Brad DeLong's Egregious Moderation

Paul Krugman Joins the Attack on Modern Finance

Money for Nothing: On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.

All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.

Why is this disturbing? Let me count the ways.

First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.

Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.

So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

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Steve Benen on Why Jay Bybee Should Be Impeached

The Washington Monthly: BYBEE'S 'REGRET'.... Unlike the other Bush administration officials who provided the justification for torture policies, Jay Bybee currently enjoys a lifetime appointment on a federal appeals court. The nomination was an insult, his confirmation was absurd, and as amn NYT recently noted, "These memos make it clear that Mr. Bybee is unfit for a job that requires legal judgment and a respect for the Constitution. Congress should impeach him."

As the jurist comes under closer scrutiny, Bybee's friends want the political world to know that the poor guy just feels awful about the whole mess. The Washington Post was kind enough to publish a lengthy piece today on Bybee's "regret."

"I've heard him express regret at the contents of the memo," said a fellow legal scholar and longtime friend, who spoke on the condition of anonymity while offering remarks that might appear as "piling on." "I've heard him express regret that the memo was misused. I've heard him express regret at the lack of context -- of the enormous pressure and the enormous time pressure that he was under. And anyone would have regrets simply because of the notoriety."

This probably isn't the right way to pushback against the criticism. The usual line from Bush administration officials is that the torture really was legally justified, and really did save lives. They're wrong, of course, but that's not really the point. For conservatives, there's nothing to "regret" at all. Indeed, the torture is to be applauded. Bybee, for the right, is a "hero."

But if Bybee feels bad about all of this, it suggests maybe the infamous Bybee Memo was a mistake. If he's filled with regret, maybe he realizes his legal guidance was wrong. Indeed, Bybee's anonymous friend said the torture memo "got away from him," and ended up in a place Bybee "never intended." Another source said Bybee "was not pleased" with the memo that bore his name.

I'd find it a lot easier to believe this if Bybee were to say something publicly, and perhaps explain his conduct.

The Post piece added that Bybee didn't even want to work in the OLC in the first place.

Bybee's friends said he never sought the job at the Office of Legal Counsel. The reason he went back to Washington, [Randall] Guynn said, was to interview with then-White House counsel Alberto R. Gonzales for a slot that would be opening on the 9th Circuit when a judge retired. The opening was not yet there, however, so Gonzales asked, "Would you be willing to take a position at the OLC first?" Guynn said.

Being unable to answer for what followed is "very frustrating," said Guynn, who spoke to Bybee before agreeing to be interviewed.

But that's hardly helpful. As Adam Serwer explained, "So Bybee knew he was breaking the law in allowing the use of torture, but you have to understand, he only did it because he really wanted to be a federal judge."

John Holbo: Injustice as Fairness, or Justice as Unfairness, or Something

Fairness for me, but not for thee - a prolegomenon to any paraconsistent theory of justice — Crooked Timber: I know, everyone read the New York Magazine piece with everyone singing Poor, Poor Pitiful Masters of the Universe. That was so a week ago. Thankfully, everything is back to normal. But let’s revisit ancient history. The following bit was especially wondered at (by Kevin Drum, for example):

Wall Street people are not moral idiots (most of them, anyway) — it’s not as if they’ve never pondered the fairness of their enormous salaries. “One of my relatives is a doctor, we’re both well-educated, hardworking people. And he certainly didn’t make the amount of money I made,” a former Bear Stearns senior managing director tells me. “I would be the first person to tell you his value to society, to humanity, is far greater than anything that went on in the Bear Stearns building.”

That said, he continues, “We’re in a hypercapitalistic society. No one complains when Julia Roberts pulls down $25 million per movie or A-Rod has a $300 million guarantee. We have ex-presidents who cash in on their presidencies. Our whole moral compass has shifted about what’s acceptable or not acceptable. Honestly, you can pick on Wall Street all you want, I don’t think it’s fair. It’s fair to say you ran your companies into the ground, your risk management is flawed — that is perfectly legitimate. You can lay criticism on GM or others. But I don’t think it’s fair to say Wall Street is paid too much.”

This argument is like a time bomb that can only be set on a 1 second fuse, and it has all the advantages of such a device.

It’s unfair for people to complain about unfairness, because our society has a ‘moral compass’ that treats unfairness as fair. Eh.

(I suppose this feels like tu quoeque, which is at least a little bit clever, sometimes. But in this case it doesn’t even work on that level. Either the person being addressed cares about fairness, in which case they have an excellent reason to ignore you. Or the person doesn’t, in which case they have an excellent reason to ignore you.)

