Questioning Market Fictions: Economic Knowledge and the Possibilities of a Real Economy

Photo source: http://financialservices.house.gov/banking/72500al.htm

A new President was just elected to office. By all accounts the election was decided above all by the dismal state of the American economy.

Deregulation and the growth of the fictitious market have been the cornerstone of economic policy since the Reagan Administration. Reagan, who on inauguration day replaced Harry Truman’s portrait with a depiction of Calvin Coolidge, began the nearly three decade long reprise of the latter's ill-fated laissez-faire policies. Through Bush I, Clinton and Bush II, regulations have been denounced as impediments to the beneficent and ethereal workings of the market. And while both Obama and McCain jockeyed to denounce “Wall Street greed” and Senate committee hearings are out for blood, the bailout was the ultimate sign of supply-side economics’ continuing resilience.

Now that's all come to naught, with the usual blowhards of conventional wisdom, who until recently were blaming the red tape of regulation as the root of all ills, are suddenly left to decry the failure of regulators to perform their jobs. And yet the basic myth escapes unscathed. It’s still the fault of lax regulators, or misaligned incentives, or greedy lenders, not of Reagan, Rubin and all the outlandish foundational assumptions beneath the house of cards that is contemporary American Capitalism. As  this article goes to press, Lawrence Summers (1) was appointed to lead Obama's National Economic Council. It seems as though the Wizards of Finance are truly our permanent government.

While we don’t have the money to spend a few billion dollars to expand children’s healthcare, Wall Street is an ever-deserving supplicant. If public assistance makes poor people lazy, the market provides an energetic response to public stimulus. If investment banks get “too big to fail” in an unregulated free for all cum crash, the public pocketbook is at the ready. And yes, it is for the benefit of that otherwise reviled sloth-prone everyman that we help Wall Street. The panegyrics to Main Street—whose economic fortunes were declining well before the recent crisis—make that abundantly clear.

Neoliberals—supporters of the market fundamentalist doctrine of “free” trade and regulatory atheism—often return to the traditional economic argument against “handouts,” a concept called “moral hazard.” Moral hazard posits that if someone is insulated from the natural risks of the marketplace, eluding the right consequences of their actions, they will behave recklessly. A poor woman otherwise inclined to seek her fortunes in the labor market will, if given welfare check, become a Queen at our expense—or so the thinking goes.

Most thinkers with a bit of distance from economic orthodoxy would point out that an individual’s microeconomic decisions are far more complex. But in this case the certainty of a government bailout led Wall Street to engage in some awfully risky microeconomic behavior. They knew the risk ultimately wouldn't be theirs.

Unfortunately for the vox populi, this was not meant to be understood. The flipside of the propaganda machine that gave America the undeserving poor—an image conjured in the service of undermining New Deal social guarantees—is the mystery and technocratization of economic knowledge. Why should Washington D.C. bureaucrat gum up the market when starry-eyed utopians had conquered risk--the economic equivalent of the end of history? We weren’t supposed to understand what was going on before the crash and we aren’t supposed to understand now, either.

The complex intricacies of the fictive economy are hidden by the cutesy sound bites of NPR's Marketplace and smiling faces of Good Morning America. Meanwhile, the brute facts are abstracted into the dramatic narrative guise of pulp fiction. Even now, some commentators would have us believe that the financial meltdown was like some contemporary film–an opaque, fatefully inter-connected world of unaware protagonists, where the whole system is brought crashing down by a few well-dressed cowboys in London trading rooms and prowling lenders on the streets of Cleveland. But just as the screenwriter ultimately constructs this illusion of coincidence, so too is the current financial crisis covered in dirty fingerprints.

Opacity was built into the system's very architecture. Indeed, there is an interesting coincidence in the obfuscation which led to this crisis—usurious and falsified home loans, the obscure securities into which they were packed, the shady process of “rating” them—and the long-time insider style of mainstream “business” reporting. The media didn’t interview the many prominent critics who saw a crisis in the making. Rather than doing hard economic reporting, they decided to report on business, for business. If business was interested in short-term profit strategies, business reporters were happy to oblige with plenty of earnings forecast gossip. And of course this is hardly the first time that massive deregulation has led to financial disaster. The Savings and Loan crisis from the 1980s is a homegrown case in point. And in a comparative light, the financial deregulation that led to capital flight and collapse in Argentina (2001) and Ecuador (1999-2000) are certainly instructive.

