It is hard to disagree or even begin to argue with Willem Buiter's FT column this morning on the disappointments of the Obama administration. The honeymoon is over. It is no longer enough to not be George Bush. Not only has Obama failed to deliver on moral reconciliation following Bush or on a real change of direction in foreign policy, his administration seems to have completely dropped the ball on financial reform. As Buiter notes
The US officials supposed to lead the systemic reforms of the domestic and international financial system are the same people who failed to recognise the emerging disfunctionalities that produced the crisis, who indeed were responsible for creating some of these disfunctionalities, who failed to prevent the crisis, who re-fought the battle of the 1930s (and insist on taking great credit for doing so) and left us with the moral hazard nightmare legacy of the end of the first decade of the twenty first century.
On the fiscal side, Barack Obama is presiding over the biggest peace-time government deficits and public debt build-up ever. According to my back-of-the-envelope calculations there is about a 10 percent of GDP gap between the medium and longer-term spending plans of the Obama administration and the taxes the Congress is willing and able to impose. The reality that you cannot run a West-European welfare state (with decent quality health care, decent pre-school, primary and secondary school education for all), rebuild America’s crumbling infrastructure, invest in the environment and fulfill your post-imperial global strategic ambitions while raising 33 percent of GDP in taxes, has not yet dawned on the Obama administration or on the American people at large.
Even more damning for Buiter is that in the face of continued economic stagnation, the administration seems to be abandoning commitments to open trade -- the very thing that deepened and cemented the depression eighty years ago.
This is an administration that appears to want to please everyone even at the expense of a coherent policy direction.
Holding forth on the causes of last years financial crisis has lately become something of a cottage industry. Developments in economics and finance are usual suspects as are incentive structures that encourage excessive and even foolish risk-taking. Without doubt there is some truth in all of these claims.
Last Thursday, Floyd Norris reminded us of a much more pedestrian cause: changes to accounting standards that allowed financial institutions to appear healthier than they really were and that allowed them to take positions that they otherwise would not have been able to. As Norris tells it
The accountants let us down.
That is one of the clear lessons of the financial crisis that drove the world into a deep recession. We now know the major banks were hiding dubious assets off their balance sheets and stretching rules if not breaking them. We know that their capital was woefully inadequate for the risks they were taking.
Efforts are now being made to improve the rules, with some success. But banks have persuaded politicians on both sides of the Atlantic that the real problem came not when their financial inadequacies were obscured by bad accounting, but when they were revealed as the losses mounted.
“There were important aspects of our entire financial system that were operating like a Wild West show, huge unregulated opaque markets,” said the man whose job was to write the accounting rules, Robert H. Herz, the chairman of the Financial Accounting Standards Board.
“The crisis highlighted how important better transparency around that system is,” Mr. Herz added in an interview this week. “I would hope that would be a major lesson learned or relearned.”
Unfortunately, some seem to have learned exactly the opposite lesson. Accounting rule makers at FASB and its international equivalent, the International Accounting Standards Board, have been lambasted for efforts to improve transparency by forcing banks to disclose what their dodgy assets are actually worth, as opposed to what the banks think they should be worth.
Both boards have tried to resist, but have been forced by political pressure to back down on some specifics. In the case of FASB, the retreat took a few weeks after Mr. Herz was ordered to act at an extraordinary Congressional hearing. The international board was given a long weekend to retreat, with the European Commission threatening to impose its own rules if the board did not cave in. Both boards tried to reduce the damage by forcing more disclosures, but it is unclear how much good that will do. Neither was willing to defy the politicians.
As so many have argued for so long, changes to fair value accounting methods largely concealed the condition of the financial sector. As Norris notes
The banks have argued that market values can be misleading, and that their own estimates of the eventual cash flow from assets are more realistic than what they — or others — will now pay for those assets. The rules already allowed them to ignore so called “distress sales” in assessing fair value, but the banks pushed to broaden that exemption in the United States, while in Europe they got the regulators to allow them to retroactively stop calculating market value for assets they said they did not intend to sell.
Behind the scenes, there is a battle pitting securities regulators — who instinctively favor disclosure — against banking regulators, who fear there are times when disclosure could make a bad situation worse.
The securities regulators argue that accounting should do its best to report the actual financial condition of a company. If the banking regulators want to allow banks to use different rules in calculating capital — rules that would not require marking down assets, for example — then they can do so without depriving investors of important information.
But that information could scare those investors, and set off the kind of panic that brought down Lehman Brothers a year ago.
It is the job of banking regulators to keep their institutions healthy, and that effort can only be helped by accounting that reveals problems early. But if the banks do get into trouble, some regulators would prefer to maintain the appearance of prosperity while efforts are made to fix the problems quietly.