But there is one conceptually interesting point hereabouts that relates, perhaps, to issues that have come up in our recent discussions of Cohen’s Rescuing Justice and Equality.

Let’s start with a simple thought. Most people are ok with a spot of unfairness around the place, even ideally. Ideally? Surely not! No, I think so. Trying to blueprint a perfectly ‘fair’ society is an interesting and educational exercise. But it’s important to see, not just that the blueprint is ‘ideal’ – with all the difficulties that entails: politics the art of the possible and all – but that, even if we could have this ideal, we might prefer something else. How so? There are lots of values (of competition and risk and achievement, for example) that are only plausibly realizable in an environment in which there is some unfairness (for some values of ‘unfair’). To take a trivial example: it isn’t unreasonable to prefer poker to chess, even though there’s more room for luck in poker; hence it is, in at least one sense, less ‘fair’ as games go. Cohen emphasizes a different angle. The ‘paying off the kidnapper’ cases, which turn out to be distressingly analogous to the difference principle cases (if you buy Cohen’s argument.) Paying a kidnapper may be the prudent thing to do, in certain circumstances (think piracy cases ripped from the headlines). That doesn’t make it just or fair. Maximizing (or optimizing) the good may involve tolerating unfairness.

I’m pretty impressed by Cohen’s argument that Rawls’ Theory of Justice – justice as fairness – is really justice as unfairness. Or even: unjust unfairness that yet might (even just on paper) be preferable to any just, fair arrangement you could blueprint as an alternative. So it turns out that the objection to Rawls may run in most paradoxical fashion: the problem with justice as fairness is that we might actually want justice and fairness. Hence the alleged need for ‘rescuing’, per Cohen’s title.

But that’s not actually what I want to talk about today (although it’s sort of the reason why it’s interesting to me): it’s hard to be sort of fair. It’s like pregnant. You are or you aren’t. Well, that’s not quite right. You can be roughly fair. Fair, unlike pregnant, can be vague. But you can’t just say ‘hey, life is unfair and that’s ok’ and also, convincingly, complain when life is unfair to YOU. Or anyone else. Even altruistic kvetching about someone else’s unfair misfortune, once you’ve cheerfully tossed fairness to the winds of affirming the thrillingness of risk, or whatever, rings pretty hollow. Fairness can’t be substantially ad hoc and capricious. Because then it isn’t fair. It’s something else.

A competition in which a panel of judges has subjective leeway for scoring competitors can be roughly fair. But a competition in which the judges randomly judge half the competitors based on performance, and assign scores based on random coin flips to the other half is not even roughly fair. You might say it is para-meritocratic, or something like that. But that’s not the same as ‘fair’.

Suppose suddenly the rules change! (Possibly due to further coin-flip.) Randomly, some of the previous coin-flips will be reversed! Eh. That doesn’t really make things worse, fairness-wise. From here on out it’s Calvinball all the way down, so far as ‘fairness’ is concerned.

Now, the reason this is interesting is that, in my tolerance for a certain degree of unfairness – my feeling that there are other values that are important, too – I am not tolerating mere ‘rough’ fairness but a substantial degree of capricious ad-hocery in life’s rewards and punishments. I am like a slower motion version of the idiot in the article, in other words, so it isn’t so obvious I’m a complete moral idiot. I basically have nothing like a paraconsistent theory of fairness. But that’s what I really need.

I suppose what people mostly do is just anchor at some point, giving them some basis for calling departures from it ‘unfair’. And then invent some story about how that point had some utilitarian merits, even though that would be hard to prove or disprove. Yeah, that’s the ticket.

Michael Steele on the Recession: ‘The Malls Are Just As Packed On Saturday’ As They Were Before

Think Progress: Steele Laughs Off The Recession: ‘The Malls Are Just As Packed On Saturday’ As They Were Before: This morning, GOP chairman Michael Steele guest-hosted Bill Bennett’s talk radio show. During the program, one caller said he could “debate” whether or not the U.S. is currently in the midst of an economic crisis. Steele laughed in agreement and claimed that “[t]he malls are just as packed on Saturday.”:

CALLER: I can really debate about how about that economic crises is because I look around and I don’t see people spending any less money than they have been.

STEELE: I’ve heard a number of people say that across the country. [LAUGHTER] The malls are just as packed on Saturday. [LAUGHTER]

CALLER: The malls are just as packed. … You still can’t get seat in a restaurant....

