'Just World News' with Helena Cobban

What is the economy FOR?

Thanksgiving is a peculiarly US-American holiday that, by stressing the important bonds of family and friends, provides us a good opportunity to reflect on the often-neglected question of what the economy that we (nearly) all participate in is actually for.

The word "economy" itself gives us a strong hint. "Eco"-- seen also in the science of "ecology-- comes from "oikos", a hearth or home. "Nomos," seen also in astronomy, gastronomy, etc., has to do with an attempt at discovering the underlying laws in the field mentioned. So we could say that what economics is fundamentally about is the discovery of what makes for a well-provisioned home, or a well-provisioned community at any larger level of which the family home can be seen as a microcosm.... And then, of course, the practice of using that understanding to make the arrangements and provisions necessary for the home or community to be accordingly well-run.

It has to do with community, and with wellbeing. More precisely, it has to do with the material components of the wellbeing of the community in question.

Notice that two words I haven't mentioned thus far are "profits" and "stock market."

I'll grant the proponents of Reagan-era "trickle down economics" this much: At least they made some attempt to explain how it was that the hyper-wealth of the plutocratic few who were expected to profit from the Regan-era tax cuts-- and in fact, did-- would in some way connect with the wellbeing of the great mass of currently non-wealthy people.

But since the 1980s, the overwhelmingly dominant view in US public discourse has been one that sees stock market profits as ipso facto desirable and good, and that has very often not even bothered to make any argument at all about the connection between stock market profits and the wellbeing of the national community as a whole. Just recall the way economic news is presented in the mainstream media: the prominence given to shifts in share prices; and the gross disproprotion between the coverage given those shifts and that given major developments in the real, brick-and-mortar lives of real Americans like plant closings, evictions, shifts in the national figures regarding hunger or infant mortality, or the health-care crisis in general.

The word "economy" has another, related meaning, too. It has to do with good stewardship of the available resources-- as in the terms, "economy of words" or "economy of force".  Folding in this meaning, too, we could say that a well-run national economy would be one that delivers good outcomes on the broad indicators of human wellbeing to all members of the nation concerned, and that does so with as little waste as possible. Here, as you can see, the idea of good stewardship also connects with the broader "ecology" of the environment.  

One example: Do we really want to continue a national economy that's based overwhelmingly on reliance on personal ownership of motor vehicles? Especially when we know that (1) our use of private autos-- however we might choose to fuel them-- is a major contributor to our country's bloated and world-damaging CO₂ emissions; (2) other models of human mobility that rely much more  on mass transit systems exist, and provide a very enjoyable quality of life to people in other countries; and (3) having an auto-centered society keeps many of our fellow-citizens here at home marginalized from the mainstream of economic opportunity and social engagement.

Other examples of wastefulness abound, in the homes and lives of large numbers of Americans...

But the mainstream media view does not look at the many superfluous things so many of us have as evidence of personal wastefulness and excess. It looks as them through the lens of desire and aspiration. The MSM-- a large portion of which works, after all, according to business plans that make them deeply reliant on advertsiements for high-end goods and services-- doesn't even seem to have a concept that some amount of material goods might actually be "enough" for a good life.

Mainstream economic thinking backs up this materialist prejudice. Economic orthodoxy, buttressed even by a number of declarations from the United Nations, tells us that every nation has the "right" to further economic development. For nations still suffering from a lack of basic material inputs required for human thriving-- homes, transportation, food, schools, basic decent medical care-- having the "right" to economic development in terms of more stuff probably makes a lot of sense. But in the US, Japan, or the rich countries of western Europe? Why should we all, in perpetuity, be guaranteed the right to additional, ever-increasing amounts of stuff? Why shouldn't the demand be, rather, that we use the stock of available stuff that we already have in our rich countries more efficiently, more wisely-- dare I say it, more economically? And we could also use it more generously, by investing the surpluses we have in many fields, in a wise way, including by increasing the wellbeing of people in need in other countries as well as our own...

....

So there is the traditional meaning of "economy", having to do with the good stewardship of resources by and for a family or broader cmmunity. And then there's casino capitalism, a state of affairs in which the financial sector grows and grows and grows, taking over an ever larger portion of the economy. You can see how that has happened over recent decades in the US, here:


(Source: Jerome a Paris, here.)

But what does the financial sector actually do, you might ask? Well, recently, my 23-year-old recently did ask me this.

There are some very useful things it does. It takes in people's savings and makes them available to other people-- often, perfect strangers-- who need loans to get their businesses started. Thereby, these useful kind of financial institutions, we could call them banks, manage to mobilize capital for new projects, hopefully doing so in a way that is both efficient and generally useful.

But then, over the years, many bankers and others with access to bank capital figured out they could use this money-- which is nearly always other people's money-- to speculate with. And that was where the troubles started. In far too many cases investments became not a good faith effort to support the efforts of worthy entrepreneurs but merely gambles. Short selling, I have always thought, is a particularly insidious thing to do. It involves investing, briefly, in a company's shares, with the precise purpose and hope that those shares will fall. Morally, it is like making friends with someone precisely so you can get to know them better and stab them in the back even more effectively once you've won their confidence. It completely subverts the normal pattern of human solidarity and empathy.

