It is still possible to find, today, articles explaining, in all seriousness, that the current crisis has been caused by too much government intervention. Unsurprisingly, the place with some legitimacy where such articles can be read most often is the Wall Street Journal, and a good exemple is an article by Arthur Laffer (of the infamous Laffer curve), which says that the Age of Prosperity is Over ... because of the bailout, which prevented markets from solving the underlying problems. I kid you not.

While commendable for its consistency in some respects (in particular the idea that, if you believe in markets, there should be no government-funded bailout), it is in full insanity mode when it suggests that the bailout (blamed, of course, on Congress, as if it hadn't been rammed through by the Bush administration under spurious grounds that the alternative was total collapse) is causing the current stock market crash and that the solution, as always, is lower taxes :

Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

(...)

Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it.

I suppose these people are beyond our reach, and to a large extent, they are being largely discredited by current events. The problem is that they are absolutely shameless in repeating their mantra despite all the evidence agaisnt it, they have access to influential media, and their message will still influence and poison economic discourse even when it should no longer do so (and loudly point the blame to others, as done above where everything in the past 8 years is now the fault of the most recent Congress, including apparently running the military). Look at all the experts that pushed for the war in Iraq, explained it would be a « cakewalk », that US troops would be welcomed with flowers and that the invasion would pay for itself in a matter of months. They are still around, pontificating on TV and in Serious Newspapers about what should now be done to clan up the mess they helped create in the first place. It's the same with Laffer and his ilk - they are still noisy enough and have enough influential friends (that should know better) to give them a loudspeaker.

In the same WSJ, Pete du Pont, despite his lovely French-sounding name, engages in yet another attemt to debase language and turn powerful words into insults. In this case, the title says it all : the Europeanisation of America is supposed to let us know that there is no worse fate than that of Europe, and that, unfortunately, is what the US should expect as it is about to elect Obama as président. Lots of horrible things will happen :

The U.S. military will withdraw from Iraq quickly ; (...)
Protectionism will become our national trade policy; (...)
Income taxes will rise on middle- and upper-income people (...)
Federal government spending will substantially increase (...)
Federal regulation of the economy will expand (...)
The power of labor unions will substantially increase (...)
Free speech will be curtailed through the reimposition of the Fairness Doctrine (...)

If only... Beyond the fact that the obligatory mention of « increase in income taxes » distorts Obama's current plans, which apply only to the rich (but, as we know, the middle class goes all the way to incomes of 5 million dollars per annum, according to McCain) and the note on government spending, which is rather rich coming from a supporter of the current administration and its out-of-control (in every litteral meaning of this expression) spending, this is just the standard boiler plate scaremongering of the right. What is most remarkable is that the current crisis apparently requires no change in the discourse of these people - even better, after demonizing liberals, they have decided to similarly taint yet another word with positive connotations : European. We'll see if it works in the current context, but past practice has shown that sheer repetition over and over again by the hard right of the same slurs has turned them into standard fare of political discourse : witness how so many on the left are embarrassed by the word « socialist » these days and actually use it as an insult when attempting to criticize the right.

That tax increases would be necesary - and will indeed be unavoidable given the déficits and debt inherited from the Bush administration - is neither here or there : the goal is just to maintain the narrative of demonization of certain ideas and the people behind them.

And the current crisis has changed nothing in that respect. In other words, don't expect the WSJ Op-Ed pages to acknowledge they had anything to do with the current crisis or even to stop pushing their ideology : their readers made out exceedingly well as a result of these ideas being put in action over the past few décades, and are clearly hoping for more of the same.

I suppose the only solution is to ignore them completely, or just laugh at them whenever they speak up.

2) the Establishment, not moving an inch

More pernicious, because it is less blatantly partisan, is what can be found in the Economist. The weekly paper still has an excellent reputation, thanks to its past (but no longer current) habit of mostly separating facts from partisan preference, and its smart coverage of many issues, but in recent years it has abused that hard-earned reputation to peddle the same toxic sludge of unfettered deregulation, lower taxes and labor market « reform » (ie, weakening the rights of workers). An editorial from last week, which at least acknowledges the current crisis, is a good exemple of their attempts to rewrite history to avoid unflattering conclusions being drawn from the facts on the ground:

Capitalism at bay

Now economic liberty is under attack and capitalism, the system which embodies it, is at bay. This week Britain, the birthplace of modern privatisation, nationalised much of its banking industry; meanwhile, amid talk of the end of the Thatcher-Reagan era, the American government has promised to put $250 billion into its banks.

