Systemic Denial

I spent the morning Wednesday at the Time Warner building in New York City, participating in a conference sponsored by the Roosevelt (as in FDR) Institute titled "Make Markets Be Markets."
I don't often -- ok, ever -- have the time anymore to go to conferences
that I'm not speaking at. But the significance of this subject, and the
prominence of the speakers, were too much for me to resist. And so at
the crack of dawn, I scrambled to a 6 AM shuttle to make the 8 AM
meeting in Midtown.

Everyone recognizes that our nation is in a financial mess. Too few
see that this mess is not simply the ordinary downs of a regular
business cycle. The American financial system walked the American
economy off a cliff. Large players took catastrophic risk. They were
allowed to take this risk because of a series of fundamental regulatory
mistakes; they were encouraged to take it by the implicit, sometimes
explicit promise, that failure would be bailed out. The gamble was
obvious and it worked. The suckers were us. They got the upside. We got
the bill.

So in coming to this meeting of some of the very best in the field
-- from Elizabeth Warren to George Soros -- I was keen to hear just
what the strategy was to restore us to some sort of financial sanity.
How could we avoid it again? Yet through the course of the morning, I
was struck by two very different and very depressing points.

The first is that things are actually much worse than anyone ever
talks about. The pivot points of our financial system -- the
infrastructure that lets free markets produce real wealth -- have
become profoundly corrupted. Balance sheets are "fictions," as
Professor Frank Partnoy put it. Trillions of dollars in liability hide
behind these fictions. And as expert after expert demonstrated,
practically every one of the design flaws that led to the collapse of
the past few years remains essentially unchanged within our financial
system still. That bubble burst, but we can already see the soaring
profits of the same firms that sucked billions in taxpayer funds. The
cycle has started again.

But the second point was even worse. Expert after expert spoke as if
the problems we faced were simple math errors. As if regulators had
just miscalculated, like a pilot who accidentally overshoots the run
way, or an engineer who mis-estimates the weight of cargo on a plane.
And so, because these were mere errors, people spoke as if these errors
could be corrected by a bunch of good ideas. The morning was filled
with good ideas. An angry earnestness was the tone of the day.

There were exceptions. The increasingly prominent folk-hero for the
middle class, Elizabeth Warren, tied the endless list of problems to
the endless power of "the banking lobby." But that framing was rare.
Again and again, we were led back to a frame of bad policies that smart
souls could correct. At least if "the people" could be educated enough
to demand that politicians do something sensible.

This is a profound denial. The gambling on Wall Street was not
caused by the equivalent of errors in arithmetic. It was caused by a
corruption of the system by which we regulate those markets. No true
theorist of free markets -- and certainly none of the heroes of even
the libertarian right -- believe that infrastructure markets like
financial systems can be left free of any regulation, including the
regulation of rules against fraud. Yet that ignorant anarchy was the
precise rule that governed a large part of our financial system. And
not by accident: An enormous amount of political influence was brought
to bear on the regulators of these core institutions of a free market
to get them to turn a blind eye to Wall Street's "innovations." People
who should have known better yielded to this political pressure. Smart
people did stupid things because "the politics" of doing right was
impossible.

Why? Why was their no political return from sensible policy? The
answer is so obvious that one feels stupid to even remark it.
Politicians are addicts. Their dependency is campaign cash. And in
their obsessive search for campaign funds, they let these funders
convince them that for the first time in capitalism's history, markets
didn't need the basic array of trust-producing regulation. They
believed this insanity because it made it easier for them -- in good
faith -- to accept the money and steer financial policy over the cliff.

Not a single presentation the whole morning focused this part of the
problem. There wasn't even speculation about how we could build an
alternative to this campaign funding system of pathological dependency,
so that policy makers could afford to hear sense rather than
obsessively seek campaign dollars. The assembled experts were even
willing to brainstorm about how to educate ordinary Americans about the
intricacies of financial regulation. But the idea of changing the
pathological economy of influence that governs how Washington governs
wasn't even a hint.

We need to admit our (democracy's) problem. We need to get beyond
this stage of denial. We need to recognize that until we release our
leaders from a system that forces them to ignore good sense when there
is an opportunity for large campaign cash, we won't have policy that
makes sense. Wall Street continues unchanged because the Congress that
would change it is already shuttling to Wall Street fundraisers. Both
parties are already pandering to this power, so they can find the fix
to fund the next cycle of campaigns.

Throughout the morning, expert after expert celebrated the
brilliance in Franklin Roosevelt's response to the Nation's last truly
great financial collapse. They yearned for a modern version of his
system of regulation. But we won't get to Franklin Roosevelt's
brilliance till we accept Teddy Roosevelt's insight
-- that privately funded public elections tend inevitably towards this
kind of corruption. And until we solve that (eminently solvable)
problem, we won't make any progress in making America's finances safe
again.

FixCongressFirst. Only then will sensible policy be possible.