Could you have a sports league with cheerleaders, but no league officials? I know lot's of guys might immediately say, "Hell, yes!" But just consider: George W. Bush was a cheerleader. So was Trent Lott. Sort of brings things down to earth a bit.
The fact is, a sports league needs it all. Say it's football. It needs cheerleaders, linesmen, receivers, running backs, quarterbacks, complementary defensive players, special teams, coaching staff, head coaches, team management, league management, sportscasters and writers, the works. And don't forget all the folks who make the logistics happen--parking attendants, ticket-takers, parking lot attendants, everyone. They all have roles to play.
But that's not how it works everywhere. Take economics, for example. Last Thursday, in "A celebration of expert incompetence", I quoted extensively from Yves @ nakedcapital on a Boston Fed paper claiming that serious economists could not have foreseen the housing bubble--even though a number of folks actually did. In particular, I highlighted a passage Yves quoted from a WSJ blog post on the paper, and then commented on it. The passage:
"The pessimistic case was a distinctly minority view, especially among professional economists," the paper observed. "The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility" in the process.
And my comment:
When I wrote about those who got it right last year, the "timing" issue raised above was also raised. But that only shows to go the dangers of an exclusively market-serving discipline. If your entire discipline is distorted by short-term client needs, then of course, who cares about a total catastrophe looming that no one can figure how to make a buck off of?
The more I thought about it, the more I found myself thinking of cheerleaders, and what it would be like if there were a sports league composed only of cheerleaders. Because that's pretty darned close to what the financial sector has turned itself into--including the economic commentators and regulators who are supposed to be keeping things honest and running properly. This is, after all, the only sort of standard by which economists would have "lost a fair amount of credibility" because they were too farsighted, because they were paying too much attention to the fundamentals.
Predicting downturns is fine, you see, provided you and others can make lots of money as a result. And this is the purview of the cheerleader, the stock analyst, or huckster, if you will.
But predicting downturns that could wreck the entire economy--indeed, almost certainly will--without saying how any one particular person can make a killing? Well, where's the cheerleading potential in that?
There isn't any. It's not related to the cheerleading function at all--which is why there was no credibility given to those who saw the crash coming as an inevitability. They were thinking like sportscasters, or even league commissioners. They were concerned with the big picture health of the game. And unlike any reasonably healthy sports league, there was just no role for them to play. Because it was a league for cheerleaders only.
Boston Fed's New Excuse for Missing the Housing Bubble: NoneOfUscouddanode
It is truly astonishing to watch how determined the economics orthodoxy is to defend its inexcusable, economy-wrecking performance in the runup to the financial crisis. Most people who preside over disasters, say from a boating accident or the failure of a venture, spend considerable amounts of time in review of what happened and self-recrimination. Yet policy-making economists have not only seemed constitutionally unable to recognize that their programs resulted in widespread damage, but to add insult to injury, they insist that they really didn't do anything wrong.
Even worse, the latest excuse, from the Boston Fed, is that they are blameless because no Serious Economist could have recognized the bubble. From the Wall Street Journal Economics blog (hat tip Richard Alford):
Should economists and policy makers have identified the housing market bubble before it burst? The answer is most likely no, says the Federal Reserve Bank of Boston, because economic theory was not up to the challenge.
"Economic theory provides little guidance as to what should be the 'correct' level of asset prices - including housing prices," the new paper published by the bank says. It was written by economists Kristopher Gerardi, Christopher Foote and Paul Willen.
"While optimistic forecasts held by many market participants in 2005 turned out to be inaccurate" those projections were not "unreasonable" given what was understood about the economy and housing market dynamics in the years before housing prices crashed and helped create one of the worst economic downturns in generations.
The paper notes economists were clearly not of one mind about the implications of rising housing prices. Some saw them as consistent with economic fundamentals, and driven by factors like the need for shelter to house a growing population, a favored explanation of central bankers themselves during those years. Others simply punted, offering no view.
Then there were those with negative views, many of whom have been sharply critical of the economics profession, and of policy makers.
"The pessimistic case was a distinctly minority view, especially among professional economists," the paper observed. "The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility" in the process. Others called a bubble with "arguments fundamentally at odds with the data" that became available after the fact, the economists write.
That paper notes that for the most part, regardless of the view economists held on housing, the science of economics wasn't really even equipped to deal with the issue. "Academic research available in 2006 was basically inconclusive and could not convincingly support or refute any hypothesis about the future path of asset prices." That meant anyone could argue anything.
Yves here. This recitation is truly embarrassing, in that the writers clearly see this abject failure as completely reasonable, as opposed to compelling evidence that the discipline is not qualified to provide policy advice. What could be more damning than admitting that economics was incapable of seeing the blindingly obvious?