(...) all the signs are pointing in the same direction: a larger role for the state, and a smaller and more constrained private sector. This newspaper hopes profoundly that this will not happen. Over the past century and a half capitalism has proved its worth for billions of people.

There is so much propaganda is those two paragraphs that it is worth listing all the doublespeak extensively :

• describing the system we had until the bailouts as "economic liberty". Liberty is not the lack of rules - it is rules fairly applied and enforced. What we had in the past 30 years was the wholesale elimination of rules and the systematic weakening of the institutions in charge of applying those that remained. Being able to pee on the neighbor's front yard because the neighbor is powerless to prevent it is not liberty under any sane definition of that word (but as we've seen above, the sane definitions are crowded out from public discourse by the other ones) ;

 

• describing the bailouts as "economic liberty under attack" is even more extravagant: not only the financial system has been holding the rest of the economy hostage, and used that extraordinary  power to extract vast sums from taxpayers, but now it claims to being forced to take that bailout against its will and as a service rendered to the economy? The shamelessness is, again, without bounds ;

 

• saying that capitalism is at bay because of the current wave of bailouts and nationalisation of banks is, of course, yet another attempt at shifting the blame and changing the topic. Nationalisations happened today because `capitalism' (as apparently defined by the Economist and its ilk) has completely and utterly failed and had to be rescued from itself by begging (or rather, blackmailing) for money from the very governmental bodies it had mocked, belittled and tried to cut down to size over the past decades. These nationalisations were conducted, it should be noted, by governments which mostly shared the Economist's vision, and tried everything to avoid such a process (thereby making it more expensive in the end). If 'capitalism' is « at bay » in any meaningful way, it's only because of the consequences of being applied as desired by the Economist by friendly politicians - in other words, because of its inevitable excesses when unchecked;

 

• in that respect, the most egregious lie is that about the prosperity brought about by the system dying today.  The capitalism that brought prosperity to many in the past is certainly not the one we had in the past 30 years in the Western world (where unregulated financial capitalism, aka the Anglo Disease, replaced keynesian policies) and the one that helped bring poverty down in China and India, the two countries accouting for most of the progress worldwide on that front) can hardly be described as « deregulated » or free of State inteventions... More importantly, and we'll get back to that in a minute, you cannot claim the happy, profitable bubble part of the bubble-and-bust and not be held accountable for the crisis during the bust. And yet that is what they are trying to do. The article notes, in the next paragraph, that " [c]apitalism has always engendered crises, and always will.", ie that booms and busts are an inevitable feature - blatantly ignoring the lessons of the mid 20th century, when we precisely learnt how to use the tools of government policy to avoid such booms and busts, and just as blatantly neglecting to point out that the current version of `capitalism' was precisely about removing these tools from use in order to have booms again (and, they want to forget, busts).
>

The Economist gets one thing right : "in the longer term a lot depends on how blame for this catastrophe is allocated." - and of course immediately goes on the offensive to start the allocation.

Their first task is, I'm happy to say, to take to task the European Tribune and its Anglo Disease concept, which they describe suberbly : it's the notion that "Anglo-Saxon capitalism has failed" and that " the "Washington consensus" of deregulation and privatisation, preached condescendingly by America and Britain to benighted governments around the world, has actually brought the world economy to the brink of disaster."

