Yer Father’s Democrats

The peril of any utopianism, of course, is how it suspends rationality and pursues a dream. In the case of millennial American conservatism, the political dream, for all its responsiveness to the tangible self-interest of rich constituencies, has been the illusion of markets as potential parliaments rather than descendants of carnivals, as rational decision-makers rather than precarious litmuses of human nature. (Kenvin Phillips, Wealth and Democracy)

I often get into it with right-wing-free-market fundamentalists. It’s not a pleasant experience, but it is illuminating. For one thing, these Randians treat us all with disdain, as if we simply cannot grasp their elemental genius. For another, they are impervious to experience. Every incidence of failure of markets to satisfy the greater good or basic human needs is turned back in our face: It’s government’s fault. Their ideal world is one where government is reduced to a few basic tasks: Deliver our mail, protect our shores, and stay the hell out of our lives.

So we see now on a charred landscape with wide swaths of destruction. It was brought about by feverish lending and borrowing and a speculative bubble. From this we are to conclude that markets are intelligent and should be left to their own? Not hardly. Markets are like fire – they can both serve us and destroy us, keep us warm and burn us to a crisp. As with fire, markets serve us best when regulated.

In the current crisis there are many culprits, and a lot of finger pointing is going on. Generally, from the right, it’s home borrowers getting the finger. And indeed, they did get sucked in – they did refinance to spend their home equity on consumer goods and pay down their high-interest credit card debt. They did fall for teaser rates and take on financial obligations beyond their ability to repay. They were not exactly smart borrowers. And they should pay a price.

On the other hand, we have the lenders, and in general, the repeal of the New Deal. In the wake of the Great Depression a large number of regulatory protections were put in place to keep the financial sector from flaring and burning, as it is known to do.

Economist Robert Kuttner:

[today we have what we would] call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank – e.g. Morgan or Chase – as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks – part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed’s discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.

Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn’t paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction – assuming perpetually rising asset prices – so in a credit crisis they can act as net de-stabilizers.

It’s not like blaming this president or that one will help us now, but if we must place blame, it falls on the shoulders of Bill Clinton and Alan Greenspan. Clinton gave us Treasury Secretary Robert Rubin, who ushered through repeal of the Glass Steagall Act, a post-depression piece of legislation that prevented conflicts of interest in lending, among other things. When Rubin left the administration, in a colossal conflict of interest, he became chairman of the executive committee of Citigroup, which was an enormous beneficiary of the repeal of Glass Steagall.

Citigroup would both originate home loans and allow borrowers extremely high leverage, and at the same time repackage those loans as securities. It’s a nice scheme that looks a lot like what we did in the 1920’s with other securities, and it works fine in a speculative bubble, but comes falling down when housing prices decline. Greenspan, for his part, kept interest rates so low as to perpetuate the bubble. He should have seen it, should have stopped it. It was only his job.

It could have been prevented, should have been prevented. We had the tools, but since the time of Jimmy Carter we have been either ignoring these tools or repealing the laws that gave them to us.

Which brings us back to Randian capitalism, unfettered markets, and what Phillips called “the illusion of markets as potential parliaments rather than descendants of carnivals.” The question before us now is do we have the political will to reimpose discipline on markets? Are the Democrats part of the solution or part of the problem?

Hillary Clinton, whose husband presided over deregulation that caused the problem, offers us nothing beyond the current stimulus package – no re-regulation, no discipline to be imposed on markets. Same song and dance. Nothing of substance comes from Barack Obama either. There’s nothing, of course, from McCain and the Republicans. That’s our most basic fundamental flaw: When both parties are captive of the same financial interests, neither has the will to impose the discipline necessary not just to remedy the immediate problem, but also to enact the long term structural fixes that need be made.

Let’s eat, drink, and enjoy our tax rebates. There is no fix in sight. The coming election is about nothing in particular. The Democrats are not your father’s Democrats. They don’t have the political will to do the real fixing that needs to be done.