The problem is that mainstream economics sees prices as a virtuous. Everything cal be solved by price. If there is some unbalance in the economy, it merely means prices need to rise or fall, the impediment must be stickiness or some other inefficiency that is preventing the magic price setting mechanism to do its magic work....
Two points (tied to cleverly bolded passages above):
(1) When I wrote about those who got it right last year, the "timing" issue raised above was also raised. But that only shows to go the dangers of an exclusively market-serving discipline. If your entire discipline is distorted by short-term client needs, then of course, who cares about a total catastrophe looming that no one can figure how to make a buck off of?
(2) Can you say, "anosognosia"? Or "groupthink"? Prices can't be the be-all and end-all, as my diary citing Michael Perelman's Railroading Economics pointed out. The 19th Century railroad bankruptcies proved that conclusively--and they happened repeatedly.
But economists can no more recognize that than counter-insurgency experts ala TMCP can recognize that their holy metrics will always end up with empires in dust.
In a landmark decision last week, the Supreme Court ruled that corporations could spend unlimited funds to influence American elections, overturning a century of legal precedent. The Court's ruling in Citizens United v. FEC undermines the integrity of the U.S. government, as President Barack Obama emphasized at his State of the Union address. But the decision also deals a damaging blow to the U.S. economy by encouraging lawmakers to write economic rules that benefit specific companies at the expense of everyone else.
The editors of The Nation lay out the High Court's hubris in no uncertain terms:
The Citizens United campaign finance decision by Chief Justice John Roberts and a Supreme Court majority of conservative judicial activists is a dramatic assault on American democracy, overturning more than a century of precedent in order to give corporations the ultimate authority over elections and governing. This decision tips the balance against active citizenship and the rule of law by making it possible for the nation's most powerful economic interests to manipulate not just individual politicians and electoral contests but political discourse itself.
Citizens United and the financial crisis
How does this ruling have any bearing on the economy? Markets are not simply the product of random interactions between consumers and producers. Even under the most radical, laissez-faire economic theories, markets are defined, coordinated and policed by the government. For the economy to function at all, we need the government to define what constitutes fair play.
But over the past few decades, we've watched Congress and the executive branch rewrite those rules of the game under heavy corporate influence, creating artificial profits for a set of favored companies with very bad consequences for the broader economy.
The U.S. banking industry serves as a prime example. Since the 1980s, banks have been spending like crazy in all kinds of elections, and getting just about anything they want in return. I interviewed Harvard University Law Professor and TARP Oversight Panel Chair Elizabeth Warren for AlterNet, and she presented a concise but unsettling economic history of consumer protection law:
Thirty years ago we had laws that put some basic fairness into the consumer credit market. Over time, the large financial institutions captured the regulators who were supposed to be the cops on the beat to enforce those laws. They also pumped hundreds of millions of dollars into Washington to make sure that no new cops were put on the beat. Without good laws, the industry started selling ever-more-deceptive products, and their friendly regulators looked the other way.
The bank lobby and the AIG bailout
In Mother Jones, Corbin Hiar reveals how even a bank that engineered a massive tax fraud scheme was able to benefit from the AIG bailout. Major financial institutions convinced Congress to block any regulation of credit default swaps (CDS) all the way back in 2000. CDS contracts were essentially insurance on the value of financial assets-if the assets lost value, banks would still get paid as if they were highly profitable.
CDS insurance encouraged banks to engage in risky mortgage lending, and allowed them to book huge profits on those risky mortgages during the housing boom, even though many of those mortgages were doomed from the get-go. AIG binged so heavily on CDS that the company was on the brink of bankruptcy in the fall of 2008. But an AIG bankruptcy would have hammered the major banks who served as AIG's betting partners, most notably Goldman Sachs. Those banks would have received just pennies on the dollar from a bankrupt AIG. But under the bailout, the New York Federal Reserve paid the banks off at full value, without demanding any concessions whatsoever.
"The credit crunch was an existential threat to every over-leveraged big bank. What's most shocking about the AIG bailout ... is that these endangered banks were able to extract such a sweet deal from the government," Hiar writes. "The banks were paid the full value of all the CDS contracts they had made with AIG-including those mortgage-backed securities they had bought when it was clear the subprime market was collapsing."
The only AIG counterparty to even consider taking CDS losses was Swiss banking giant UBS, which was negotiating a separate settlement with the U.S. government over a massive tax evasion scheme. But even the tax fraudsters at UBS ultimately received full payment on their CDS exposure, and it now appears that the Swiss bank will be able to protect its wealthy tax-evading clients.