But short selling is far from the worst of it. Whole groups of people known as "financial engineers" got to work on creating ever more rarified forms of financial arrangements, of which Credit Default Swaps (CDS's) were some of the worst. Buying a CDS is like buying a bet on someone else's misfortune. It is completely removed from the normal world of using money to support a project you actually believe in. It's like going to Atlantic City-- but instead of going with a fistful of quarters you're joining with hundreds of other speculators putting bets of hundreds of millions of bucks on eventualities that may occur elsewhere in the financial markets. People became almost literally addicted to it: to the risk, the big stakes, and the possibility of truly enormous pay-offs.

In 1933, after the depth of the post-1929 financial and economic crisis became clear, Congress passed the Glass-Steagall Act, which established a wall of separation between the banks and the "investment" (= often, speculation) houses that were allowed to do much more risky things. But the banks had to act in a much safer manner. They were subject to much more stringent oversight and regulation by the new regulatory body that the Act created, the FDIC. That had two main consequences: People with deposits in the banks up to $100,000 were assured that their deposits were safe, and you had a banking system that could continue to function even if there was chaos, uncertainty, or a serious downswing elsewhere in the financial markets.

In the go-go 1990s, the big American banks saw the hyper-profits that were being made by some of the  investment houses, and they wanted part of the action.  They lobbied hard to end the "separation" provision of Glass-Steagall. Citigroup (which had been a very rogue player back in the Crash of 1929, under its earlier name of National City Bank) was one of the leading actors in that campaign. And in 1999 it succeeded. Glass-Steagall was repealed through the Gramm-Leach-Bliley Act of that year, which was duly signed into law by Bill Clinton. Gramm, as in the very rightwing Republican Sen. Phil Gramm. Leach as in the moderate Republican Congressman Jim Leach... who turned up most recently as one of Barack Obama's key, "bipartisan" economic advisers.

So from then on, the banks were able to play in the financial casino as much as they wanted. Which many of them did. With the effects that we have now seen. Namely, that since it is still the case that nobody knows what the eventual losses in the financial casino have been, the banks that have been involved in it have all been dragged down to the bottom and are unable to perform their normal, natural function of providing loans to the productive sectors of the economy that might need them.

That's why the economy is stuck deep in the doldrums right now. It's not just a matter of consumer confidence or the need to get more consumer spending, which is what the nightly TV news tries to tell us. It is that we have a banking system that is broken, run by people who have (a)  betrayed the public trust placed in them and also (b) fatally mismanaged their own institutions, allowing the riskiness of their various "investments" (= bets) to gallop away completely out of their control or even, in many cases, anybody's ability to quantify and assess.

So here's my question. Given that these bankers-turned-gamblers have behaved in such an extremely damaging way, why on earth are the Bush administration and the Obama administration-in-waiting both relying so heavily on further government bailouts of these banking/gambling businesses to save the broader economy?

It completely defies logic.

If Bush or Obama want to stimulate the economy, why not do it through visionary programs of public works that are directly administered by the government? Why on earth try to do it by using the banks, once again, as a "pass-through", making huge additional sums of money available to them with the idea that the banks will then suddenly provide more credit to consumers?

Consumers (= citizens) don't actually, in the main, need more credit. What they need are  jobs with decent wages and benefits-- jobs that also contribute to the wellbeing of the entire society of which they are a part. They (we) certainly don't need more credit-card debt.

...

This Thanksgiving, I am very thankful that we elected a real symbol of change from the tragic recent past, to be our new president.

But I am very concerned indeed that in many respects, including his approach to the economy, Obama doesn't represent anything like the degree of change that we need.

We need to restore the safeguards around our basic banking system that the Glass-Steagall Act provided. We need to outlaw, or at least much more tightly regulate, the risky kinds of casino "investing" that have brought the entire US financial system to the brink of disaster. We need direct government investment in a program of people-based public works. We need to see  government at all levels using its leadership and resources to restore the idea and practice of community to our society.

Instead of which, as of now, we see Bush and Paulson shoveling unimaginably large amounts of money into the banks before they rush out of Washington-- those same banks that have been so ill-managed up until now; yet we see Bush and Paulson making no requests that any of the leaders of those banks resign, or even turn in any portion of the quite undeserved bonuses they have given themselves in recent years... Why on earth should the taxpayers be suppsed to support that??

And now we see Obama also surrounding himself with the same kind of banking types who led the anti-Glass-Steagall movement of the 1990s.  I'm not reassured by any of the people he has named to his economic team so far, including Timothy Geithner for Treasury Secretary. Geithner has been working hand-in-glove with Paulson throughout the crisis of recent months. Like Paulson, he has been extremely generous to, and uncritical of, the banks and their CEOs. He seems like a typical example of "regulatory capture," the phenomenon whereby regulators get "captured" by the very people they are supposed to be regulating. Willem Buiter has an even better term for this phenomenon. He refers to "cognitive regulatory capture", a ort of Stockholm Syndrome of Wall Street and Washington whereby the regulators actually come to share the entire worldview, perspective, and outlook of those they are supposed to regulate. And certainly, the vast majority of voices in the MSM have also fallen victim to a similar form of cognitive capture...

So it might be a long haul to change the terms of the national discussion on the economy. One good way to start is to remember that the "eco" in the word there is about "oikos", the home and the sense of a caring community.

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Some other resources on these themes:

• This post, and others from B of Moon of Alabama.
• This post and others from Calculated Risk.
• This post from Jerome a Paris, on European Tribune.
• This post and others from Willem Buiter's Maverecon.
• This piece by Stephen Pearlstein of the WaPo (someone who occasionally deviates from the pro-casino biases that dominate most of the MSM.)