded out for the Fed – Summers was the primary architect of the Obama administration’s economic policy at the height of the crisis.

And that’s why there was so much opposition to Summers from the left.

We all thought that the policies of 2009 were timid, and far too biased towards Wall Street. There was no way the liberal wing of the Democrats were going to tolerate yet more weak policy. Obama could have pushed the appointment through, but it would have cost him dear. He has lost traction on the economy which languishes at very poor levels for a recovery this old. And that economic record stems exactly from the lack of strength the White House showed back in 2009.

Not only is this recovery a poor one, but it is the most unequal in recent history [if not ever]. Inequality is now our overriding domestic issue. About 95% of all wealth generated since 2009 has gone to the top 1% of income earners. That is an astonishing fact given that we have a Democrat in the White House. Not only this, but social mobility has collapsed – the US is now less a land of opportunity than most other western nations. We have a rapidly developing class system dominated by financiers and industrialists, despite the crisis that the banks brought upon us. Obama’s bank reform is a dud – it still isn’t completely implemented because of legal wrangling and bank lobbying, and what parts are in place are ineffective. I know no one in the industry who truly believes that reform has changed anything.

Meanwhile Elizabeth Warren is leading the charge for regular people and embarrassing Obama by highlighting his insipid policy making.

Why did Obama float Summer’s name so early? He did the same thing with Susan Rice. His approach is inept. He gave the opposition so much time to organize and undermine the favored appointment. Now he has to retreat. Again.

As for Summers: his record is that of a brilliant, self absorbed, self promoter. He gives the appearance of being on every side of every argument. His major achievements are mostly those of the Clinton era and 2009. From my perspective neither is much to be happy about. Deregulation, pro-business, and definitely pro-Wall Street characterize Summers body of work. Lately he was on record as being more of a monetary hawk than most of us want. He changed his tune when it appeared he might not get the Fed job. That confirmed his reputation as someone whose ambition matters more than the needs of the job.

Oddly this is one occasion when the left and Wall Street are in agreement: stock prices surged on the news of his withdrawal. Dovish monetary policy is the only thing propping us yup right now. Fiscal policy is working negatively. Yellen is now the clear favorite [ although I would  not rule out Roger Ferguson, CEO of TIAA-CREF and an ex Fed vice chairman]. She is a monetary dove. Good. That’s what the economy needs. Now if we could only get an expansionary fiscal policy…

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Five Years Already

Amazing. It’s roughly five years since the economy tanked, since Lehmann folded, and since we began to discuss the worth or otherwise of bailouts. Five long years. Five fairly rotten years. In that time we have been stuck in more ways than one.

First: economic policy has been somewhere between pathetic and horrible. The Obama administration came into power after the bottom had fallen out and seemed to assess things wrongly from the start. The big error made by the White House – one that reverberates to this day – was that such a dramatic economic collapse would inevitably be followed by an equally dramatic recovery once the bleeding had been stopped. So the policy goal was to provide just enough help to stop the free fall, let the automatic stabilizers like unemployment benefits kick in, and wait for things to come screaming back.

So much for that.

It was a strategic error of monumental proportions and one which was easily avoidable had someone – anyone – in the administration paid attention to recent history. I am being too harsh, people like Christine Romer did pay attention. Unfortunately Larry Summers has a louder voice and seems top have won the day. From that moment forward economic policy was inadequate.

Compounding this was the deep connection between Tim Geithner and Wall Street. Come to think about it, Larry Summers has such a connection too. That Treasury department and Wall Street nexus prevented an effective response to the banking crisis that roiled the economy throughout 2009. Instead of nationalizing Citibank – something deemed too radical and de-stabilizing in the good old US of A – taxpayers were forced to ante-up and allow the shareholders off the hook for their deplorable oversight of the bank’s management. The behemoth banks were allowed to wallow in their own mess and gobble up fallen peer banks so as to fatten up and thus book profits sufficient to offset their prior lunacy. Bank reform when it did arrive was too little, too late, and ridiculously complex – the lawyers are still arguing over the fine print and mush of the “reform” is not yet enforced.

Yes, it has taken five long years for the bureaucrats to put in place an insipid and pathetically ineffective so-called reform. Yet the White House looks on approvingly. Heck the heavy odds are that the White House wants to bring Larry Summers back to run the Federal Reserve Board as if he is a conquering hero and not a stooge of Wall Street.

Five long years indeed.

Unemployment is still too high. The economy generates jobs at a tepid rate. We have had more false starts than I care to remember. Housing has only recently staggered back to life. Demand is weak. Consumers have paid down debt, but with wages languishing they are likely to build debt up again. General Motors is still alive. Yea! But largely because it now builds lots of cars in China. Boo!