Of course, they call it a "weak, populist argument" and argue that

 [e]ven allowing for the credit crunch, this decade may well see the fastest growth in global income per person in history

ignoring, again, that

• most of the growth on the planet, as measured, has occurred in countries with systems that are distincly un-capitalistic, whichever definition one uses, but especially when one considers the deregulated version promoted these days by the Economist ;

 

• the 'growth' (as measured using blunt instruments like GDP) in the parts of the world where the Economist's preferred version has been applied has been accompanied by an extraordinary growth of inequality which has meant, in practice, that all the economic 'growth' went to a very small minority while everybody else stagnated - making 'growth' per capita (ie, an average) an exceedingly uninformative, or even misleading, indicator, suggesting that the fruits of such measure prosperity were widely shared when they are not ;

 

• again, the performance of the boom-and-bust version of capitalism can only be evaluated over the whole cycle. Using an arbitrary calendar decade as a relevant period only suggests that the Economist believes that numbers will still look flattering by end 2010 and that the downturn will last longer than until that date (ie numbers then will look better than a few years later...). The fact is, growth so far tells us nothing, and judgement must be suspended, in the best case for the Economist's version of things, until the trough of this crisis. Using today's artificially inflated numbers to make claims about growth is simply dishonest. A simple factoid tells us how dishonest : the 9 biggest US banks have already made more writedowns in the past 5 quarters than they made in profits in the 3.5 years before, thus ensuring, even before the full force of the economic recession hits, that they have made no profits whatsoever in the last (favorable) 5 years. When you remember that financial profits made up to 40% of all corporate profits in America just 2 years ago, you see how claims about recent performance may need to be revisited...

It's simple : they're trying to claim crédit for the boom, and blame ineffective government for the bust. It's the same old logic: privatise the gains, socialise the losses. But what is clear is that, while they reluctantly acknowledge that more regulation of finance is needed, they consider that it doesn't work (bankers, being better people given the money the get, will always outsmart regulators) and thus that the system, despite its hiccups, is fit for purpose.

Another issue they sneak by in that article is to conflate unregulated financial capitalism and free trade, as if restricting one necessarily entailed restricting the other. By mixing up regulation of finance with « protectionism », the intent is clear : weaken the regulatory drive under pretexts that have nothing to do with it - guilt by association - knowing that lots of governments (like the German one) are much more favorable to the free trade of goods than to unfettered financial gambling. I'm not entering here in the debate on free trade, but will only say that the case for trade is stronger than the case for financial deregulation.

All in all, this is an « all or nothing » gambit : capitalism only comes in the form we like, and if you want prosperity, then you can't have a mild version, you need the full monty : again, this is unrepentant, and it comes from influential quarters.

:: ::

A slightly weaker version of the same can be found in the Financial Times, Under the byline of John Thornhill, their European editor (based in Paris, where else ?), you can read that :

... there are doubts about how far Europe's neo-statism will go. The pressures on public finances in ageing societies will constrain governments' spending ambitions. State spending in France, for example, already amounts to 54 per cent of gross domestic product, higher than in almost any other developed economy. The web of international obligations in which European governments are enmeshed will also restrain overt protectionism. However much politicians rail against the trade and competition policies of the World Trade Organisation and European Commission, they are obliged to respect their rules.

Leszek Balcerowicz, professor at the Warsaw School of Economics, warns that Europe may be in danger of learning the wrong lesson from the financial crisis in believing that it was caused solely by the failure of the free market. But in many respects, he suggests, the crisis will only intensify the economic pressures on Europe, forcing it into further market reforms. "The present crisis does not undermine but only strengthens, the case for structural reforms in labour and product markets and for fiscal discipline," he says.

In his quieter moments, Mr Sarkozy seems to accept at least some of that logic. The French president has argued that the financial crisis was caused by the excesses of capitalism, not by capitalism itself. He is trying to inject more flexibility and competition into the French economy by neutering legislation enshrining the 35-hour working week, deregulating parts of the retail trade and reducing the tax and bureaucratic burdens on small business.

(...)

As a consequence of the crisis, the US economy is becoming more European in terms of regulation and state intervention. Europe's economies may yet be forced into becoming more American, too.

Call this the defensive school of hopeful inevitability of capitalism : Europe cannot be more « Europeanized » than it already is, and can thus only move in the other direction - just because we wish it were so. As usual, the solutions include deregulation of business, lower taxes and weaker rights for workers. The consistency across the punditry on these themes is quite impressive. It almost sounds like scripture...

But the message is there again - the crisis is irrelevant (or better : it makes it even more urgent !) but the European economies need to « reform » and do more of exactly what brought about the current crisis.

In other words: don't expect change from the Establishment. They love the current system, profit handsomely from it and want more of the same. Thy don't care about prosperity, they care about being richer than the plebes around them, now.

