Deregulation, the Financial Crisis, and the Ideology of “Common Sense”

“Obama knows what is going on in Iraq and in Afghanistan and how many people are getting killed” said professor Moretti in the beginning of this course (or something along these lines) “so why he doesn’t say something”?

U.S. and UK officials as well as the media in these countries knew that the embargo on Iraq during the 90s might have caused between 200,000 to 400,000 thousands kids to die (UN sources) but no one said anything! You couldn’t find any stories on US media despite the fact that these numbers were coming from UN agencies and other reputable non-profit organizations.

“How come no one saw it coming” quipped the Queen of England in a speech to London School of Economics referring to the financial crisis that still threatens the stability of the global financial (and political) system.

What was the point that Professor Moretti was trying to make? He went to say that it seems to be an “invisible gatekeeper” controlling what it can be said and what it can’t.

I would like to use the role of government regulation or, to be exact, absence of it or bad regulation, to illustrate the “acceptable” views on regulation and government intervention. Starting in the early 80s, and with more intensity in the 90s, the acceptable view on government regulation became that “regulation and good” do not fit in the same sentence. The fervor against regulation reached its apogee during the Bush administration and it became “common sense” that regulation is by definition bad. You could hear people talking on CNBC about the economy and if a guest dared to mention “regulation” the anchors would dismiss her with something like “…we all know that regulation is bad so no need to waste our time in the subject..” If she somehow insisted on the subject, she wouldn’t be invited back on the show ever again. You would expect, after a financial crisis, never seen since the great depression, which threatened to throw our country and the world in a chaos and even civil unrest, people would change their views about government regulation and intervention. Admittedly and by any measure, it was the government that saved the economy – as controversial as its actions might had been by saving the banks with public money. The unemployment rate could have gone up to 11, 12, or even 15% in the next several years and the economy would have contracted much more dramatically than the 6.5% it did in the first quarter of 2009. The $800 billion stimulus package, which was submitted by the Bush administration and passed by Congress after many bitter and emotional fights in the height of the crisis and which the Obama became responsible for dispensing it, has helped reduce the unemployment rate between 0.8 and 1.7[1] per cent. These numbers come from the Congressional Budget Office an independent and nonpartisan agency. Surowiecki writes, in The New Yorker, that “a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above 11% and GDP (gross domestic product) would had been almost  half a trillion lower.” I, personally, have seen Wall Street research by several economists which argued that the stimulus added somewhere between 2 and 3 per cent to GDP growth.

But you wouldn’t know it by watching CNBC or other financial news networks or reading mainstream news and financial media like Washington Post, WSJ, Investor’s Daily, not to mention the multitude of financial sites. The “acceptable view” that stimulus was/is very bad for the economy, despite all the clear evidence to the contrary, is so strong out there that even the President and other officials of his administration stopped using the word “stimulus.” I do not agree with many of the Administration’s financial policies, but “facts should be the same for everyone” and as Surowiecki, writes in the same article, the “weight of the evidence suggests that fiscal policy softened the impact of the recession, boosting demand, creating jobs, and helping the economy start again…politically, however, none of this has made any difference. Polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they are opposed to a new stimulus plan.”

Matt Taibbi, who became famous for calling Goldman Sachs “a vampire squid wrapped around the face of humanity”, in his new book Griftopia, devotes a full chapter on how the public has been convinced that total deregulation is the best way to deal with the financial crisis. In academia but also on Wall Street, everyone is turning to Hyman Minsky and his theory of financial fragility hypothesis.  A debt induced financial crisis has come to be known as “Minsky Moment.” The Levy Institute at Bard College, where Minsky was an economics scholar at the time of his death in 1996, has published numerous research and policy papers about the financial crisis using Minsky’s theory to explain the financial crisis. Randall Wray[2], a scholar at the Institute, in a paper published in 2008,  “explained the historical development that led to today’s complex and fragile system and how the seeds of crisis were sown long ago by lax oversight, risky innovations, and deregulation during a lengthy period of relative stability.”