Despite Steele’s claim that consumers are packing shopping malls, they don’t appear to be spending their money there. Indeed, Gallup found that last month consumer spending among all Americans reached a 15-month low and is 27 percent lower than last year’s figures.

Additionally, Reuters reported yesterday that vacancies at regional and strip malls are soaring to record highs:

Vacancies surged at U.S. strip malls in the first quarter and set a record at U.S. regional malls, as the deterioration in the retail real estate sector accelerated, according to real estate research firm Reis.

“I’m extremely skeptical,” Reis Research Director Victor Calanog said. “This is the first pullback we’ve seen in 17 years that really affected retail properties directly.” Vacancies at U.S. strip malls rose to 9.5 percent, up 0.6 percentage point, the largest single quarterly rise since Reis began publishing quarterly figures in 1999, Reis said in a quarterly report released on Wednesday.

The reasons for this are clear. Just yesterday, the Labor Department reported that 654,000 Americans applied for first-time unemployment benefits, while the “number of people staying on benefit rolls rose to a record 5.84 million in the prior week.”

More puzzling, however, is the fact that Steele has previously tried to portray himself as taking the curent economic crisis seriously. He’s spoken often about the need to stimulate the economy and critiqued Obama’s own attempts to do so. Now, however, Steele seems ready to dispense with the facade and admit that the economy is not something he understands as well as he should.

Reihan Salam on Sarah Palin:

Sarah, You Blew It - The Daily Beast: Levi Johnston, a 19-year-old with a perhaps undeserved reputation as a backwoods simpleton, has done what Barack Obama and Joe Biden and sneering liberals and cringing conservatives couldn’t: He has killed off Sarah Palin as a serious contender for the next Republican presidential nomination. And I have to say, this depresses the hell out of me.

By now everyone knows about Johnston’s on-again, off-again romance with Palin’s daughter Bristol. During the campaign, the fact that Bristol was pregnant with Johnston’s child sparked a minor culture war, with pro-lifers rallying to the Palin family’s defense while a coalition of censorious snobs from the left and the right blasted Bristol for her irresponsibility. Back then, the official line from the Palins was that Levi and Bristol were getting married—and indeed, Levi had an elaborate finger tattoo to prove it. At the time, I found the Bristol-Levi story incredibly affecting. Here were two kids who were probably in over their heads, but they were trying to make it work. And here is this big, sprawling, weird, wonderful American family that had their backs during this completely wrenching time. Palin came across as a different kind of Republican, and her slightly messy life seemed to prove it. Since returning to Alaska, one can’t help but get the impression that Palin is a clownish, vindictive amateur.

But sure enough, like so many young loves, the engagement later dissolved. Instead of just giving his would-be in-laws the stink-eye over Thanksgiving dinner, Levi lashed out at supposedly snobbish Sarah on the Tyra Banks show. Inevitably, the Palins counterattacked, and the whole tawdry episode has given the Republican elite—those mysterious, shadowy pointy-heads who control the purse strings—second and third thoughts about Project Palin.

This is only the latest indignity in the long, slow downward spiral that’s been Palin’s brief career as a national figure, as everything clever and distinctive about her has been replaced by an unrecognizable Reaganite fembot caricature. Months before Palin was selected as McCain’s running mate, I told anyone who’d listen that she’d be the shrewdest pick. When she addressed the Republican National Convention in Saint Paul, I was utterly electrified. But during the latter days of the campaign, I started hearing rumors about how top-level McCain backers were shuttling back-and-forth to Alaska to put out various fires, and of course there has been a steady drumbeat of stories about Palin’s low-level abuse of power. Then there is the fact that the national Republican Party has destroyed much of what was great about Sarah Palin, and she let them do it.

For all its virtues, Alaska has a very quirky political culture, one that doesn’t always translate in the lower 48. At first, this was Palin’s strength. She wasn’t a Southern evangelical, a familiar—some would say overfamiliar—figure in Republican politics. Rather, she was a Northern evangelical, with an accent that almost made her sound like a Minnesotan. Despite her meteoric rise as a foot soldier of Wasilla’s Christian right, she also cut a strangely post-partisan figure in her early days as governor. As she told The New Yorker’s Philip Gourevitch long before she was selected as McCain’s running mate, she was actually glad that Barack Obama was polling well in Alaska because it represented a challenge to the status quo. Suffice to say, most rising Republican stars would stick to praising John McCain.