3) the smart analyses that point in the right direction

All of the analyses below, which are in a different category (ie a lot more critical) come, it should be noted upfront, from the Financial Times, which has been, despite being a willing member of the above-decried Establishment through its editorials and headline policy, much more willing to ask hard questions and to give a voice to uncomfortable opinions than other Establishment papers.

The first one is a technical analysis by their markets editor, Gillian Tett (who has done a great job over the past year and before of simply writing about bits of the financial makrets that very few people had heard of, and explaining what was happening there) about the return of volatility and its consequences on financial modelling :

When banks extend credit to hedge funds, they often use so-called "value at risk" models (VAR) to measure the risks attached to such loans. These models typically assess the riskiness of an asset by measuring how its market price has moved in the past.

During the Great Moderation, this approach cast a fabulously flattering light on the investment world, creating the impression that it was safe for banks to extend massive volumes of credit to hedge funds. Moreover, since banks typically use VAR to measure the risk attached to their own assets too, these models also seduced banks into feeling complacent about their own risks.

Now, this process has gone violently into reverse: as volatility surges, VAR models are showing that the risk attached to almost any transaction has exploded upwards. Thus banks are selling assets and slashing loans to the funds - in turn sparking more fire sales and increasing volatility in all asset classes.

What this points to (beyond traders forgetting the first rule of the markets, and the one bit of fine print that everybody has heard of, ie that the past is not a useful indicator for the future) is the incredible pro-cyclical nature of non-regulated financial markets : there are lots of positive feedback loops that reinforce ongoing opinions and make it possible to bet more than one should on some risks, thereby making these bets, at least in the short term, very good ones. That's why you have booms. Markets have self-fulfilling properties, and self-reinforcing tendencies.

Thus the main task of regulation should be to be anti-cyclical. Instead, in recent years, everything was made to make it pro-cyclical, via things like Basel II capital adequacy ratio requirements, mark-to-market accounting rules, and the widespread use of ratings based to a much too large extent on past payment performance.

While this is left unsaid in this particular article by Tett, it at least points to practical propopals for changes once the crisis moves away from its acute phase: go for anti-cyclical regulation. And indeed, the Spanish exemple, with both BBVA and Santander coming up this week with growing profit numbers which contrast nicely with the results of most other banks is there to show that anti-cyclical regulation is not only possible but actually works the Bank of Spain imposed higher capital requirements during the boom of the past few years). Rules like increasing capital requirements in good times (rather than lower ones as under current market practices) cut off profitability a notch in good times but avoid the crash in bad times, which might finally be seen as a good tradeoff...

In a similar vein, Morgan Stanley's Stephen Roach, who has long warned of the likelihood of this crisis, wrote in a recent Op-Ed piece that it should be necessary to [a]dd `financial stability' to the Fed's mandate :

Specifically, the US Congress needs to alter the Fed's policy mandate to include an explicit reference to financial stability. The addition of those two words would force the Fed not only to aim at tempering the damage from asset bubbles but also to use its regulatory authority to promote sounder risk management practices. Such reforms are critical for a post-bubble, crisis-torn US economy.

He includes harsh words for « Bubbles » Greenspan, explicitly calling him ideological :

There is no room in a new financial stability mandate for bubble denialists such as Alan Greenspan, the former Fed chairman. He argued that equities were surging because of a new economy; that housing forms local not national bubbles and that the credit explosion was a by-product of the American genius of financial innovation. In retrospect, while there was a kernel of truth to all of those observations, they should not have been decisive in shaping Fed policy. Under a financial stability mandate, the Fed will need to replace its ideological convictions with common sense. When investors buy assets in anticipation of future price increases the Fed will need to err on the side of caution and presume that a bubble is forming that could threaten financial stability.

In other words : there is no free lunch ; price increases that look too good (and too easy to grab) to be true are unlikely to be « real », and it's better to kill them off early rather than wait until they have spawned a whole pyramid of debt and associated instruments and take everybody down when they collapse.

That means in particular that the Fed should no longer be allowed to inflate away any sign of weakness in the economy or the stock market by pushing cheap debt on everybody ; and it points to the specific role of debt, and leverage, in creating unsustainable bubbles and this crisis in particular. Stephen Roach notably suggests that the Fed should impose margin requirements, ie limit leverage, on some of the most dangerous instruments.

