Community Reinvestment Act

In the old days, before orthodox economists decided to try to look scientific, economics was more commonly called “political economy” or some such thing. Evidently the discipline’s founders had no problem with advertising the obvious connection between the study of matters economic and matters politic. The two seem a natural pairing. Especially when it comes to giving advice on policy. Thus the great political debates about the Corn Laws in the UK provided the context within which people like Ricardo began the development of what we now call simply “economics”.

But it really is political economy. It doesn’t seem that scientific to me at all. Not when it disappears into the methodological individualist rationalist rabbit hole. In order to create the pretense of being scientific economists had to decide what they meant by science. On reflection it appears they had a very narrow view. Lots of math. Lots and lots of math. Did I say lots of math? If not I meant to. Economics is now a branch of applied mathematics with an emphasis on constrained optimization. On the periphery economists talk about other stuff, but at the core, oddities such as dynamic stochastic general equilibrium – phew! – is what counts. Of course in order to strip away non-mathematical material, and to focus on doing the math, economists had to throw overboard all sorts of interesting topics, many of which would strike you and me as being the very essence of an economy. Or at least interesting from a general social perspective.

This all came to a head during the 1930’s when ardent free market economists were being forced to defend capitalism from the then healthy challenge represented by both fascism and communism. Note that the idea was to defend capitalism, not to study economies. This would be like defending alchemy against the intrusions of chemistry rather than studying actual chemical things. So convinced were these free market types that they convinced themselves that no matter how twisted their logic or how absurd their assumptions they were truly scientific as long as the answer was “correct”. One might wonder what the correct answer was.

Well guess.

It was what they wanted it to be. Free markets, unencumbered by the evils of government intervention are always – always – a better coordinating device for an economy than any heavy handed centrally planned way of doing things. So they say.

Set aside the fact that every single one of our large corporations is a centrally planned economy. That’s different apparently. In the wonderland of free market economics it is cheating to mention real world phenomena.

And also set aside that the only way the free market emerges as the clear winner is to assume everyone knows everything. Yes that’s stupid, but it’s necessary to get the “correct” answer. It also raises the knotty problem that if everyone knows everything then, presumably, an omniscient central planner would arrive at the same coordination solution as the omniscient market does. Whoops. How do we tell the difference?

Ideology.

In other words we are discussing political economy.

I raise all this because of today’s news.

Rumbling along for some months has been something called the Financial Crisis Inquiry Commission. This august and worthy group was charged with determining the causes of the fiscal meltdown, and to advocate some measures that would help us avoid a repetition. The news is that the group is hopelessly divided along political lines.

This is no surprise. In contemporary America everything is divided along political lines. Even the air we breath is either left or right wing depending on whether it makes you cough. So to read that the Republican members of the commission plan to release their own findings is no shock at all.

Nor is it shocking to read their definition of the culprit.

It was the government.

Who would have guessed that?

Yes. The US government was entirely to blame for the collapse of the mortgage market, the real estate bubble, toxic asset accumulations, rotten risk models, unsafe leverage ratios, and all sorts of other sins. Had the silly government stayed well away none of this would have happened. And at the very heart of the problem? You guessed it. Fannie Mae and Freddie Mac. The twin evil towers of the government’s attempt to socialize real estate and force unsuspecting banks to make loans that they would never have made otherwise. The very worst example of government coercion of the poor innocent bankers is that neo-socialist Community Reinvestment Act designed to channel hard earned money into poverty stricken areas populated by irresponsible poor people who should never be allowed to borrow. All those CRA loans were the thing that brought the entire edifice crashing down. Why do we know those people were irresponsible? Because they’re poor, and they live in neighborhoods no self respecting banker would ever lend unless forced to.

None of this is true. None of it. But it is a rollicking yarn and conforms to right wing ideological interpretation of history.

It is political economy writ large.

That there are plenty of right wing mainstream economists who agree with it confirms what I wrote at the beginning. Getting at a neutral, “positive”, or truly scientific economics is devilishly difficult, if not impossible.

A goodly part of the problem stems from the orthodox view that there are no structures in an economy, and that the only subject worthy for study is the rational individual. Those of you in the UK will remember Margaret Thatcher’s insane comment that society doesn’t exist. She meant it didn’t exist in her ideological view. This is like saying that the only object for study in physics is the atom. Stuff like galaxies, planets, stars, molecules, and so on, are not worthy of consideration except in so far as they represent agglomerations of atoms. And forget anything smaller than atoms. That’s not possible in Thatcherite physics.

In economics, without structure as part of the subject, we can no longer study “group” effects or “group” activities. We cannot study the pull of fashion or the tug of class. Gender melts to nothing. Religion, and culture are rendered meaningless. And corporations are flattened into absurd caricatures. All this in order to ensure that any analysis produces the “correct” answer: free markets rule. Above all else the hideous specter of the government, that group of all groups, no matter how democratic, has to be expunged from our thoughts. That a market is a social group is conveniently overlooked. That “correct” answer must be arrived at.

This is old ground, and not usually exposed so visibly to the public gaze.

Yet today’s news is a stark reminder of the deep and permanent divide that has sundered economics. As political economy this is understandable. In such a setting the economic argument is openly about supporting an ideological position. Is it the capitalists? Or is it the workers? Who do we want to appear the driving force and thus the group to be nurtured or rewarded?

But in a positive economics, one based upon a dispassionate assessment of real world economies, this won’t do. Interpreting the fiscal meltdown would be a forensic exercise. We would be able to agree on the major points. Countrywide Bank and other unregulated rogue lenders would exist. So too would the long term effects of banking deregulation. That mortgages were bundled haphazardly and recklessly would also be in the report. That bankers relied on faulty economic theories about efficient markets would be there too. So would the rating agency habit of getting paid to raise their ratings to a satisfactory level. That a mortgage was called subprime precisely because it failed to live up to government standards for lending might also get a mention. Even if it mucks up the anti-government story line.

In the end this all makes me wonder whether we have any hope, any time soon, of executing a sensible economic policy. You know, one that actually helps us all, rather than one aimed at specific interest groups. So fractured is our polity, and so divided is the world of economics, that it is hard to see sense prevailing.

At the end of his great “Decline and Fall of the Roman Empire” Gibbon lists as one of the primary causes of that decline as being the intractable nature of the political divide that prevented Romans from acting in their collective welfare. So riven through with ill will and self referential focus had the various factions become that the failure of the state was more acceptable than any of the necessary policies needed to save it. The decline was inevitable.

I am ashamed that economics could be one of those self referential causes of our decline. Perhaps going back to our roots is one way to revive ourselves. Political economy sounds good enough to me. It sounds almost sensible.

Then again who can define “sensible” in our current context?

Addendum:

With all due respect to the Republican members of the FCIC, their analysis of the causes of the bubble falls apart at the very first step. How do they account for the crisis in Ireland, Spain, the UK and all the other non-American places where the exact same thing occurred? Is the evil US government so influential that it brought down Ireland as well? Did the Irish fall into the clutches of the CRA?

I think not.

Political economy indeed.