Palin was quirky in another respect: Recognizing that Alaska had to carve out its own path, she broke with Beltway Republicans in supporting a windfall-profits tax on oil companies among other populist measures. But once Palin signed up as McCain’s running mate, she couldn’t talk up the windfall-profits tax, one of her central accomplishments, because the Republicans in Congress bitterly opposed it. Palin also had a gift for communicating policy details in homespun language. Soon after meeting the McCain team, she reportedly pressed for proposals that she could sell to working mothers and small-business owners and other key constituencies. The sad truth is that the McCain platform, a mish-mash that reflected the often-contradictory input of dozens of advisers and donors, didn’t give her much to work with. Sarah Palin thus became red meat for the base—the pitbull with lipstick.

Palin’s campaign antics can be forgiven. What can’t be forgiven is the ham-handed way she’s tried to build her national profile since she returned to Alaska. She’s abandoned the bold right-left populism that won over Alaska voters—and me—in the first place in favor of an increasingly defensive and harsh partisanship. After making her name as a determined enemy of Alaska’s corrupt Republican establishment, she recently called for Democratic Sen. Mark Begich to step down so the hilariously crooked Ted Stevens could get another crack at the seat. She loudly promised to leave federal stimulus money on the table before clawing that promise back with a whimper. One can’t help but get the impression that Palin is a clownish, vindictive amateur.

Now, for example, Palin is raising hackles for naming colorful crackpot Wayne Anthony Ross to be Alaska’s attorney general. It turns out that Palin may have consulted with Ross over a state senate appointment, a move that would have been against state law. As a general matter, state law is something you might want your AG to be on top of.

What I’m wondering is: Has Sarah Palin undergone some kind of secret lobotomy?

Martin Wolf: Why the ‘green shoots’ of recovery could yet wither

FT.com / Columnists / Martin Wolf - Why the ‘green shoots’ of recovery could yet wither: Spring has arrived and policymakers see “green shoots”. Barack Obama’s economic adviser, Lawrence Summers, says the “sense of freefall” in the US economy should end in a few months. The president himself spies “glimmers of hope”. Ben Bernanke, chairman of the Federal Reserve, said last week “recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding and consumer spending, including sales of new motor vehicles”.

Is the worst behind us? In a word, No. The rate of economic decline is decelerating. But it is too soon even to be sure of a turnround, let alone of a return to rapid growth. Yet more remote is elimination of excess capacity. Most remote of all is an end to deleveraging. Complacency is perilous. These are still early days.

As the Organisation for Economic Co-operation and Development noted in its recent Interim Economic Outlook, “the world economy is in the midst of its deepest and most synchronised recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade”. In the OECD area as a whole, output is forecast to contract by 4.3 per cent this year and 0.1 per cent in 2010, with unemployment rising to 9.9 per cent of the labour force next year. By the end of 2010, the “output gap” – a measure of excess capacity – is forecast to be 8 per cent, twice as large as in the recession of the early 1980s.

In the US, the rate of decline of manufactured output compares with that of the Great Depression. Japan’s output of manufactures has already fallen by almost as much as in the US during the 1930s (see chart). The disintegration of the financial system is, arguably, worse than it was then.

If the world experiences a “Great Recession”, rather than a Great Depression, the scale of policy support will be the explanation. Three of the world’s most important central banks – the Federal Reserve, the Bank of Japan and the Bank of England – have official rates close to zero and have adopted unconventional policies. The real OECD-wide fiscal deficit is forecast at 8.7 per cent of gross domestic product next year, with a structural deficit of 5.2 per cent. In the US, the corresponding figures are 11.9 and 8.2 per cent. Governments of wealthy countries have also put their healthy credit ratings at the disposal of their misbehaving financial systems in the most far-reaching socialisation of market risk in world history.

It would be impossible for such activism to have had no effect. We can indeed see partial normalisation of financial markets, with a marked reduction in spreads between riskier and less risky assets (see charts). The FTSE All-World index has jumped by 24 per cent and the S&P 500 by 23 per cent since March 9 2009. Purchasing managers’ indices are picking up (see chart). More broadly, the chances of a manufacturing turnround are high: big falls in demand generate inventory build-ups and collapses in output. The latter are sure to reverse. China’s growth is also rebounding.

We can say with some confidence that the financial system is stabilising and the rate of decline in demand is slowing. But this global recession is different from any other since the second world war. Its salient characteristic is uncertainty.

