Monday, September 14, 2009

Some Economic sanity and Some Suggestions for Reform With Regulation

by Norman Markowitz

President Obama has spoken on the question of economic regulation today and the first press response is "Wall Street Takes in Obama's speech and meanders on."

After all, Obama's forceful rhetoric about "reckless behavior and unchecked excess" means very little to those who have received hundreds of billions in public funds with little control over what they are to do with those funds. Obama's comment that "those on Wall Street cannot resume taking risks without regard for the consequences and expect that next time American taxpayers will be there to break there fall" will inevitably fall on deaf ears, since that is exactly what they have come to expect over the last three decades and will continue to expect unless the administration, this time, moves to establish new regulatory legislation, policy and act to gain public control over the hundreds of billion already spent as bailout money As more and more information is brought forward about the banking crisis a number of things become apparent. the first is that the large banks engaged in their own version of a "ponzi scheme," or more appropriately, a game of hot potato. "predatory lenders" aka de facto thieves were given winks and financial incentives to make bad loans which were then sold and resold and resold for the profit of the respectable institutions until the bags of bad paper burst, leading to the present crisis, with millions facing foreclosure and hundreds of billions of public funds invested to "save the financial system--at example as one New York Times reporter aptly put it, of "privatizing gains and socializing losses", or a textbook version of how state capitalism works, if the book were a Marxist one of course.

The second point is that the regulators to a great extent knew this was happening while it was happening and ignored, denied, bureaucratically sat on the information that they were gathering. In part this is a direct result of the anti-regulatory approach of the Bush administration and its predecessors, who since Reagan have made "deregulation" into a a foundation of economic policy. This has led to "regulation" that begins with the premise that its first responsibility is to protect those being regulated, not the public. As in other areas of government (the Pentagon being the best example) SEC and Federal Reserve regulators, like forward to leaving government to get lucrative jobs with the businesses which they are doing business with. Given more regulatory power to these officials, whose present and future is tied to the banks and brokerage houses that they are supposedly regulating is no real solution, even if the higher agency administrators seek to establish policies of regulation in the public interest (unfortunately, one of the great truisms in the history of bureaucracy is that lower echelons are quite adept at implementing or failing to implement policies in ways that protect their parochial interests).

As an historian, I think immediately of the New Deal model. There new legislation and new agencies and new people (many independent progressives who were deeply opposed to the Coolidge-Hoover policies of the 1920s) helped to create meaningful progressive reform. So far, if the press is to be believed, that is not happening in the Obama administration, but it still can happen. Significant numbers of positions in the federal government remain unfilled, in part because of the guerrilla war that the Republicans are fighting against nominees for those positions. A new Federal Reserve Act and a New SEC act are in effect long overdue (it is important to note that the even without the destructive deregulation of the last 30 years, the SEC and the present Federal Reserve is rooted in legislation enacted in 1934-1935, legislation more than seventy years old, legislation in terms of the internationalization of capital, new forms of capital formation ("hedge funds," etc) and new technologies to do business and transfer capital that is about as modern as old tube filled black and white TV sets are to contemporary television.

Increasing regulatory powers under the present legislation with the present personnel is not "change we can believe in." New regulatory legislation for finance and new people to implement the legislation through restructured regulatory agencies is – people who don't come from or wish to move up to the banks and brokerage houses, people who have been on the outside of the system rightly called "casino capitalism," those who have been exposing the abuses and offering alternatives to the policies which have led to the present crisis for a long time, even though no one in power was listening.

The administration might also begin to adopt an important new study which a Commission of leading economists, including Nobel Prize winners Joseph Stieglitz and Amaryta Sen, both leading progressives have just presented to the President of France. The report states what Marxists and non Marxist scholars and intellectuals have been proclaiming through the world since the early cold war era, that increases in Gross Domestic Product (GDP) or its predecessor Gross National Product(GNP) do not measure the economic well being of people in society. "What we measure affects what we do," the report concludes. "If our measurements are flawed, decisions may be distorted. Policies should be aimed at increasing societal welfare, not GDP."

Amen brother, although for those for "economic growth" has become a religion, this is heresy. The Commission mentions most significantly that the U.S., which has by far the biggest GDP in the world ranks 15th among nations using the UN's human development index, in which GDP is counted along with employment, health care, housing, and other in dices of real life.

Although Sarkozy, the rightwing President of France, is praising the study and claiming that France will put it forward in international meetings "that have for an objective the creation of a new international order" I strongly doubt that he will use the report for anything more than domestic and international PR. But the Obama administration has the capacity to use it as a rationale for national economic policy which highlights employment, housing, health care, education, social mobility, higher levels of income equality, as the basis for government study and policy.