The brings to mind the Monty Python classic about the dead parrot
As with the parrot, no amount of subterfuge will permanently disguise the facts.
I finally had a chance to view Leo Panitch's Big Ideas lecture from earlier this year on marxism in light of the financial crisis. There is not much I can add to what I said earlier. But I can recommend this video for those who want a cogent analysis of what we have been through over the past year and what it means for progressive politics.
From Matt Talbot at Vox-Nova.com comes this story taken from an investigative report produced by the Government of Ireland.
In Ireland, there is a system of Catholic-run schools for the children of the poor, and these schools were the scenes of utter depravity between the 1930s and 1990s.
One victim’s memory of sadistic torture at the hands of a nun:
I was hit for having red, curly hair. You had to have straight hair like Our Lady. This sister was a monster. She’d drag you into the office and take her long cane and just beat you and beat you. She had a bamboo cane four feet long. She’d be frothing at the mouth. She’d say, “You curled your hair last night,” and when I’d say, “Yes, I curled it,” she’d stop. She had castor oil, she would press it into my head, to make my hair straight. My face would be swollen from the beatings, the oil would be running down my face.
This next testimony is especially appalling:
I was an animal lover. There were wild cats and kittens going around starving, and I used to sneak them into the dormitory. i had a kitten. This nun called me one night. She said, “You see that kitten you have there?” She got me out of bed by the hair and brought me down, they had one of those stoves that you put coal in the top. She said, “Take that top off.” I had to go up on my knees. I had to put the cat in there and put the lid on it — and the screams. Then she said, “Go back to bed.” The next morning, she got me out of bed and she made me rake that fire out. I think I was about twelve at the time.
I am used to praying for God’s mercy on the souls of sinners, especially me. I prayed that God may be merciful to the man who paralyzed, and ultimately killed, my late older brother.
There are, however, some offenses that make such prayers very, very hard to offer. For a representative of Mother Church, a person whose job it is not just to teach the faith, but to model in some way God’s loving relationship with his children, to force an animal-loving, born-into-poverty little girl to burn her kitten to death is definitely in that fucking category. It would have been bad enough for the sister to kill the kitten; for her to make the little girl do it…like I say: incandescent rage.
Like others, I am left speechless. I am aware that the Catholic Church has no monopoly on such evil. As a member of the Body of Christ, however, I feel compelled to respond to this. These children and the world desperately need to witness a church leadership publicly admit complicity and seek forgiveness. And we all need to shine a light on this; evil only flourishes in darkness.
Maybe more important, I have to examine my willingness to quite often look the other way, keep quiet, offer excuses or simply not see what I do not want to see, both for myself and others. Yes I must forgive or ask for forgivenness, as impossible as that may often seem. But I cannot forgive, or seek forgiveness for, that which I do not acknowledge.
Via today's BoingBoing comes a statement by John Perry Barlow made on the afternoon of September 11, 2001, which says, in part
This morning's events are roughly equivalent to the Reichstag fire that provided the social opportunity for the Nazi take-over of Germany. I am *not* suggesting that, like the Nazis, the authoritarian forces in America actually had a direct role in perpetrating this mind-blistering tragedy. (Though their indirect role deserves a much longer discussion.) Nevertheless, nothing could serve those who believe that American "safety" is more important than American liberty better than something like this. Control freaks will dine on this day for the rest of our lives. Within a few hours, we will see beginning the most vigorous efforts to end what remains of freedom in America. Those of who are willing to sacrifice a little - largely illusory - safety in order to maintain our faith in the original ideals of America will have to fight for those ideals just as vigorously.
And rather than pointing at the U.S., we should remind ourselves first that our Prime Minister in waiting has spoken and written extensively on his approval of what followed and that both his party and the Conservatives have participated in 9/11 inspired horrors such as the Arar affair.
Those who would trade freedom for security get neither.
If you need proof that when it comes to Canadian politics there is no there there, look no further than the NDP's dear leader.
In the face of news that the Harper tories plan to raise the EI payroll tax, the most regressive tax in the federal government toolkit, to fight the deficit, the NDP leader is criticizing the government on the higher than expected deficit. Earth to Jack, in the face of last years economic cataclysm, every major economy is facing higher than expected public sector deficits. Canada is in fact in better shape than most.
The key question moving forward is how, as the economy improves, deficits will be reduced and who will bear the cost of doing this. Raising EI premiums by billions places the burden squarely on those who were worst hurt, people with incomes under $40 thousand per year -- i.e. the working poor. Way to be tories. Way to be Jack.