Consider obvious perils: given huge excess capacity, a risk of deflation remains, with potentially dire results for overindebted borrowers; given the rising unemployment and huge losses in wealth, indebted households in low-saving countries may raise their savings rates to exceptional levels; given the collapse in demand and profits, cutbacks in investment may be exceptionally prolonged and severe; given massive and persistent fiscal deficits and soaring debt, risk aversion may lead to higher interest rates on government borrowing; and given the flight from riskier borrowers, a number of emerging economies may find themselves in a vicious downward spiral of weakening capital inflow, falling output and reductions in the quality of assets.

In short, as Stephen King and Stuart Green of HSBC note in a recent report, the exceptional dynamics of this crisis suggest a healthy scepticism about the timing and speed of recovery. What is most disturbing, moreover, is the scale of the policy action required to halt this downward spiral. This raises the big question: how and when might the world return to normality, with sustainable fiscal positions, strongly positive short-term official interest rates and solvent financial systems? That Japan has failed to achieve this over 20 years is surely frightening.

What I find most disturbing of all is the reluctance to admit the nature of the challenge. In its policy advice, even the OECD seems to believe this is largely a financial crisis and one that may be overcome in quite short order. Even the latter looks ever more implausible: in its latest Global Financial Stability Report, the International Monetary Fund now estimates overall losses in the financial sector at $4,100bn (€3,200bn, £2,800bn). The next estimate will presumably be higher.

Above all, the financial crisis is itself a symptom of a balance-sheet disorder. That, in turn, is partly the consequence of structural current account imbalances. Thus, neither short-term macroeconomic stimulus nor restructuring of balance sheets of financial institutions will generate sustained and healthy global growth.

Consider the salient example of the US, on whose final demand so much has for so long depended. Total private sector debt rose from 112 per cent of GDP in 1976 to 295 per cent at the end of 2008. Financial sector debt alone jumped from 16 per cent to 121 per cent of GDP over this period. How much of a reduction in these measures of leverage occurred in the crisis year of 2008? None. On the contrary, leverage rose still further.

The danger is that a turnround, however shallow, will convince the world things are soon going to be the way they were before. They will not be. It will merely show that collapse does not last for ever once substantial stimulus is applied. The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained, private-sector-led growth probably remains a long way in the future.

The world economy cannot go back to where it was before the crisis, because that was demonstrably unsustainable. It is at the early stages of a long and painful deleveraging and restructuring. Fortunately, policymakers have eliminated the worst possible outcomes. But there is much more yet to be done before fragile shoots become healthy plants.

Mark Thoma: John Steinbeck: A Primer on the '30s'

Economist's View: John Steinbeck: A Primer on the '30s': Via email:

A Primer on the '30s' by John Steinbeck, 1960, pgs. 17-31: Sure I remember the Nineteen Thirties, the terrible, troubled, triumphant, surging Thirties. ... I remember '29 very well ... the drugged and happy faces of people who built paper fortunes on stocks they couldn't possibly have paid for. ... In our little town bank presidents and track workers rushed to pay phones to call brokers. Everyone was a broker, more or less. At lunch hour, store clerks and stenographers munched sandwiches while they watched stock boards and calculated their pyramiding fortunes. Their eyes had the look you see around a roulette wheel ...

Then the bottom dropped out ... I remember how the Big Boys, the men in the know, were interviewed and re-interviewed. Some of them bought space to reassure the crumbling millionaires... "Don't be afraid - buy - keep on buying" Meanwhile the Big Boys sold and the market fell on its face...

The came panic, and panic changed to dull shock. ... People walked about looking as if they'd been slugged. ... Then people remembered their little bank balances, the only certainties in a treacherous world. They rushed to draw the money out. There were fights and riots and lines of policemen. Some banks failed; rumors began to fly...

What happened in the seats of power? It looked then and it still looks as though the Government got scared. The White House, roped off and surrounded by troops, was taken to indicate that the President was afraid of his own people. ... I speak of this phase at length because it was symptomatic of many positions of leadership. Business leaders panicked, banks panicked. Workers demanded factories stay open... Voices shrill with terror continued to tell people what was happening couldn't happen...