With the AIG bailout, the corporate takeover came full-circle. The banks purchased radical deregulation in Congress, and when the deregulated banks destroyed themselves, the government paid out billions to save them. The rest of the economy was ravaged by predatory lending, and taxpayers, not bankers, footed the bill for bank losses.
Redefining corruption
So the Citizens United decision will not introduce corporate influence in elections. Instead, it takes an uneven playing field and tilts it further in the favor of corporate executives. The Roberts court didn't just open the floodgates for corporate cash in U.S. elections and call it a day. It also explicitly redefined "corruption" to give corporations-and anyone else-greater leeway to financially curry favor with politicians. Heather K. Gerken details the new definition for The American Prospect:
The most important line in the decision ... was this one: "ingratiation and access ... are not corruption." For many years, the Court had gradually expanded the corruption rationale to extend beyond quid pro quo corruption (donor dollars for legislative votes). It had licensed Congress to regulate even when the threat was simply that large donors had better access to politicians or that politicians had become "too compliant with the[ir] wishes." Indeed, at times the Court went so far as to say that even the mere appearance of "undue influence" or the public's "cynical assumption that large donors call the tune" was enough to justify regulation. "Ingratiation and access," in other words, were corruption as far as the Court was concerned.
Most of us would consider the key lawmakers ensnared in the Jack Abramoff scandal as fundamentally corrupt-Abramoff flew former Republican Whip Tom DeLay of Texas to Scotland for golfing vacations in an effort to win greater leverage over DeLay's legislative agenda. The court's ruling claims that this kind of activity is not corrupt, and bars Congress from passing any laws to counteract it. As filmmaker Alex Gibney emphasizes in an interview with Amy Goodman of Democracy Now!, the court has essentially taken Tom DeLay's corporatist philosophy and made it a piece of constitutional law.
"Tom DeLay's view is, we spend more money on potato chips than we do on political campaigns. His view would be, let the money rush down like great waters,," Gibney says. "I think the court was channeling Tom DeLay when they issued their recent decision."
Why citizens need to speak out now
So what can we do about this? As GRITtv's Laura Flanders discusses in a roundtable discussion with several progressive leaders, there will be a long fight for a Constitutional Amendment to ban corporate influence in politics. Until then, as progressive strategist Mike Lux explains, citizens will have to take an aggressive stance against Corporate America as shareholders. Corporate power is exercised by a handful of executives, but the resources that support that power come from ordinary Americans who own stock in those companies, primarily through retirement plans. By demanding that the giant firms we own do not highjack our democracy with lobbying, we can limit some of the damage from the court's recent decision.
If you liked the bank bailouts, then there's plenty for you to love about the Citizens United decision. If you didn't, then it's time to speak up.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
As you may have gathered from my earlier diary, "Renormalizing Economics & Politics", I'm going to blogging alot about economics this weekend. A good part of this revolves around the ongoing economic crisis and the failure to foresee or comprehend it, as part of a larger failure of economic thought. This in turn is a reflection of the political success and practical failure of conservative hegemony. Some of the pieces have been in the works some time as part of somewhat different trains of thought, but they dovetail pretty well, nonetheless.
To begin with, I want to start small and simple, with the housing bubble, whose bursting underlay the eventual Wall Street collapse. But the staggering loss of household wealth since 2007 is reason enough to make this topic vitally important on its own.
In the end, Baker concluded "bubble". And bubbles eventually burst:
In the last seven years, home sale prices have increased nearly 30 percent more than the overall rate of inflation. Approximately one-third of this increase corresponds to an increase in the price of rental housing relative to other goods and services. The other two thirds is attributable to an increase in home purchase prices relative to rental prices.
This paper shows that there is no obvious explanation for a sudden increase in the relative demand for housing which could explain the price rise. There is also no obvious explanation for the increase in home purchase prices relative to rental prices. In the absence of any other credible theory, the only plausible explanation for the sudden surge in home prices is the existence of a housing bubble. This means that a major factor driving housing sales is the expectation that housing prices will be higher in the future. While this process can sustain rising prices for a period of time, it must eventually come to an end.
The following chart shows the relative rise in rents and housing prices:
After reading Deviltower's cogent summary of the last several boom-bust conservative economic collapses, I began to ponder the pattern at work here. What is a "bubble" anyway? How does this keep happening? I've realized it is because conservative economics is really a repeating effort to thwart economic thermodynamics and create some kind of free lunch of magical wealth beyond what the economy can create with any rational mechanism. This is what we must work to prevent, and what should be the goal of any regulations that are imposed going forward.
The unregulated and poorly reported credit default swaps may have actually passed $70 trillion last year, or about $5 trillion more than the GDP of the entire world.
So, are you starting to get an idea of just how big a genie Phil Gramm and his pals unleashed?
STATE BLOGS