Frank Furedi has a very perceptive piece in The Australian, examining the role of experts. For Furedi, the problem is not the role of expertise or its dominant role in addressing technical problems. It is instead the politicization of expertise or the privileging of a particular type of knowledge and of individual over all others.
Key quote
The exhortation to defer to experts is underpinned by the premise that their specialist knowledge entitles them to a higher moral status to the rest of us. For example, Ken Macdonald, former director of public prosecutions in Britain, pushed for the right to use expert witnesses to help boost the low conviction rate in rape trials. Former Home Office minister Joan Ryan, a junior Home Office minister at the time, backed him, arguing that expert evidence in court could "address myths about rape and its victims". The assumption seems to be that ordinary jurors lack the intelligence to grasp how rapists and their victims behave, which is why courts need the expert psychologist to put them right.
In previous times, pronouncement about who was evil or who had sinned was the prerogative of the priest. With the end of deference to the church such mystical powers have become associated with the authority of the professional expert witness. The call for ordinary jurors to ignore their intuition and subjugate themselves to the superior insight of the expert is seldom characterised as what it really is, a new form of non-traditional deference. According to this perspective, the prejudices and myths of ordinary jurors need to be overcome through the intervention of the enlightened views of the expert.
It is necessary to state at the outset that any civilised 21st-century society is likely to take expertise seriously. The efficient functioning of such a society depends, to a significant extent, on the quality of contribution made by its experts. Anyone who is ill or confronted with a technical problem will turn to an expert.
The problem is not the status of the expert but its politicisation. All too often experts do not confine their involvement in public discussion to the provision of advice. Many insist that their expertise entitles them to have the last word on policy deliberation. Recent studies indicate that in public debates those whose views run counter to the sentiments of scientific experts find it difficult to voice their beliefs.
Interestingly, I have just finished reading Terry Eagleton's Faith, Reason and Revolution, which looks at the complex interplay between secularism and faith. It is impossible to to his argument justice in a short blog post, but his work certainly suggests that far from overturning the power of an established priesthood we have in so many ways merely replaced it with another.
Kudos to Matt Yglesias for being one of the very, very few to suggest that the root of problems with publicly provided health care is the monopoly power of doctors.
It is inconceivable that we will achieve real patient centred care or cost containment until we wrest power and the rent-seeking incentives that go with it from the medical profession. Doctors have no more right than any other group to control over their clients lives or the public purse.
NYT wunderkind and infrequent columnist Ross Douthat has a worthwhile take on voluntary suicide as a segue to much more egregious practices. As Douthat argues
What’s at stake is the right to voluntary euthanasia, not the sort of involuntary plug-pulling that some Republicans have claimed is concealed in the finer print of the current health care reform proposals. But you don’t have to share Sarah Palin’s death panel fears to see perils lurking at the intersection of physician-assisted suicide and health care reform.
Consider the words of a prominent oncologist, bioethicist and health care wonk, critiquing assisted suicide in 1997, just before a Supreme Court ruling on the issue. “Once legalized,” this writer warned in the pages of The Atlantic, “euthanasia would become routine. Over time doctors would become comfortable giving injections to end life and Americans would become comfortable having euthanasia as an option.” From there, it would be an easy slide to euthanizing the incompetent: “Comfort would make us want to extend the option to others who, in society’s view, are suffering and leading purposeless lives.”
Comfort — and budgetary constraints. Euthanasia would be much more likely to pass from an exception to a rule, the bioethicist argued, “in the context of demographic and budgetary pressures on Social Security and Medicare as the Baby Boom generation begins to retire, around 2010.”
And of course in Canada, where the publicly funded healthcare system is already overwhelmed, this is much more likely to be true.
The real fear, of course, is that an unaccountable medical guild will increasingly make these decisions on their own. Witness events in New Orleans following Hurricane Katrina. Perhaps the most important and least understood of needed changes in health care delivery is the need to hold physicians to far more effective account, both for decisions made and resources used. Few if any politicians have the courage to take on the medical establishment. Until they do, efforts to take control of our health care system will remain largely cosmetic.
From Bloomberg today comes a report that some key hedge funds are suggesting that far from being over, recent market gains represent a temporary uptick in what remains a bear market and lingering recession. Key for these influential players is the remaining problems with bank balance sheets resulting from changes to fair value accounting rules earlier this year.
As the report notes
The Financial Accounting Standards Board voted in April to relax fair-value accounting rules. The change to mark-to-market accounting allowed companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities that plunged with the housing market.
Banks are reporting better earnings because they haven’t been forced to account for their losses yet . . .
It seems that the downturn and underlying factors driving it are not so much resolved as forgotten. The news cycle has moved on but the problem remains.
