30 Years Too Late, Greenspan Learns The First Great Economic Lesson Of The 20th Century

This hasn't been a popular opinion for a while, but here goes. The 20th century offered two great economic lessons: (1) Underregulation of markets is a very bad thing, and (2) overregulation of markets is also a very bad thing. The first lesson should have been abundantly clear in the winter of 1932-33. But by the '70s, the second lesson was prominent, so much so that many economists just plumb forgot about the first.

Among the most influential of these economists was Alan Greenspan, later to become a longtime chairman of the Federal Reserve. I found it disturbing, reading about his background way back in the '80s, that the Span Man actually bought into the crackpot economic notions of the late Ayn Rand and her quasi-solipsist cult.

But among economists, such was the climate of the '70s and '80s. The welfare-state excesses of the '60s and early '70s had suddenly made the reforms of the New Deal era irrelevant, and the pre-1929 mind-set had returned with much vindictiveness.

But Greenspan, appearing before a House committee this week, made a startling admission. He conceded that he was "partially wrong" in trusting financial markets to police themselves. Here's the link.

Onward.


Sadly, the Span Man ran the Fed mostly as a "free" market ideologue for 18 years. By the time he left the post, most of the damage had been done. Now it's going to be up to younger Americans -- Mr. Greenspan is 82 -- to clean up the mess for generations.

Let's revisit the two great lessons. In the early '30s, it was a no-brainer that the greed of players in the financial markets had contributed greatly to the worst economic meltdown in U.S. history. And so, general economic thinking was dramatically altered. It should have been clear that, left so unregulated, greed is NOT good. It leads to unsound practices, skewed income redistribution, social irresponsibility, shortsightedness; and in the end, everybody gets hurt. Au contraire, Gordon Gecko. Unregulated greed is BAD. Greedy people do not police themselves; quite the opposite, they do their best to rig the game. We have seen repeatedly in history that unregulated greed ultimately DOES NOT WORK.

But, by the '60s, we had the Galbraith-dubbed "affluent society," in which so much could seem to be taken for granted. We sort of became victims of our own success. The welfare state tried to do a little too much -- though in the U.S., it paled in comparison to the largess of other societies that spent far less on their war machines.

By the '70s, we had the symptoms of "stagflation" and demand-pull inflation that tend to show up in societies that are overregulating and overtaxing. Unfortunately, this opened the door for the economic quackery that has characterized the "supply-side" and "trickle-down" (tinkle-down, I sez) thought of the past 30 years. Many economists, secure in their own tenure and advisory posts, conveniently forgot about what happened in the first half of the 20th century.

Now, at last near the end of our second Gilded Age, Alan Greenspan is compelled to humble himself before Henry Waxman, and admit that he's had to rethink his ideas of the past 40-plus years.

Pardon me, little fish that I am, that I take a moment to gloat a bit. I was warning about this in 1984. I couldn't get many people to listen back then, mesmerized as they seemed by the foolish platitudes rising through Ronald Reagan's 70-ish turkey neck.

Don't worry, Mr. Greenspan -- you'll have plenty of dignified company in the online history books. Now just fade away, and leave the cleanup to sadder but wiser generations.

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McCain-Keating-Palin '08: The Real GOP Ticket

If there is any remaining doubt about John McCain's connection with the deregulation debacle facing the country now, let's go back 20 or so years, to his "palling around" with one Charles Keating. Obama is only slightly acquainted with Billy Ayres, and was 8 when the bad behavior took place. Whither Charles Keating, Big Mac? (Fries with that, hon?)

http://www.keatingeconomics.com/

Or:

There are technical problems, but one or the other approach will get you there. -- MJ

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An Era Of Re-Regulation? Progressives Shouldn't Celebrate Too Soon

So, deregulation in America is supposed to have died last week? Not so fast. Laissez faire, historically, is one of those economic notions that's sort of like Jason in those bad splatter movies -- it keeps coming back.

I don't doubt that, no matter which candidate is elected president in November, deregulation will be a somewhat untouchable position for a while, where financial markets are concerned. Until several years pass, and the $700 billion payoff at taxpayers' expense is complete, we won't hear much about it.

But this zombie is a re-animator's dream, having risen from rigor mortis again and again. It's a toxic idea that has always served the interests of the moneyed class in most societies. Even after being discredited by financial crises such as this one, and by many before, it only takes a generation or two to resurrect it with as much "credibility" as ever.

Onward.

As a one-time college textbook editor, I worked with economists, and found them to be largely a priesthood of ideologues. Their ideas don't have to bear strong resemblance to events of the real world. Among many, if not most of them, the "free market" is a quasi-religion, to be challenged only at the questioning of one's intellect and/or sanity.

