Rationale for a nightmare

“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times….” Lawrence Summers, Obama economic advisor in today’s Financial Times.

This is the wrong argument, one that supports unregulated markets most of the time. Rather, we’ve learned that the balance of market and regulatory power is something that cannot remain static over time, that constant retooling is needed. IF we want to think differently, it’s time to acknowledge that mixed markets are the healthiest and that, once this crisis is over, there is no “going back,” because the unregulated economy has demonstrated it is a ruinous economy.

Warren Buffett agrees: “We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do.”

Our “CEO President” and the economic record

George W. Bush liked to call himself a “CEO President”—though even that conceit has passed away now—so let’s look at the record of the performance of our economy to see what his results look like.

Here is the Dow Jones Industrial Average from the first business day after Inauguration Day in 2001 through today.

George W. Bush's economic stewardship in a nutshell

You can check this yourself here. Unfortunately, we are not done, yet.

By the time Bush leaves office, his team of cronies and their lax approach to regulation will have managed to do worse damage to the economy than the 9/11 terrorists—who were trying.

The runaway candidate

Now he’s out of the race. McCain should continue the debates, regardless of what he wants to spend his days doing. It is essential to our democracy that we hear from the candidates about all the issues.

If Senator McCain wants to suspend his campaign, he should drop out of the race and let someone who wants to answer to the American people run in his place. That would rule out Sarah Palin as a presidential candidate, as well.

Recovery or double-dip?

The bail-out of Wall Street will merely compound the problems that got us here, because the program leaves the banks free of the cost of their junk assets while depriving the buyers of those assets—that’s us, the taxpayers—with any of the benefits of ownership. As planned, the bail-out will simply transfer paper around. That, my friends, is the recipe for a moral hazard. But not the moral hazard of government intruding in markets, rather it is the temptation on bankers’ parts to do it all again, because they are insured against the loss. Or, more to the point, they will not have paid the price for their misdeeds this time around.

Democratic calls for concessions by the banks, such as restrictions on CEO salaries and assistance to homeowners, while these are needed, will not temper the market’s desire for huge returns. They are band-aids on Godzilla, which makes the monster a little less ugly, but doesn’t change its appetite for destruction. The $700 billion+ the already expended $300 billion (on AIG, liquidity lending by the Treasury to the Fed, etc.) we’re spending is merely going into the accounts of the people who, feeling no limit to their tolerance for risk, ran the economy aground last week. The Bush Administration was part of that wretched crew, not its saviors. In fact, they are merely greeting their beleagured friends at the dock with buckets of money to hand out to the “survivors.”

In reality, the survivors of the economic meltdown haven’t been exposed yet. Fired bankers will go home and relax, because they have a lot of money. The rest of the country is simply waiting for the glacial pace of erosion to accelerate into their lives like a continental flood when the ice sheet disintegrated. Since those folks are now going to spend $1 trillion to “save” some banks from bad paper, which carry virtually no upside and a lot of risk that the paper will become valueless, the severity of that eventual economic cataract will only get worse.

On the other hand, if that $1 trillion represented real value, which the government could then sell at some future date, taxpayers would, at minimum, have some influence over the disposition of all the property that banks acquired during this spending spree. We’ve heard so much about “the ownership society” over the past seven years. Why, now that we’re dishing out another trillion dollars, are we not getting some ownership, as the government did when it bailed out AIG last week?

Everyone is expecting a recovery now. The market was disappointed today, to the tune of 300 points, that people are debating the terms of the bail-out before simply handing over all that cash. How can we be so presumptuous? Granted, the bail-out is necessary, but not necessarily in the form it takes under Henry Paulson and George W. Bush, a banker and a, well, “executive president,” who are bailing out their base.

If the bail-out goes ahead as planned, I’d hold on tight for a double-dip, when Wall Street comes begging for more help.

How we got in this hole

Joseph Stiglitz, Nobel Prize winner, explains in two sentences how we got where we are economically and why it was easy to fall for the story along the way.

Falling Down
The task of unraveling all that went wrong in our financial system is a difficult one, but in essence the financial system’s latest innovation was to devise fee structures that were often far from transparent and that allowed it to generate enormous profits–private rewards that were not commensurate with social benefits. The imperfections of information (resulting from the non-transparency) led to imperfections in competition, helping to explain why the usual maxim that competition drives profits to zero seemed not to hold.

Remember all the talk about the miraculous new economy? Suckers born every minute.

Without sustained investment in American intellectual capital, we will end up living on the vanquished memories of when this country was great being doled out at the Republican convention this week.

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You Kant be social and barbaric?

“All industries, arts, and crafts have gained by the division of labour—that is to say, one man no longer does everything, but but each confines himself to a particular task, differing markedly from the highest perfection and with greater ease. Where tasks are not so distinguished and divided, where every man is a jack of all trades, there industry is still sunk in utter barbarity.”—Immanuel Kant, Groundwork of the Metaphysic of Morals

It’s interesting to note that in the evolving economy, we are both more specialized and necessarily more generalist. We must specialize deeply in the tasks we want to accomplish for remuneration and generalists in those we share freely as part of the exchange of information that allows new value to spring from social software. We’re just not clear about where the dividing line is or where it will be in the future.