There is a general consensus among economists that markets don’t function well when there is “imperfect information.” Stiglitz pioneered research on this idea and won a Nobel Prize for it.

There is also a general consensus among advocates of democracy that it doesn’t work well without good, accurate and widely shared information—it is a challenge to deliberate in the dark. The Iraq War and the never-to-be-found Weapons of Mass Destruction are illustrative. Dick Cheney simply said, “trust me.” So too did Wall Street. The backroom negotiations and revolving door from Goldman Sachs to the Treasury Department deregulated our economy, and facilitated the emergence of overly complex and difficult to value financial instruments, what Warren Buffet in 2003 warned to be “financial weapons of mass destruction”—but neither business reporters nor politicians care much for pessimism.

Everything looked pretty good for bankers as long fresh capital was pouring in. Alan Greenspan—who with typical understatement admitted that he made certain “mistakes” during his tenure—was happy to oblige the demand for cheap cash, keeping interest rates low, low, low so the Dow could stay high, high, high. But the second their credibility was called into question and the loans stopped coming in, “highly leveraged” started to mean “ain’t got shit.” Bad information turned Wall Street into a casino and one dangerous moment of clarity brought the whole thing down. And since the neo-liberal prophylactic for market breakdowns was to build more meta-markets, the resulting failure has been that much more spectacular, with insurance companies who backed the debts falling alongside the banks who held them.

If regular citizens knew more about the economy—especially the ways in which financial markets intersect the “real” economy where we work and consume—we would probably have stronger opinions on economic policy. In neo-classical economic theory, financial markets are supposed to allocate capital and manage risk. With capital invested in bets rather than production, and risk perversely allocated to taxpayers, the markets have failed.

This was an economy fueled by your credit card debt, our trade debt and the investment bank’s mortgage backed securities. And I would be remiss to leave our ecological debt unmentioned. Propelled by our economy’s long-term and fundamental reliance on burning artificially cheap natural resources, we are now only just beginning to experience the unbearably high social and environmental costs of this willful (self-)deceit.

Former World Bank Chief Economist and current heterodox critic Joseph Stiglitz describes neoliberalism as a “grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well.” Neoliberalism, on a socio-cultural level, unleashed a new technocracy and a discourse that legitimated technocratic expertise at the expense of democratic participation and deliberation. If economics is a hard science like chemistry or physics, as the followers of the late Milton Friedman would argue, then laypeople should shut up and get back to work.

As a result, we have been led to feel mystified by the workings of the economy and frightened at the thought of meddling in the powerful natural forces of the market. But we now begin to ask ourselves, "Why does the invisible hand always seem to be stroking someone else?" As Stiglitz wryly notes, "The invisible hand often seems invisible because it's not there." The market's pleasures have never been all that preternatural in origin.

If we were more financially and economically literate, we would be demanding that homeowners in foreclosure have their mortgages restructured. Not only is helping people stay in their homes the right thing to do, but it would also pump money into the economy. Conveniently, the principled solutions to the liquidity problem are also the ones that will work. Stiglitz estimates that we could have produced $1.5 trillion in goods throughout the period of this slowdown had we invested in the real economy instead of speculation and novel financial instruments.

We know that our pensions are tied up in complex financial instruments. We know that our commercial banks have, because of bipartisan deregulation, become involved in highly leveraged craziness. We don’t know exactly what will happen as the crisis deepens and the new administration takes over, but I hope that widespread anger leads to a renewed emphasis on a real, local and sustainable economy—a green New Deal of sorts (2). Yet in order to avoid simply creating a green bubble, we also need to enact beefed up restrictions which segregate the speculative sector from the coming massive public investment in alternative energy. These are first steps toward rebuilding America and decreasing the very real hell that our fictitious economy has wrought upon ourselves and the rest of the world.

¹ Larry Summers was Bill Clinton's Treasury Secretary, former Chief Economist of the World Bank and former President of Harvard University. He was a strong force for free market fundamentalism in all three positions and a real jerk, too.

² Van Jones’ The Green Collar Economy and Bill McKibben’s Deep Economy seem to be pointing in the right direction. They’re on my winter reading list.

Daniel Denvir is the editor of Caterwaul Quarterly and a frequent contributor elsewhere. He is a 2008 recipient of NACLA's Samuel Chavkin Investigative Journalism Grant, and is currently writing a book on natural resource conflicts in Ecuador.