We didn't have to steal much... All over the country the WPA was working... [I]t was the fixation of businessmen that the WPA did nothing but lean on shovels. I had an uncle who was particularly irritated at shovel-leaning, When he pooh-poohed my contention that shovel-leaning was necessary, I bet him five dollars, which I didn't have, that he couldn't shovel sand for fifteen timed minutes without stopping. He ... grabbed [a] shovel. At the end of three minutes his face was red, at six he was staggering and before eight minutes were up his wife stopped him to save him from apoplexy. And he never mentioned shovel leaning again. I've always been amused at the contention that brain work is harder than manual labor. I never knew a man to leave a desk for a muck-stick if he could avoid it. ...

[I]n the Thirties when Hitler was successful, when Mussolini made the trains run on time, a spate of would-be Czars began to rise. Gerald L.K. Smith, Father Coughlin, Huey Long, Townsend - each one with plans to use the unrest and confusion and hatred as the material for personal power.

The Klan became powerful, in numbers at least... The Communists were active, forming united fronts with everyone... Except for the field of organizers of strikes, who were plenty tough ... and devoted, most of the so-called Communists I met were middle-class, middle-aged people playing a game of dreams. I remember a woman in easy circumstances saying to another even more affluent: "After the revolution we will have more, won't we dear?" ...

One night we got Madison Square Garden [on the radio], a Nazi meeting echoing with shrill hatred and the drilled litany of the brown-shirted audience. Then a dissenters voice broke through and we could hear the crunch of fists on flesh as he was beaten to the floor and flung from the stage. America First came through our speaker and it sounded to us very much like the Nazi approach. ...

Prosperity had returned, leaving behind the warm and friendly associations of the dark days. Fierce strikes and retaliations raged in Detroit, race riots in Chicago: tear gas and night sticks and jeering picket lines and overturned automobiles. The ferocity showed how frightened both sides were, for men are invariable cruel when they are scared...

The strange parade of the Thirties was drawing to its close and time seemed to speed up. Imperceptibly the American nation and its people had changed, and undergone a real revolution, and we were only partly aware of it as it was happening...

A few weeks ago, I called on a friend ... in midtown New York. On our way out to lunch, he said, "I want to show you something." And he led me into a broker's office. One whole wall was a stock exchange trading board. .. Behind an oaken rail was a tight-packed, standing audience, clerks, stenographers, small businessmen. Most of them munched sandwiches as they spent their lunch hour watching the trading. ... And their eyes had the rapt, glazed look one sees around the roulette table...

Richard Armitage On Torture: I Should Have Resigned From Bush Administration (Video)

Richard Armitage On Torture: I Should Have Resigned From Bush Administration: ARMITAGE: We'd lost the discussion about the terminology and the Geneva protections. Did not know, to the best of my knowledge anyone in the Department, that torture was going on. LEWIS: But you suspected it. You must've.

ARMITAGE: We did know that we lost the terminology question in Geneva. We did know of course because the [International Committee of the Red Cross] would come to see me and Secretary Powell. We certainly knew that they had suspicions.

LEWIS: So when you knew that the administration of which you were a part was departing from the Geneva Conventions and sidelining them, why didn't you quit?

ARMITAGE: In hindsight maybe I should've. But in those positions you see how many more battles you have. You maybe fool yourself. You say how much worse would x, y, or z be if I weren't here trying to do it? So torture is a matter of principle as far as I'm concerned. I hope, had I known about it at the time I was serving, I would've had the courage to resign.

Tim Fernholz: Simon Johnson, the Unlikely Revolutionary

Simon Johnson: The Unlikely Revolutionary | The American Prospect: The global economic crisis has produced far more villains than heroes among the economic experts in academia, journalism and business. Nonetheless, a few outspoken economists have become central to the national conversation, including Paul Krugman, who has actively critiqued the current administration from the left, Mark Zandi, whose research drove the stimulus debate, and Nouriel Roubini, who faced derision as "Dr. Doom" for his pessimistic but accurate pre-crash forecasts. None though, have created such a stir as Simon Johnson, the British-born economist and emerging markets expert who took a look at the United States and didn't see an economic powerhouse, but a banana republic.

"In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets)," Johnson writes in a piece published this month in The Atlantic.

Long-held assumptions about the efficacy of markets and the role of government in economic life have been under intense scrutiny since the September failure of the nation's financial system, perhaps most famously in ur-free market guru and former Chair of the Federal Reserve Alan Greenspan's congressional mea culpa last fall. But no other economist of Johnson's credentials has stepped forward to call the United States a financier-run oligarchy. It's a charge that's attracted a lot of attention coming from an MIT professor and former chief economist at the International Monetary Fund, an institution that is normally a bête noire of the left.