Finance cannot be allowed to drive the real economy, but it will if we let it tempt us through too much easy debt, which looks like wealth but really isn't - it's either nothing, or at best future wealth that we'll still need to work for at some point.

Which brings me to the last article, one that will not bring any new information to my readers, but which it is enlightening to see in the business press :

Stuck in the middle

But much larger sections of voters - those living in the bottom 80 per cent - have been experiencing a means of wealth redistribution in the past few years that has led many of them to different conclusions.

This kind of redistribution is of a different complexion to the progressive taxation that Mr Obama supports and which Mr McCain apparently no longer does. It has come via the mechanism of the market and has shifted wealth in the opposite direction - from the middle classes to the wealthy. It long predates the collapse of the subprime mortgage market last year that lit the fuse for today's global financial crisis.

Economists call it median wage stagnation. Others dub it the "silent recession".

This is the first time that I see this reality so clearly and so explicitly labelled as a transfer of wealth from the middle classes to the rich - and moreso so directly linked to market mechanisms.

The article brings back some useful reminders, as well as heartening political factoids :

Between 2000 and 2006, the US economy expanded by 18 per cent, whereas real income for the median working household dropped by 1.1 per cent in real terms, or about $2,000 (£1,280, €1,600). Meanwhile, the top tenth saw an improvement of 32 per cent in their incomes, the top 1 per cent a rise of 203 per cent and the top 0.1 per cent a gain of 425 per cent.

(...)

Economists such as Lawrence Summers, who was President Bill Clinton's last Treasury secretary and is tipped by some to return to that role in an Obama administration, say the income stagnation crisis is America's most troubling long-term economic problem.

In contrast to the Clinton years - when there was some growth in median income, although still at lower rates than productivity growth - people such as Mr Summers and Robert Rubin, his predecessor, are now openly sceptical of the market economy's ability to distribute socially desirable rewards.

"It is critically important that the next administration makes it a priority to focus on the structural causes that hold back growth in workers' wages," says Mr Summers. "That means reversing the perverse Bush tax cuts, empowering labour in strategic ways, as well as investing in healthcare, education and infrastructure."

At last, reform that is not the usual « reform » of tax cuts, deregulation and weakening labor, but talks about investment and focuses on basic services to the population rather than on profits. Finally, the alternative to the dominant narrative of the day is appearing in the more enlightened corners of the business world and punditry.

:: ::

What still needs to be made is the case that the toxic combination of tax cuts for the rich and financial deregulation is at the heart of the problem : by making it easy to make lots of money, and by allowing people to keep that money for themselves, it created a powerful (if small) group of people intent on making sure that their ability to extract wealth from the rest of us was protected and expanded. They co-opted pundits, politicians and « common wisdom » through sheer repetition, and made « reform » inevitable and even desirable, by making their prosperity look like a good thing for everybody else, by reinforcing the notion that money could measure everything, including personal worth, thus making the pursuit of money the ultimate goal ; and by making it possible for others to have the impression they could join in the fun via cheap debt. That cycle was self-reinforcing for a long time, thanks to the magic of asset appreciation, and mark-to market accounting of such, which turned virtual wealth into apparently real one.

The reality was, of course, that of a Ponzi scheme with the very rich taking the first round and everybody else left empty-handed ; it was not an accident, it was a choice, and it points to the solution to get ouf the crisis now, as hinted in some of these articles :

• much higher real taxes on the rich

 

• anti-cyclical monetary Policy and banking regulations ;

 

• a policy focus on wages rather than on profits ;

 

• a public investment programme, ideally centered on renewable énergies and energy efficiency (given that the all too real energy and climate crises are just aiting around the corner).

 

• and, very importantly, a way to take money's influence away from both politics and news

Either we get a noise machine to repeat these points as loudly as the hard-right was able to drum its pro-plutocracy agenda into all our heads over 3 decades - or we find a way to tone down theirs by changing the rules on public discourse.

There is a window of opportunity today, as the current crisis forces acknowledgement that the current system has major flaws, but change can only happen if we know what we want and how to get it, and are able to get more people to hear our case.