Sunday, February 01, 2009

Business as Usual

The most underreported aspect of the current economic crisis is the degree to which this is just business as usual. By making events seem extraordinary, we don't develop the public will to change.

Economic downturns, crisis in the banking industry, large-scale bailouts of corporations, fraud in the securities industry, millions of investors losing their shirts - all happen on a regular basis. The last US recession was just five years ago. This time the housing bubble burst; ten years ago the tech bubble burst. The US government bailed out the auto industry in the late 70s and the banks in the early 90s (and thousands of other companies from that period to now). This time inadequate regulation led to enormous losses due to sub-prime mortgages and the securitization of risk; in the 80s lack of regulation led to enormous losses due to junk bonds. In the 80s the banking sector was rocked by the Savings & Loans scandal, and in the early 90s it was rocked by the collapse of that decade's real estate bubble. This year investors lost billions to Bernie Madoff; just a few years ago investors lost billions in Enron. I was flipping through a 2005 copy of a financial industry magazine the other day, and it was full of articles about fraud and corporate collapse in the hedge fund industry. This recession is so far no worse than those we suffered in the early 80s and early 90s.

The essential problem seems to be an inability to understanding during booms that booms lead to busts. Alan Greenspan kept interest rates low long past the time that monetary policy was needed to spur to the economy, and so created the massive bubble that burst so spectacularly last year. During booms we feel that the good times will never end. I recall during the tech boom that the business press line was: If you don't invest in tech stocks you're throwing away money; tech stocks grow by 30% every year while every other investment pays a fraction of that; it's crazy not to invest in tech stocks! Then tech stocks went kaput.

During a downturn we all understand the concept of business cycles. During an upturn we forget about it completely. If citizens, investors, policy-makers and regulators all developed a clear long-term approach to business cycles, then we might start to get some coherent policy that would avoid our current situation of lemon socialism, in which the rich bleed dry a company and then seek government assistance.

If we saw the situation for what it is, we might institute taxes on financial transactions to create a bailout fund (first, we should create a fund to pay off previous bailouts; then start saving for future catastrophes). Or we might decide that if something is too big to fail then it's too big to be in private hands. We might think about regulating the bonus system in financial institutions that lets financial managers collect bonuses on investments that make huge gains in the short term but face catastrophic risk down the road, after the manager collects the bonus.

We might see that we need some reins on the ability of the elite to enrich themselves at the helms of large corporations. That there is something wrong when individuals in the hedge fund industry make over a billion dollars a year (and pay only a 15% tax rate). Or when CEOs of money-losing companies take home hundreds of millions in remuneration. Or even little things like senior management of public companies flying to the superbowl on company jets.

And we need to see that the good times aren't so good after all. We need to even out business cycles by putting a damper on booms. This can be done with monetary policy (raise interest rates to slow down a hyperactive economy), but also with fiscal policy, such as some form of excess-profits tax. Just as we have economic stabilizers for downturns, such as employment insurance payments, so we could institute economic stabilizers for booms, such as more top-end tax brackets.

Thirty years ago, at least we knew we were being shafted. Now we (the middle class) seem to have been blinded by our own increased affluence, even though it is mostly driven by demographics (more people in peak-income years), women joining the workforce and so creating two-income households, increased hours of work, and a decrease in the non-immediate remuneration of pensions. We also fail to see that the increasing lack of job security means that our income is lower than it would seem from a single pay cheque: increasing numbers of us face periods of no income.

Once we see that this economic crisis is not extraordinary but just business as usual, it becomes clear that this isn't bad luck: it's a corrupt system. We haven't moved beyond the trickle-down economics of the Reagan years. In fact, the gap between the compensation of senior management and the average compensation of everyone else in corporations continues to widen, while tax cuts have mostly benefited corporations and the wealthy; and when bad times hit, it is the taxes of the middle class that bail out the wealthy. It's time for real change, and it's not going to come without public awareness and will.


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