Fukuyama[3], not a liberal by any sense, in a Newsweek article at the middle of the crisis wrote “…under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society.” In The Gods that Failed,  Elliot and Atkinson write that “blind faith in unregulated and free-for-all markets has cost us our future.”[4] In the afterword of their book they argue that “the collapse of the free market and the validation of state intervention have opened up the possibility of real and radical reform of the global financial of the global financial system. …(policymakers) need to bear in mind a truth that was forgotten during the years of free market excess: economies and markets exist not for their own sake but in order to promote the fullest possible development of the human person.”

Little did they know how wrong they would be on these last observations! As I have outlined above, exactly the opposite has happened. If we were to run a Google search for “Deregulation and Financial Markets” we will get pages after pages with articles on “how deregulation had nothing to do with the crisis and that…We need complete deregulation of the financial markets.”[5] The link to Fukuyama’s article was number 103 while I could count many from the Cato Institute before it.

So what we are missing here? Throughout this course we have been talking about critical thinking and rational thought and the need for justice and a sense of equality. Could it be that inequality and injustice have something to do with the financial crisis? It would be a heresy to hear anyone on CNBC or read on WSJ that inequality even exists in this country.

No other than an economist from the University of Chicago, the citadel of financial conservatism at the center of “the accepted view” on regulation and government intervention[6] for more than a half a century, Raghuram Rajan, cites rising income inequality as one of the root causes of the financial crisis. Ragan, who calls himself a pragmatic, is an exception among economists in calling for attention to income inequality as a destabilizing factor of the financial markets. In his recent book, Fault lines, says that “…we need to worry about inequality not just because it upsets our sense of fairness but because it creates dangerous political dynamics.”[7]

How is it possible, in this era of unparalleled access to information and knowledge and expertise, not to mention that everyone receives a minimum 12 years of formal education (whatever we teach the kids is not to be critical thinkers or question authority), we, as society, are so blindsided and not being able to distinguish the facts from opinions and ideology and formulate reasoned views as opposed to going with the “common sense”?

We should look no further than Gitlin’s “Hegemony in Transition” for a superb explanation of how acceptable views or “common sense views” are formed and defended by the “system.”  He tells us that “ideology is generally expressed as common sense – those assumptions, procedures, rules of discourse that are taken for granted. Hegemony is the suffusing of the society by ideology that sustains the powerful groups’ claims to their power by rendering their preeminence natural, justifiable, and beneficent. The decisive point is that hegemony is a collaboration….. Hegemony is a process of organization in which cultural elites occupy top positions and supervise the work of subordinates in such a way as to draw their activity into a discourse that supports the dominant position of the elites; at the same time, hegemony cannot operate without consent of those subordinates. Hegemony takes places behind the backs of its operatives; it is a silent domination that is not experienced as domination at all. Hegemony is the orchestration of the wills of the subordinates into harmony with the established order of power.”  Although his discussion is centered on entertainment and not news, he doesn’t see much difference so that “…the workings and functions of the hegemonic news-selecting and –distributing industry are not essentially different from those of entertainment. ……Hegemony in news as in entertainment takes notice of alternatives to the dominant values, descriptions, and ideals, and frames them so that some alternative features get assimilated into the dominant ideological system, while most of that which is potentially subversive of the dominant value system is driven to the ideological margins.”

In his conclusion, Gitlin argues that,

 “by themselves, new forms of distribution signify nothing momentous. By no means do they guarantee that substantive alternatives will emerge; they might simply circulate new assortments of the standard ingredient. Genuine innovation can never be reduced to a technological fix. What develops in popular culture depends on the practitioners, on the degree to which they generate culture that matches the desires of publics in distinguished ways….the sway of the culture industry presupposes two elements; audiences that it satisfies …and cultural producers who are willing to work within the going conventions, under oligopolistic constraints.”

What could negate Gitlin’s conclusion as it relates to a technologic fix through the new communication technologies known collectively as “Internet and Information Technologies and Sciences?” What if this new medium could eliminate the two key assumptions in Gitlin’s argument, that is, 1) practitioners are the cultural producers and 2) oligopolistic constraints? I might add one on my one; transaction costs, which relate to oligopolistic constraints, for consuming and producing “culture” that soon will approach from negligible to zero!

Yes, somehow hegemony has a way to prevail in the end and history is in its side. But as I survey the history of mankind and all we have read, discussed, and learned in this course, I see for a first time that the “lay” and freedom and justice loving people, have a chance of liberating themselves from “Gramsci’s organic intellectuals.”

