Notes on the current crisis


Jamies Gorelick is emblematic of a large part of the problem.

Mistress of Disaster: Jamie Gorelick

Making sense of the economic crisis

It is bad enough that insiders like her bounce from failure to failure while collecting huge paychecks. What is really galling is the lack of scrutiny people like Gorelick receive from the “watchdog press”.

No surprise. When her conflict of interest on the 9-11 Commission came to light, she did not lack for defenders. Establishment pundit David Ignatius raced forward to denounce criticism of his “friend” as partisan smears. In such an environment, you cannot expect the MSM to look into the actions of sharp operators like Gorelick, Raines, or Johnson.

The greater sin of the elite media is the fairy tale version of Washington they foist upon their readers/viewers. In their telling of the story, the Party of Free Enterprise wages a vicious, partisan war against the Party Opposed to Big Business.

The reality is something far different. Liberal Democrats like Chris Dodd, Barack Obama, and Barney Frank received huge sums of campaign cash from Freddie and Fanny. Joe Biden watches out for the interest of credit card giant MBNA while his family dabbles in running hedge funds.

The fairy tale has been obsolete for decades. The Democrats made their peace with Big Business in 1975 when Phil Burton and Tip O’Neil realized that they could use corporate money to preserve their post-Watergate majorities.

The Beltway and Wall Street seem so connected that the ethos of crony capitalism prevails. The Republican Secretary of the Treasury, a former chairman of Goldman Sachs, crafts bailouts with the input of the current chairman of Goldman Sachs. Should anyone raise questions about the propriety of this cozy deal-making, both men can count on a ringing defense from a past Democratic Treasury Secretary and the Democratic Governor of New Jersey. Oddly enough, both men are Goldman alums.

The fairy tale conflict and cozy bipartisan reality is a negative by-product of the “mediated democracy” Powerline discussed.


There seems to be a fatal contradiction in free market theory when it comes to financial services. On one hand, “too big to fail” is cold unpleasant reality. The terrible thing is that it encourages big firms to take too much risk because the Feds will have to save their bacon to avoid a financial meltdown. Right-wingers hate this.

At the same time, they hate anti-trust action. Therefore, they permit more and more financial services companies to reach that “too big to fail” threshhold.

‘Tis a puzzlement.

In our market research in consumer banking we ran into a concept called “the moralization of credit.” A certain segment of the population looks at how their neighbors manage their money through a prism of “right and wrong” not “prudent or unwise”. I hear echoes of that in many conservative commentators.

Frequently, these moralists seem most offended by the borrower who cannot pay, not the banks who encourage the borrowing (and turned a tidy profit for a time.)

Yet these same conservatives recognize that the drug dealer is a bigger villain than the addict. How is credit different from dope?

I think a sensible conservative has to add a little Niebuhr to his Hayek. We cannot expect men in groups to behave as morally and as responsibly as men will as individuals. That does not change just because the group is a for-profit corporation.

A sad quirk of fate is that McCain did more than most senators to address these problems before they became a crisis. Yet, he does not get credit for his foresight. Instead, the economic bad news will probably cost him the election.

In the aftermath of this crisis, many companies will fail, or merge, or be taken over in a shotgun marriage. Nearly everyone will blame the unforeseen credit crunch, market meltdowns, etc., etc. in many cases this is just a new form of failure laundering. The true cause of their problems are bad strategies or poor management. The broader economic problems just provide a convenient fig leaf to hide these executive failures.

There is a special class of market victims in these sorts of bubbles and they get almost not attention. These are businesses who tried to manage prudently while the irrational exuberance was rising toward flood tide. In the Hayekian/Darwinian fairy tales of the Right, these firms will step forward to pick up the pieces. The reality is that many of these firms have disappeared. What now looks like prudence was formerly condemned as stodgy, unimaginative, and out of touch. Their lagging stock price made them takeover bait for the glamorous high rollers who then crashed and burned. Other once prudent businesses replaced their “underperforming” executives with aggressive charismatic executives who drank freely of the bubble Koolaid.

The Bush-Cheney administration has worked assiduously to restore the power and prerogatives of the executive branch. They have been curiously loath to wield those powers at critical times. We saw it first in their lackadaisical efforts to win the Iraq War. We saw it again in the present economic mess.

Hmmm, jealous of its prerogatives yet indolent in governing. That sounds more like a decadent monarchy than a vigorous Jacksonian chief executive. I think the Right got Bush wrong. Today, he seems more like G.W. Bush II of Connecticut than he does the forceful W from west Texas.