Interestingly, most of them, even the "free-market" disciples, agree that the looming $700 billion taxpayer bailout of the U.S. financial system is necessary, though perhaps a necessary evil.

We come back to a condition of humans never liking to admit they are wrong. We also come back to old wisdom that one shouldn't bite the hand that feeds one. Most professional economists have "invested" a big stake in "free-market" theory, and their sources of income -- universities, "think" tanks and such -- generally expect them to maintain a certain ideological purity.

When current events fade into history, don't be surprised if we have a lot of economists, and compliant lawmakers trolling for right-wing votes, who want to start deregulating everything yet again. To broadly paraphrase the poet Santayana, most people do not remember the past, and they are therefore condemned to repeat it.

I'll steal another line, this one paraphrased from Citizen Kane: You're going to need more than one lesson, and you're going to get more than one lesson. In this case, the "you" is the American people.

What happened during the past 30 years was widespread economic amnesia, even among the alleged experts. What was forgotten was people's natural inclination to grow greedy and behave badly when not subject to certain restraints.

It's easy to blame the people who signed on to unsound subprime mortgage loans, who ran up vast credit-card debt, and so forth, if you look at the situation in just one dimension. What about the predatory lenders who offered them all this credit they could never have gotten 30 years ago?

I remember being quite impressed in the spring of 1978, as I approached graduation from college, at being offered my very first gasoline credit card. It was a big deal. "We believe that people about to graduate from college are good credit risks," I was told. Years later I was offered an actual Visa card, and the line of credit was pretty modest.

Now, all you need is a pulse. My 81-year-old mother, in assisted living, is getting solicitations. It would be possible for her to obtain one of these cards and run up a $10,000 tab in a hurry, then default. What would they do? Ruin her credit? Garnish her Social Security check?

The fault ultimately lies with greedy lenders. The great unwashed are always an easy target for blame, but the people in the suits don't have to make such absurdly generous offers to hapless people. This go-round, they approved loans and gave out other credit like it was lunch, with no thought for when the bills came due and they had to actually collect.

A wonderful analogy came from Kathleen Day, a spokeswoman for the Center for Responsible Lending, a consumer-oriented research group. In a Monday piece from McClatchy Newspapers, she commented on the regulatory lapses:

"The job of regulators is that when the party's in full swing, make sure the partygoers drink responsibly. Instead, they let everyone drink as much as they wanted and then handed them the car keys."

Here's the link to the complete article.

It is important to note that Bush, possibly the Herbert Hoover of this generation and much worse, has nevertheless planted seeds for an eventual revival of the old market mentality. One couldn't expect a mediocre-at-best product of privilege to do otherwise. Here's some of what he had to say, as reported by The Associated Press:

The president favored government intervention even though it opened him up to criticism from financial conservatives who are raising their eyebrows at the pricetag of the bailout plan. "Look, I'm sure there are some of my friends out there saying, `I thought this guy was a market guy. What happened to him?'" Bush said.

"Well, my first instinct wasn't to lay out a huge government plan," he said. "My first instinct was to let the market work until I realized, upon being briefed by the experts, of how significant this problem became."

In other words, this is supposed to be an anomaly, not the logical outcome of unregulated capitalism, even though we've seen it in history over and over. Here's the full AP article about Bush's take on this, if you can stomach it.

It would be desirable in many ways to just let the avaricious fatcats go under amid this excess, but that can't be. There are dogmatic libertarians who actually think Americans could be that stupid, both individually and collectively. But we can't afford that. It comes to a kind of economic blackmail -- the risk is too great for too many people who had nothing to do with the bad decisions on either end of the credit process. So, the fatcats will be bailed out.

The hope, against hope, is that "we won't be fooled again." That they won't be able to sell this bill of goods to the next generation in 20 years, and that our own generations of today won't forget. That the libertarians will finally learn that their naivete assumes marketplace self-policing that neither people nor institutions will ever do.

Maybe, just maybe one day, we'll learn. Keep a close watch on your retirement investments in the meantime. Here's one more thought-provoking link by Steve Fraser that I urge the reader to ponder.

Crossposted at Manifesto Joe.

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The Great Prevaricator Remembered II: With Reagan Policies, Seldom Has So Much Harm Been Done To So Many By So Few (Plus Swipes At Phil Gramm)

With news of a Bush/Treasury/Federal Reserve bailout of mortgage giants Fannie Mae and Freddy Mac, I'd say it's unofficially official: Reaganomics, and the 30-year era of helter-skelter deregulation that came with it, is at long last dying for good.

No, it's not dead yet. I think terminal brain cancer is a certain diagnosis. Yet Reaganomics lingers, having been reanimated repeatedly from the dead. But I don't think another long-term resurrection is possible.