We have health care reform styled along Republican party lines, yet opposed ferociously by the Republicans. We have a Congress so mired in dysfunction and subject to extremist blackmail that it cannot do anything to fix the economy. Not that the Republicans want to do anything because they are beholden to right wing economic theory that says the economy will correct itself if only the government gets out of the way.

Which brings us to today.

There is a debate going on about how correct that right wing theory is. Well, it is correct. Economies do del-correct. Eventually. Sometime. Maybe. That isn’t the proper focus of discussion though. What we ought to be talking about is just how desirable that self-correction might be. Let’s use an analogy: most diseases can be fought off by the human body. Eventually. Sometime. Maybe. But we don’t think it sensible to let that happen. We intervene with medicine and treatments. That shortens the period of illness, accelerates recovery, and thus limits the long term damage.

Our economic policy debate has been – or ought to have been – about whether we administer medicine or not, and about whether we shorten the period of illness or not.

The doctors lost. Indeed, they weren’t even consulted.

Let’s review a little history.

The crisis was caused by excessive debt and loose or exploitive banking. That debt build up was in the private sector, where households were struggling to maintain a lifestyle in the face of stagnant wages. Rising inequality syphoned off too much income for the wealthy and left the middle and lower end of wage earners no longer able to keep up. And, don’t forget, wages adjusted for inflation have been stuck for thirty years. The entire Reagan era has been terrible for workers and average families. So, just as happened prior to the Great Depression, the vast majority of workers reacted to wage stagnation by borrowing. And, just like it did in the 1920’s, the debt bubble burst. It had to burst. The cost of all that debt became too burdensome in the absence of wage increases. The real estate bubble was just one part – albeit the most noticeable part – of a wider and deeper malaise. The infamous 1% was trashing the rest and starving the economy of demand.

So the bottom fell out, and the private sector began a long period of lower spending while it shed debt. Cash was used to pay down debt instead of for buying stuff. That meant sales dried up and businesses fired workers. That drained even more cash from the economy, raised fear and uncertainty, and made the slump worse.

With demand slumping and the banks near bankrupt, the Fed responded with aggressive monetary policy. The problem was that interest rates were already low – the Fed had kept rates low during the early 2000’s because the economy was weak after the 2001 recession – and so could not go too much lower before they hit zero. A further problem was that even zero rates was not enough to induce anyone to borrow and then invest because they were too focused on getting debt burdens down.

We were trapped. Rotten economic policy from the 1980’s on, lowering taxes for the rich, pushing up inequality, favoring business, deregulation, and the reliance of markets instead of government, had combined to create an unsustainable economy. It was going to break down sometime. It came apart with a vengeance in 2008.

Five long years ago.

Since then right wing economics has, by and large, ruled policy. The stimulus of 2009, so reviled by the right wingers, was pathetically small. That inadequacy was born directly from the miscalculation I referred to above. It was designed to be a stop-gap, not a curative. The White House believed in market magic and the self-healing properties of the economy. They imagined a small stimulus would do.

It didn’t. It couldn’t.

It stopped the rot. It did not build a recovery. We were left discussing whether it worked because it was never designed to work clearly enough to be obviously successful. It was intended to be in the background while things returned to normal. Which they were never going to do quickly without lots more medicine.

The problem is this: an asymmetrical economy, one where profits boom as wages stagnate, where the top 1% get to rewards and the rest flounder, where deregulation allows banks to over-lend without consequences, where business is preferred to consumers, where the safety net is weakened to save the government money, and where government spending is cut even as the private sector shrinks, is one that will, eventually, implode. And when it does that vaunted self-correcting ability of right wingers love to talk about is seriously weakened. The economy’s immune system cannot function properly.

Yes, the classic right wing recovery will turn up one day. A weak upturn in investment is inevitable once all the old machinery needs replacing. But it won’t be sufficient to get us back on our feet alone. The elimination of strong wage growth will impinge on business investment plans. Why invest if there’s no one out there with cash to buy what you are making? The economy needs demand as well as supply.

On an emergency basis that demand has to come from the government going into debt and spending what it borrows. Simple. Simple medicine. A simple remedy.

And it needs wages to get back to their historic share of the economy so that workers have spare cash to spend and don’t have to crimp on everything. That means profits have to fall as a share of the economy – down from their current near historically high levels.

And it means we have to stop obsessing over budget deficits. Not that we will. The Federal deficit has fallen sharply, and Federal employment is dropping quickly too. The states are busy in deep austerity measures. Combined these things are slowing us down and costing us jobs. We are busy creating our own headwind. Policy is hurting not helping.

And we are now having a discussion about whether economies can self-correct? Really?