This is not an easy argument to make and it will be long before we will know how far the “Internet” can take us. It will be a generation or two before we see any concrete results but these results will be built on the dreams of people like the ones who established the Open Source movement, The Wikipedia,  and, why not, WikiLeads[8].

 I will take up that challenge in the next and final essay for this course.

[1] James Surowiecki, The New Yorker, September 20, 2010

[2] Randall Wray, “Financial Markets Meltdown: What Can We Learn from Minsky?,” The Levy Economics Institute of Bard College, Public Policy Brief No. 94, 2008

[3] Francis Fukuyama, “The Fall of America, Inc.” Newsweek, April 2008

[4] Larry Elliot & Dan Atkinson, The Gods that Failed (New York: Nation Books, 2009)

[5] Someone would expect to see a balanced output of articles in the Google search output and that the Internet is a way for ordinary people to reach views outside the censored “acceptable views” of hegemony. I am a strong believer in the “Internet” as an enabler in allowing people to bypass the “allowed views of the Hegemony” so how come that the Internet offers us pages after pages of articles arguing for “acceptable view” of deregulation and markets? This is something that I am going to explore in my final write up, but I should point out here that if we check all these articles, they are all pointing to sites associated with free market ideology such as Cato, National Review, AEP, and many “tea party” associated .org sites. In order to get academic research papers either you have to go beyond the 10 or 20 pages count or to know how to write complex queries in your searches, something only a “critical thinker” would do (she would learn how to write the query because it’s an indispensable tool in using the Internet to access varied information and form reasoned, and based on facts, opinions). Most people will just check the first or two pages of results, will glimpse through a few articles and they will form the “acceptable” opinion that deregulation is “Good and Government Intervention is bad.” The quick answer why we get these results is that the results are manipulated (The Atlantic, November 2010, provides an excellent account how groups manipulate the rankings in searches so that opposing views are literally “buried”).  

[6] Obviously, deregulation and bad regulation don’t relate only to financial markets but to all markets and economic activities. In passing we should mention the catastrophic oil spill we observed this past spring in the Gulf of Mexico because of an oil rig blow up. The New Yorker most eloquently wrote that “…during the past decade MMS (Mineral Management Service) officials had let oil companies shortchange the government on oil-lease payments, accepted gifts from industry representatives, and, in some cases, literally slept with the people they were regulating. When the industry protested against proposed new regulations (including rules that might have prevented the B.P. blowout), MMS backed down.”

[7] As an insider (I started out my career working for a legend in the Hedge Fund industry, have spent over 20 years in finance and technology, and have been a partner for over 7 years at $1.3 billion Hedge Fund) I know firsthand the twisted logic that is used by Hedge Fund and Private Equity partners to justify why they should only pay 15% of their earnings in taxes while their secretaries and the people who clean their offices pay 20, 25, and 30% of their salaries in taxes. It is mind boggling how the finance industry has lost any sense of fairness and decency for the people that (the taxpayers) had to put their money and save them! It seems, as a Hedge Fund manager observed in an investment forum before the crisis (a Russian living and working in the UK after all), that Wall Street has hijacked America.

[8] It was said in the class that WikiLeads is like the Pentagon papers. Yes, but with a very distinct difference. WikiLeads represents a movement which is turning itself into an institution. It’s an “enabler” Institution for everyone out to other to bring out, expose if you want, the hypocrisy and secret and illegal agendas of the various governments and commercial and noncommercial “hegemonic institutions” around the world. In a recent article, The New Yorker argues that it doesn’t understand how WikiLeads adds value by dumping all these documents for all to see! How the public gains anything from them without “a moderator” asks The New Yorker? Probably by a moderator, the New Yorker means the “organic intellectual”. My response is that “did it occur to them that it might, at some point with the help of the Internet the public will be both the producer and the consumer of ‘culture’ and that it will have no need for Organic Intellectuals? “ For every node in the flat and distributed network, the Internet, we have both a consumer and a producer. This is not to say that the Internet will overcome Hegemony (the question becomes what it will replace it) or that it will not create as many problems as it will help to solve (not everything is bad with hegemony.) It’s a Wild, Wild, Internet out there!

---