Wednesday, April 15, 2009

Establishment Media: We Hope Liberal Critics Are Wrong (Though We Doubt It)

Liberal critics of the Paulson/Geithner bailouts have levied three main criticisms to date: first, subsidies to banks represent highly costly transfers of wealth from taxpayers to bankers; second, insolvent banks need to be put into receivership, rather than subsidized; and third, policymakers have avoided restructuring banks because of they are still enthralled in the ideology of market worship/the banking lobby has captured the government. Paul Krugman and Joseph Stiglitz have popularized the first two points, while former IMF chief economist Simon Johnson provocatively advanced the third point in his recent piece in the Atantic.

What has been the response from the administration and the establishment media to these fairly devastating critiques? Government officials have suggested those calling for temporary nationalization are either naive or simply wrong; leading media voices, meanwhile, have expressed unease - unease because they hope these liberal critics are wrong, but they're not confident of it. From Newsweek:

If you are of the establishment persuasion (and I am), reading Krugman makes you uneasy. You hope he's wrong, and you sense he's being a little harsh (especially about Geithner), but you have a creeping feeling that he knows something that others cannot, or will not, see. By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring. But sometimes, beneath the pleasant murmur and tinkle of cocktails, the old guard cannot hear the sound of ice cracking. The in crowd of any age can be deceived by self-confidence, as Liaquat Ahamed has shown in "Lords of Finance," his new book about the folly of central bankers before the Great Depression, and David Halberstam revealed in his Vietnam War classic, "The Best and the Brightest." Krugman may be exaggerating the decay of the financial system or the devotion of Obama's team to preserving it. But what if he's right, or part right? What if President Obama is squandering his only chance to step in and nationalize—well, maybe not nationalize, that loaded word—but restructure the banks before they collapse altogether?
And this from a New Republic piece on Simon Johnson:

there's something that bothers me ever-so-slightly about the piece. It turns up as Johnson shifts from the political economy of an emerging-market financial crisis to the political economy of American finance over the last 25 years to the political economy of this particular crisis....

In the United States, Johnson argues, the situation is even more insidious in some ways. Our own financial elites have not only been politically ascendant for the last generation, but intellectually ascendant, too. Policymakers blithely adopted the view that vast unregulated flows of capital were in the national interest--a view that just happened to overlap with Wall Street's self-interest. "A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true," Simon writes. A bit hyperbolic, I'd say, but definitely a kernel of truth here.

It's the last pivot where Johnson loses me. Well, he doesn't exactly lose me, because I worry he may be right. But he certainly leaves me a little cold. Johnson concludes that American financial elites "are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive." He adds that we're afflicted by "a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support." Johnson's preferred solution--one I'm sympathetic to--is that the government seize weak banks, recapitalize them, and sell them off in pieces. But he thinks this is next-to-impossible so long as Wall Street stays so powerful.

Now, certainly there are a lot of data points consistent with the financial sector having a veto over public policy. As Johnson notes, a lot of the bailouts the Fed and Treasury have arranged left the banks basically intact. By most reasonable measures, the terms have been more favorable to bankers than to taxpayers, which raises questions about who controls whom. Likewise, the Geithner plan certainly goes to elaborate lengths to avoid seizing banks, which also looks on its face like the work of an overly-solicitous policy mind.

On the other hand ... we just don't know. Johnson has performed a service by marshalling the available data points and drawing some provocative connections, but he's not great at establishing what's driving what....

The point is that figuring out whether financial interests control public policy is a question that needs to be answered directly--with documents and testimony. You can't just infer it from a bunch of circumstantial evidence.

This unease comes from fear that populists may be right. For our elites, populism is a knee-jerk reaction on the part of the uneducated, unsophisticated masses. It is almost always wrong. But today, as Simon Johnson points out below, some of the most respected members of the economics profession - along with members of the educated classes spanning the political spectrum - could easily be mistaken for full-blown populists.

This creates cognitive dissonance within establishment circles, especially traditional left-of-center publications that place great weight in the opinions of experts such as Krugman, Stiglitz and Johnson. They would seem to have only two choices: either claim that such denunciations are wrongheaded, or admit that the critics are right. Instead, they have hedged their bets, explaining that the critics make compelling cases, but perhaps they go too far; these critics can't prove what they're saying in a court of law, after all. This is nothing more than a craven refusal to perform their roles as journalists. Instead of investigating the claims of critics, they try to assuage the public's anger at the bailouts with flimsy defenses of the establishment, while acknowledging that something might be rotten in the District of Columbia. Their ostensible role as public watchdogs demands that they do more than simply cross their fingers that we don't live in a banana republic.

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