No, I mean: really??

After five long years of stagnation and policy failure?

After five wasted costly years?

Who cares if they self-correct?

Not the unemployed that’s for sure.

 

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Upcoming Struggles

My Obama watch antenna are unusually sensitive right now. We are headed into another round of semi-gridlock politically inept infighting down in Washington. As usual we the people will be, by and large, bystanders, while our erstwhile leadership goes through another round of bruising she-said he-said so-called dialog and policy making.

There are two issues of particular note:

One is the obvious continuing floundering of our economy. We are in a sideways drift that, under more healthy political conditions, would be considered an embarrassment. Our economy has oodles of under-utilized resources, pernicious long term unemployment, and gaping regulatory problems in banking, none of which will be high on anyone’s list this fall. Instead we will watch as we are forced through another round of brinkmanship by our extreme right wing Congressional Republicans.

Their focus – for the umpteenth and counting times – is Obamacare. Oh, and the debt ceiling. They have decided that they will combine the two and fight one more last stand against creeping socialism by refusing to raise the debt ceiling unless Obama shoots himself defunds his signature legislative victory. Since there isn’t a hope in hell of him actually acquiescing with the defunding of his own legislation, we have to assume that either we hit the debt ceiling and default on our debt, or that the Republicans cave in.

Now, there are a few Republicans of a slightly less rabid nature who see these two possible endings and would like to avoid both. So they are trying, not yet successfully, to disentangle the toxic weave being spin by their more extremist brethren. These efforts at sensibility merely incite the extremists to greater heights of end-of-the-world invective, and expose the ‘moderates’ to attack in next year’s election cycle. America’s perpetual elections mean that there is no longish period during which temperatures can fall and sanity re-assert itself. Instead we face yet another year of Tea Party activism aimed at weeding out those few – very, very few – Republicans who would like to govern rather than overturn government.

I am not the first to note that our current gridlock stems precisely and exclusively from the extremist drift in the Republican party. That part of the party willing to reach out and compromise rather than object and take hostages is so severely diminished that the entire nation is now stymied in its efforts to reflate the economy and enjoy a full recovery. It is both obnoxious and delusional to assert that, somehow, the Democrats are equally to blame. They are not. The simple fact is that the Republicans have no intention of compromising and wish only to force through their own agenda via various congressional tactics and stonewalling. They do not negotiate they simply submit sets of demands. Then they try to divert the blame onto everyone else when nothing gets done.

This is an epic struggle and one which Obama is not well equipped . His bureaucratic mindset and centrist tendency makes him a poor defender of those who would suffer most from the enactment of the extremist agenda. His rhetoric belies his weakness, but his action – or more often his inaction – make him the most likely moving part in the story line being played out.

So I wait with trepidation as he fumbles about and tries to pretend America is governable. Which is why this is an Obama watch and not a Washington watch.

The second issue where I fear Obama’s poor leadership skills is on the nomination for a replacement for Ben Bernanke at the Federal Reserve Board. All the latest rumblings suggest that Obama wants to nominate Larry Summers. Quite why I don’t know. Well, that’s not quite true, we do know: Summers was part of the White House inner circle during the 2009 policy making process that came up with Obama’s crisis solution. The story seems to be that the White House is so satisfied with the so-called success of its crisis response that those associated with it have a sort of saintly aura these four to five years later. Summers is one of those benefiting from this aura and is thus trusted. He is an insider for a president who relies overly on insiders. Thus Summers is the hot favorite for the Fed. He is also a very bad choice. Very bad.

First monetary policy is not Summer’s strong suit. I realize that someone with a vaulting ego the size of Summer’s acknowledges no weak suit, but let’s just say that money and banking are lower on the list of his strengths than some other aspects of economics. Second, that renowned ego and sense of self-importance means that Summer’s interpersonal skills are closer to those of Attila the Hun than those of Mother Theresa. In these days of gridlock and policy division a modicum of tact seems a useful attribute, especially at a Fed riven through with doubt about its own policies. Then, third, there’s the little matter of Summer’s regulatory record. He is a friend, putting it mildly, of Wall Street. Indeed he just made quite a fortune in finance. His record on banking and finance regulation is appalling. He is one of the legendary gang – along with Robert Rubin his mentor and Alan Greenspan – who foisted the failed bank deregulation on us with all its subsequent disastrous consequences. He has never, publicly, stepped back from that deregulatory stance. He thus remains a Wall Street advocate.

But Obama likes his buddies and their elitist credibility. He seems intent, as of now, to press for Summers. Let’s hope the growing tide of opposition forces him to change his mind

Meanwhile Obama watch shifts into high gear.

 

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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.

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