"I'm not a populist, OK. I'm very concerned about fiscal responsibility, I'm very concerned about runaway inflation," Johnson told me last week. "I'm interesting to people on the left in part because I really am a very centrist-type character who is completely agreeing with, and in fact going further than, many left-type people."

But there is more to his argument than mere controversy. His bleak picture of U.S. political economy hints at the future of a profession in crisis.

"In essence, everything is up for grabs," Martin Wolf, a former World Bank economist who is now the chief economics commentator at the Financial Times, says. "It's like asking, in a way, in 1932, two years after the crisis really hit, what was the Great Depression going to mean?' The answer, we now know, is that the Great Depression changed everything, it ended us up in a completely different intellectual world, political world, social world."

Johnson underwent this shift. He recalls, early in his time at the IMF, signing off on a report about liberalization in developing countries. "I didn't disagree with this at the time: If you have strong institutions and a well-run regulatory structure, you can and should move towards capital market liberalization," he says. But after an "oh-my-goodness" moment one evening last September, as the full impact of the Lehman failure and the U.S. takeover of AIG became clear, he changed his mind. "Now," he says, "that's not my view. We should go back and look at everything, and wonder about if anybody has the regulatory structures able to withstand what happens when you liberalize."

His argument, in a nutshell, is that the last 25 years have seen deregulatory policies driven by the banking interests, leading to an over-large financial sector that has captured the political process. Financiers promoted free-market ideals, served in government, and funneled millions into the political process. Now, the risky behavior of major financial institutions, combined with the public policy they promoted, has created a major crisis. But the bankers' political power hasn't waned, and they are preventing the government from acting aggressively to start recovery.

Johnson and other economists across the ideological spectrum have fashioned a rough consensus that the government needs to take insolvent banks into receivership and use anti-trust tactics to break them apart, producing a financial sector that is small, simple and heavily regulated. But Johnson doesn't believe this will happen unless the financial crisis becomes even more severe; otherwise, the political incentives standing in the way will be insurmountable even if the price paid by the economy is, in the long-term, devastating.

On the other hand, the results of the recent G-20 economic summit offer a glimpse of the current political response to the economic crisis: return to the status quo. Leaders blame the crisis on technical decisions made by regulators and the central banks that set monetary policy; they hope to prop up the existing system, and, with slightly more regulation, continue on with essentially the same game.

Many economists see in this approach as complacent, and indicative of a fundamental misunderstanding of the financial sector's structural problems. Johnson's contribution is identifying the political factors that contribute to the rosy-eyed government consensus in the face of many academics' hard-edged analysis.

"Economists don't usually talk like that about policy making unless they're in political economy departments," Wolf says. "That might change the way the debate goes and might delegitimize, if [Johnson] is successful, some of the policies promoted by the banking system and indeed the current administration."

Despite Johnson's comparison of the United States to an emerging market, a key difference is that the United States isn't broke and desperate for the aid of the IMF. Our ability to borrow cheaply gives us flexibility those countries don't have. Johnson worries that flexibility leads to indecision; others observe that the stakes are much higher for U.S. policymakers. While another country might suffer an internal financial crisis, U.S. failure risks a global depression. The American government worries that a massive bank receivership could create panic, and administrative challenges could lead to an even worse functioning financial system.

Wolf, a friend of Johnson's, agrees with much of the MIT professor's assessment -- up to a point. He differs not on the right solution but on the role of ideas, not just interests, in creating the crisis and the motivating the government's response. "It's not enough to tell people, as it were, they're venal, it's not enough to tell people they're wrong," Wolf says. "You have to tell them that the alternative that you want them to pursue is actually one that you can manage within the U.S. political context."

Like another Johnson critic, Harvard's Dani Rodrik, has argued, Wolf believes that free-market ideology, rather than the power of moneyed interests, plays a major role in the problem. While conceding that interest group politics is important, both Rodrik and Wolf cite John Maynard Keynes, who famously said that "practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist," to argue that the aggressively laissez-faire policies of the last three decades were driven not just by profit, but by an honestly acquired, if damaging, worldview.

"It really isn't true that Chicago economists and Alan Greenspan and all of these people had the ideas they had about the world because they were venal," Rodrik says. "They didn't do it because they were bought by anybody. They made these policy choices … because they had certain ideas about the way the world works."

Johnson, on the other hand, believes his argument "subsumes" the ideas critique, that the damaging world-view promoted by the Greenspans and Robert Rubins of the world is one of the ways oligarchy maintains its power.