And as the details of a massive bailout emerge, the person who comes to my mind is that turkey-necked geezer who presided over the first "great" round of deregulation during the '80s -- The Great Prevaricator himself, Ronald Reagan.

Reagan survives largely just in right-wing mythology. But some of his soldiers, who helped him construct this sturdy economic Trojan horse, are still with us. Despite a rebuke over a recent gaffe, former GOP Sen. Phil Gramm of Texas, deregulator extraordinaire, is still John McCain's economic adviser.

Gramm, a Texas Aggie economist (Know how to spoil an Aggie party? Flush the punchbowl), earned his bars in the "conservative" movement as one of The Fibber's hardiest point men. He started in the House as a major architect of the 1981 tax cuts that, first, handed a bonanza to the wealthiest Americans. Then, those cuts plunged the federal budget so deeply into the red that piecemeal tax increases had to be sneaked past the public for many years thereafter to slow the hemorrhaging.

He was also a player in the '80s deregulation of savings and loans, which ultimately opened them up to full-scale looting. It took years, and many, many billions from the taxpayers, to clean up that mess. (Sound familiar now? To paraphrase the poet Santayana, our leaders did not remember the past, and we are ALL condemned to repeat it.)

Near the end of his venal "service" in the Senate, Gramm was a towering figure in the second "great" wave of deregulation. This from Wikipedia:

Later in his Senate career, Gramm spearheaded efforts to pass banking reform laws, including the landmark Gramm-Leach-Bliley Act in 1999, which modernized Depression-era laws separating banking, insurance and brokerage activities. Between 1995 and 2000 Gramm, who was the chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, received $1,000,914 in campaign contributions from the Securities & Investment industry.

Here, "modernize" means that the bill Gramm co-sponsored repealed certain New Deal-era regulations of the Glass-Steagall Act of 1933, which had helped keep those pillars of high finance separate, and hence relatively honest and solvent, since the '30s.

Not content with leaving only this much damage imminent, Gramm helped pull off a major deregulatory coup the following year. More from Wikipedia:

Gramm was one of five co-sponsors of the Commodity Futures Modernization Act of 2000, which critics blame for permitting the Enron scandal to occur. At the time, Gramm's wife was on Enron's board of directors.

A big part of the CFMA was what became known as the "Enron Loophole." Again, Wikipedia:

The CFMA has received criticism for the so-called "Enron Loophole," 7 U.S.C. §2(h)(3) and (g), which exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The "loophole" was drafted by Enron Lobbyists working with senator Phil Gramm seeking a deregulated atmosphere for their new experiment, "Enron On-line." ...

The legislation was passed by the Republican controlled Congress and signed by President Bill Clinton [ouch --MJ] in December 2000 to allow for the creation, for U.S. exchanges, of a new kind of derivative security, the single-stock future. An attempt to reverse this policy was vetoed by President Bush in 2008. Several Democratic Legislators introduced legislation to close the loophole from 2000-2006, but were unsuccessful due to Republican control of the House and Senate.

So, in the ensuing years, Phil acquired a succession of nicknames, including "Enron Phil" for the CFMA, and recently "Foreclosure Phil" for his banking "modernization."

For more on the extent of the profound injuries that then-Sen. Phil Gramm personally inflicted on America, click here for a Joe Conason article in Salon.

But enough with beating up on a now-obvious sleazebag operative like Gramm. Let's go back a generation, and longer, to that moth-eaten spirit ultimately behind the Enron accounting scandal, and behind what is becoming known as the Panic of 2008. It's that mythical right-wing figure, the man Gore Vidal once perceptively described as "grandmotherly": Reagan.

The Sixties spawned a unique cast of characters who lingered and did their dance macabre across our collective unconscious, on their way to oblivion. The same seems to be happening with the malefactors of the Eighties, the Armani-clad hooligans of the Reagan era.

They seem determined not to go away completely, at least not right away. But I foresee a day when they will be like withered cranks at small-town school board meetings, voted out of office but showing up in enfeebled bids to harass those who replaced them. An effectively permanent death seems at hand.

Going back to the Fannie Mae/Freddy Mac bailout -- and perhaps forward toward many more -- here are a couple of especially significant quotes from The New York Times on this story:

The companies, known as government-sponsored enterprises, or G.S.E.’s, touch nearly half of the nation’s mortgages by either owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies and other large institutional investors.

“G.S.E. debt is held by financial institutions around the world,” Mr. (Treasury Secretary Henry) Paulson said in his statement. “Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.”

"... a stronger regulatory structure"? This from a Bush Cabinet member?

R.I.P., Ronnie Reagan. (And Phil Gramm?)

Crossposted at Manifesto Joe.

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