Supercapitalism run amok

It's fun to fulminate about the folly of Wall Street CEOs who ran their firms -- and the economy -- into the ground. But clearly something larger than individual stupidity was in play.

Take Robert Rubin - plainly one of the best financial minds of our time, who did nothing to help steer Citi away from the cliff's edge. Some may find his valedictory mea culpa a bit lacking in the 'mea' and 'culpa' departments:

My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today. Clearly, there is a great deal of work that needs to go into understanding exactly what led to this situation and what changes, regulatory and otherwise, must now be implemented to reduce systemic risk and protect consumers.

In fact I think this is a balanced statement - accepting a measure of blame for lack of foresight while focusing on the responsibility now to figure out what went wrong and fix it. As Rubin suggests, there's a complex causal chain to unravel. Links on that chain include metastasized lobbyist influence, botched regulatory reform, and skewed incentives to take on undue risk.

One potentially useful tool for the postmortem is Robert Reich's Supercapitalism (2007) -- though the market meltdown demands some modification, I think, of Reich's central premise. According to Reich, it's relentless global competition among businesses, much more than right wing policy, that has driven the erosion of middle class prosperity, security and opportunity over the past thirty-odd years. Reich portrays a kind of extreme Darwinism that leads corporations to compete as relentlessly in their lobbying efforts as they do on all other fronts:

The citizen in us has a more difficult time being heard now in Washington and other world capitals not because big business has become more powerfully monolithic but for the opposite reason -- because competition among businesses has grown more cutthroat. Companies have entered politics to gain or keep a competitive advantage over their business rivals. The result has been a clamor of competing business interests -- a cacophony so loud as to almost drown out any serious deliberation over the public good (pp 142-143).

Right-wing ideology, favoring ever more deregulation and tax cuts, is more a result of this competition than a cause of it. Lobbying produces the ideology to accommodate business interests.

What Reich might want to rethink is his assumption that what's been bad for our politics has been good for business. In Reich's telling, the business interests that have helped to erode democracy and community have served us all supremely well in our capacities as consumers and investors. Reich's admiration extends from technological innovation to financial engineering:

Capital markets--including stock exchanges, banks and other financial institutions, and money market funds -- are far more efficient than they were decades ago, though still far from perfect.

While briefly acknowledging weak points, such as Wall Street's short-term focus and money managers' conflicts of interest, he writes: "Yet for all this, investors have triumphed, just as consumers have" (p. 95).

Uh huh. What we've now learned is that the hypercompetition Reich chronicles has been maladaptive for businesses -- starting of course with financial companies -- as well as for government, citizens and workers. As Barack Obama memorably put it last March: "What was bad for Main Street was bad for Wall Street. Pain trickled up." Among the skewed incentives: pay packages that provide individuals enormous reward for short-term gain, with no personal financial risk should gain turn to loss. A market that punishes those who eschew short-term gain that comes at the price of undue risk. A regulatory regime that weakened capital requirements, refused to regulate the market for securitizations that divorced lending risk from loan origination, and turned a blind eye to blatantly fraudulent underwriting practices. And on the international stage, global trade imbalances that flooded the U.S. government, businesses and consumers with cheap money, inducing debt-fueled consumption that proved unsustainable.

While the value of evolutionary analogies to market forces is dubious, an evolutionary tale told by Stephen Jay Gould seems at least metaphorically apt. The Irish elk flourished for a brief period from about 12,000 to 11,000 years ago before abruptly becoming extinct. During this time the male's antler set evolved to enormous proportions, eventually reaching approximately 90 lbs. According to Gould, this development was driven by competitive display -- a large set signaled dominance to other males and provided access to females. Extinction followed when the climate and habitat changed abruptly.

The analogy would be more satisfying if the 90-pound headset itself doomed the elk, but Gould doesn't assert this. What does seem relevant is that natural selection can operate in a kind of cul-de-sac in which the trait that leads individuals to success does not serve the species' overall survival capability. Evolution may be no more "efficient" than markets. Our own task, at any rate, is to shape our own environment -- to align incentives with the interests of society as a whole.

Hillary packs a punch in Scranton

In primary season, Barack Obama proved himself a much better speechmaker than Hillary Clinton. But in Scranton today, Hillary's attack on Bush-McCainonmics packed a stronger populist punch than Obama's usual fare. Her riff below shares a core theme of Obama's: that "prosperity" isn't real or sustainable unless it's shared. But it's got a couple of zingers he could do worse than borrow.

In the runup, she spun a narrative in which Republicans ignored the housing crisis, despite her warnings and proposals (no mention of Obama's), but sprang to action when the crisis hit the banks. Then this:

According to the Republicans in this new global economy, America can’t win unless most Americans lose. It makes absolutely no sense, but that is truly what they believe. That’s why they ignored the home mortgage crisis until it became a financial crisis.

That’s why John McCain and has even proposed more tax cuts for the oil companies and the drug companies. That’s why John McCain has said repeatedly that the fundamentals of our economy are strong. Because to John McCain and George Bush the middle class isn’t fundamental, it’s ornamental. They don’t understand that we are at the core of whether this country goes up or down.

That’s why my friends sending the Republicans to solve this economic crisis is like sending the bull to clean up the china closet. They broke it and we’re not buying it anymore. Barack Obama and Joe Biden will be leaders who will lead us out of this economic crisis. They will once again clean up this economic mess that Republicans have left behind.

In case anybody doubts we can do this – I want you to think back. By the close of the Clinton Administration, America had created 22 million new jobs. Our nation had built an economy with the lowest child poverty rate in 20 years. Wages were rising and prosperity was shared. We produced a balanced budget and a budget surplus.

Now, 8 years later we have to add a digit to the national debt clock. It took a Democratic President to clean up after the last President Bush. It’s going to take a Democratic President to clean up after this President.

Make no mistake about it and we’ve done it before and we’ll do it again. America will once again rise from the ashes of the Bushes.

Back in March, Obama offered a memorable diagnosis of the financial crisis: ""What was bad for Main Street was bad for Wall Street. Pain trickled up." It was vintage Obama: a cerebral cause-and-effect narrative. Hillary transcribes the diagnosis of trickle-down economics into pure populism: According to the Republicans in this new global economy, America can’t win unless most Americans lose. That's gold. The middle class isn’t fundamental, it’s ornamental [to McCain and Bush] is silver. "Sending the Republicans to solve this economic crisis is like sending the bull to clean up the china closet" is copper -- pedestrian but solid fare. "America will once again rise from the ashes of the Bushes" -- pithy, but unfair to the elder Bush.. In any case, going back two decades to attack Poppy serves the Clinton's interests, not Obama's -- it dilutes the overwhelming case against W. and "more of the same" McCain.

For Obama, the middle class is "you"; for Hillary, it's "we." Bogus, but in the later primaries the Appalachian belt seemed to buy it. The speech was larded with references to her grandfather buried in Scranton, his elementary school education, etc. etc.

Bill, btw, delivered a warmup almost straight out of Saturday Night Live. He showered some praise on Biden but had practically nothing good to say about Obama. Bill "endorsed" him essentially as a fill-in-the-blank Democrat.