Whether through corruption or an honest belief in the magic of derivatives, the same damaging decisions were made. But the distinction between ideas and interests is important if changing the current response matters. While defending his economic plan, President Barack Obama said that Sweden, an oft-cited example of a decisive response to a financial crisis, "has a different set of cultures in terms of how the government relates to markets, and America’s different." Obama's political instincts -- and constituency -- would normally put him opposite the bankers, but a major constraint is his, and his administration's, ideas about what is and is not acceptable. The battle to fix the financial crisis must include political organizing and efforts to limit the influence of money in politics, but we also have to change the way we think about economic policy.

Unfortunately, Johnson posits, the economic specialty that deals with business cycles and recessions -- short-run macroeconomics -- hasn't yet acquired the tools to assess the influence of political interests on their policy proposals. Perhaps unsurprisingly, finance specialists have.

'"If you walk into a finance seminar with data pertaining to power and influence, the kind of things we're talking about, they will take you very seriously," Johnson says. "The short-run macro people, not so much."

A fluid speaker who peppers his conversations with interruptions of "and another thing," Johnson recalls that when he was appointed to his IMF position, The Economist wrote a snarky piece criticizing his approach to economics. The magazine suggested his consideration of political issues was unsuited to the IMF's needs at a time when the institution was focused on macroeconomic liberalization and the World Bank was better known for its political focus on development and poverty. Now he feels vindicated.

"Short-term macro should be more about oligarchs, and power structures, and what goes on in countries," he says. "That turned out to be right. I didn't think it would be quite as right as it really is. On the other hand, you can say, look, that Simon has a hammer and everything's a nail. Maybe I'm wrong; maybe the banking system isn't too big, too powerful, or fundamentally bad for us."

John Berry: Distracted Congress Loses Focus on Credit Freeze

April 13 (Bloomberg) -- Members of Congress have lost sight of the point of all the efforts to end the nation’s financial crisis. Hint: It’s not to punish executives at financial institutions whose behavior led to the turmoil. The politically popular urge to punish is getting so much attention on Capitol Hill, it’s pushing aside the real goal of getting enough credit flowing to stop the economy’s nosedive.

A limit on executive salaries at companies receiving federal assistance -- part of the economic stimulus enacted in February and applied retroactively to those who had taken money under the Troubled Asset Relief Program (TARP) -- could discourage participation in the pending Public-Private Investment Program (PPIP). So could the proven willingness of Congress to change the rules whenever it wishes. PPIP would get the so-called legacy securities and loans -- formerly known far and wide as toxic assets -- off bank balance sheets. That’s an essential next step in getting financial markets to function normally again.

This complicated program won’t work without private investment money; private managers will retain control of the assets, with the Federal Deposit Insurance Corp. looking over their shoulders. The existing restrictions on compensation might apply to these investors. If not, some members of Congress want them to. That would be another case of cutting off our nose to spite our face.

Congressional leaders should make clear they won’t impose pay restrictions on PPIP participants. Further, they should commit not to change any more rules retroactively. That would ensure the widest possible participation in the PPIP. Of course, they’re not about to make any such commitment. Even if they did, they might not be able to keep it, given the anger in the country and on Capitol Hill directed at Wall Street.

In addition to compensation limits, the stimulus law imposed restrictions on visas for foreigners hired by hedge funds investing in various credit facilities. That caused some funds to decline to participate. What a foolish thing for Congress to have done. The visa issue has been one factor in the extremely slow start for the Term Asset-Backed Securities Loan Facility, or TALF. Up to $1 trillion worth of credit is intended to support loans collateralized by student, auto, credit card and commercial real estate loans. However, only $6.4 billion worth was requested in the first two rounds.

Credit in the asset-backed securities market has been frozen for months. Yet members of Congress have shown themselves willing to let that central issue fall by the wayside when invited to take steps toward protectionism or, in the case of pay caps, paternalism. I have no trouble with actions to curtail the outrageous levels of compensation some corporate executives receive. The time to start, however, is not in the middle of a severe recession. And whatever is done ought not to apply just to a company that has received TARP money or participated in a needed effort such as TALF. (Companies getting TARP money also must allow shareholders a non-binding vote on executive-compensation packages at annual meetings. Why not require shareholder approval of executive compensation at all large companies -- and make it binding? Often compensation committees are comprised of well-compensated corporate board members with a conflict of interest: They have been brought to the board by the executives whose pay they are helping set.)...