Janine R. Wedel <http://www.huffingtonpost.com/janine-r-wedel>
Author, "Shadow Elite"
*Capitalism's Crisis Within, and How Larry Summers Still Doesn't Get
It*Posted: 04/21/11 08:19 AM ET
It's strange to think that, while attending a recent conference of some
of the most illustrious names in economics and finance, the talk of the
2008 market implosion actually transported me back to eastern Europe in
the years before and soon after communism fell.
When listening to the many ways that economic dogma has diverged from
economic reality, it began to seem as if capitalism, like communism, was
a system that had rotted from within. The conference, held in the iconic
setting of Bretton Woods, New Hampshire, was organized by the Institute
for New Economic Thinking <http://ineteconomics.org/>. INET is backed by
billionaire financier and philanthropist George Soros, someone with
intimate knowledge of communism and its many corruptions. The message
from some at INET seemed to be, if capitalism is to thrive, it needs to
be saved from itself and its most ideologically-hardened practitioners.
Among those practitioners are the free market economists at prestigious
universities and institutions whose predictions have been so wildly off
the mark, and the financial wizards who espouse the ideals of capitalism
but have actually twisted and compromised those ideals at trading desks
and boardrooms across the world. As they sold the conventional wisdom
that a rising tide lifts all boats, the reality is that most of us have
been pushed under water by a wave of surging income and wealth inequality.
Princeton economic historian Harold James
<http://ineteconomics.org/net/video/playlist/conference/bretton-woods/B>
believes that trust in economic predictions has been broken, and it's
not hard to see why. In the free market utopia, markets are supposed to
allocate efficiently, self-correct, and bring ever greater prosperity to
all, if only regulators would get out of the way of rational financial
actors. But just as in that other, now-discredited utopian system
(communism), the ideology and the reality had little connection to each
other. What we have seen in the disaster of the past few years is that
getting out of the way allowed a small fraction of the elite to get very
rich by making extremely risky bets. In my view, they used what I call
shadow, or unregistered, lobbyists to shape and keep government policies
to their liking. And when their luck turned, these "free marketeers"
sought and got government help. So much for "getting out of the way."
And welcome to the era of moral hazard, a threat which, Soros said, now
"looms larger than ever before."
Where exactly have economists gone wrong? A screen that served as a
backdrop for one INET session put it well: chalk it up to "arrogance and
its ignorance." First there's a faith in the inherent stability and
resilience of financial markets, which, of course, is amply discredited
by recent history.
Then there's the tyranny of the mathematical models favored by so-called
"market fundamentalists." As James points out "....calculations about
likely risks.... are terribly.... misleading. If we think there's
one-in-a-1000-year chance of something happening, we're inclined to
ignore it. But then we find suddenly that these one-in-a-1000-year
chances....seem to be happening every 10 minutes...."
Economic models also can't truly account for, as Soros pointed out, the
uncertainties that, by definition, cannot be quantified. Nor can they
model irrationality. Political economics (a field often derided by
mainstream economics) got some of its due
<http://ineteconomics.org/net/video/playlist/conference/bretton-woods/M>
at the meeting among those who hope to capture the reality of how market
systems actually work. That would mean at least trying to account for
the unruly human factors that complicate any predictions and/or policy
prescriptions.
There's the ignorance of economists who mistake concepts for reality,
according to Berkeley economist and Nobel Laureate George Akerlof. He
says the mistake is in treating concepts like the production function or
utility function as a thing that is stable without considering the
context in which it is applied.
And finally there is the zealous devotion to the idea of broad economic
growth creating prosperity for all. This market dogma has driven
economic (often deregulatory) policy for decades under both Democrats
and Republicans. You could say that it has a sort of parallel in the
corporate world where CEO's say that their primary goal is to maximize
shareholder value. These ideals might be worthwhile if they actually
delivered, but they haven't. As INET speaker University of
Massachusetts-Lowell Professor William Lazonick
<http://ineteconomics.org/net/video/playlist/conference/bretton-woods/N>
pointed out, CEO's have used stock option manipulations to keep
delivering rewards to executives under the guise of "maximizing
shareholder value." Average stockholders meanwhile are still reeling
from the losses of 2008. This recalls the asset-stripping in Russia that
occured after communism fell, with U.S.-sponsored economic "reforms"
often providing incentives to those doing the stripping. A crucial
patron of those "reforms" was then-Treasury official Larry Summers, who
gave a keynote at the conference.
And in terms of the broader economy, the focus on growth has been a boon
for power brokers and the already-wealthy, and a bust for nearly
everyone else. University of Massachusetts-Boston political scientist
Tom Ferguson <http://ineteconomics.org/people/advisors/thomas-ferguson>
laid a lot of the blame for income inequality on the fact that
regulators can now routinely walk out the door and make sometimes
millions as one of the regulated: "in effect it turns government
agencies into recruiting agencies for the regulated....there's a point
beyond which sheer inequality destroys a [democratic] political
system...." U.K. financial regulator Adair Lord Turner
<http://ineteconomics.org/net/video/playlist/conference/bretton-woods/J>
also attacked the inequality issue, suggesting the time has come to
question whether a singleminded focus on overall growth should shift to
goals of stability and crisis prevention.
While Turner struck a reflective tone, one of the most important
economic policy players shaping the environment leading up to the
financial crash did not. Former Treasury Secretary and avid deregulator
Larry Summers
<http://ineteconomics.org/net/video/playlist/conference/bretton-woods/R>
said he wasn't convinced financial "innovation" caused the crisis, a
convenient narrative for someone who allowed exotic derivatives to grow
unchecked under his watch. (And a bit hard to square with what he said
last year on PBS
<http://www.pbs.org/newshour/bb/business/jan-june10/summers_04-22.html>
when asked if he had any responsibility for the crash. He said that
credit default swaps were "the center of the issue now," and this
financial innovation "barely existed [during his tenure at Treasury.]")
He also warned against the demonization of mainstream economics by
people who "don't do math," and flagged the dangers of overregulating in
the wake of a crisis. Summers suggested that a crisis mentality is what
led Communists to create a planned economy, which eventually collapsed.
To my ear, Summers himself sounded not unlike communist authorities who
deflected blame by simply denying having agency or authority, and
striking a disinterested, distancing voice. By the way, in that PBS
interview, he said the word "mistakes", "error" or "failure" five times,
with his finger pointed not at himself but squarely at Wall Street and
corporate America. Arrogance and ignorance, meet evasion and avoidance.
/Linda Keenan <http://www.huffingtonpost.com/linda-keenan> edited this
column.
/
/http://www.huffingtonpost.com/janine-r-wedel/capitalisms-crisis-within_b_851876.html
/
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