Yes, Paul, I Agree! (Sort Of)

In today's post, Paul Krugman writes that we should not cry for the bankers, and I agree. Would that he had written that two years ago when Washington was airmailing billions of dollars to Wall Street to buy up the "toxic assets" (yes, an oxymoron) and "save" the system.

It always is frustrating in reading a Krugman column which begins with promise, as I don't want to be opposing the guy just to oppose him. Rather, I wish to oppose his arguments. For example, a few years ago, he was (appropriately) knocking down the so-called lump-of-labor fallacy that holds there are only a finite number of jobs in any economy, so they have to be spread out. (Union work rules arise from this theory, which is why we often see some ridiculous work arrangements in union contracts.)

As I was reading the column, I was agreeing wholeheartedly. Unfortunately, he ended with his usual non sequitur. He claimed that by not "fully funding" the Homeland Security Department(!), the Bush administration was falling to the "lump-of-labor" nonsense, leaving me with a "Huh?" response.

Likewise, today he begins by saying the following:

On Thursday, President Obama went to Manhattan, where he urged an audience drawn largely from Wall Street to back financial reform. “I believe,” he declared, “that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector.”

Well, I wish he hadn’t said that — and not just because he really needs, as a political matter, to take a populist stance, to put some public distance between himself and the bankers. The fact is that Mr. Obama should be trying to do what’s right for the country — full stop. If doing so hurts the bankers, that’s O.K.

More than that, reform actually should hurt the bankers. A growing body of analysis suggests that an oversized financial industry is hurting the broader economy. Shrinking that oversized industry won’t make Wall Street happy, but what’s bad for Wall Street would be good for America.

At one level, he is correct. Wall Street DOES need reform, and it cannot be business as usual for the Usual Suspects. That being said, however, we need to remember that two years ago, the market was saying the following in no uncertain terms: "You bankers have had a wonderful run, with your bonuses and your big houses in Connecticut. It is time to say goodbye to all of that and live in the real world again."

However, being that Krugman believes the market always is bad, he called for bailouts and then demanded "reform." And, once again, we see that Krugman recognizes the disease, but then calls for a "cure" similar to bloodletting or pouring arsenic down the patient's throat.

There are two ways to travel here. The first way is what Krugman and others are demanding: Have essentially a state-run financial system in which the SEC controls ALL of the investment sectors, with the supposed "brilliant" regulators knowing exactly what investments to choose. Yes, I guess Krugman means people like this, which apparently populate that august regulatory agency known as the SEC:

As the country was sinking into its worst financial crisis in more than 70 years, Security and Exchange Commission employees and contractors cruised porn sites and viewed sexually explicit pictures using government computers, according to an agency report obtained by CNN.

"During the past five years, the SEC OIG (Office of Inspector General) substantiated that 33 SEC employees and or contractors violated Commission rules and policies, as well as the government-wide Standards of Ethical Conduct, by viewing pornographic, sexually explicit or sexually suggestive images using government computer resources and official time," said a summary of the investigation by the inspector general's office.

More than half of the workers made between $99,000 and $223,000. All the cases took place over the past five years.

My guess is that Krugman would claim that these people did not "believe in government."

There is another way, and that is to make these firms accountable to the market for their actions. Yes, there is moral hazard created in the markets and, yes, people scratch each others' backs, but that also goes on in government, and I would defy Krugman to create a government agency that ultimately does not become yet another example of how "Capture Theory" works.

As Peter Schiff noted in this speech (yes, I repeat stuff from an earlier post), the market would have caught onto Bernie Madoff long before the SEC had figured out the scam, but because the SEC was putting its bill of approval on Madoff's secret Ponzi operation, he went undetected until the whole thing fell down.

Are we going to have that kind of Wall Street, a financial system in which individuals actually are accountable to their errors? Not at all. The irony, however, is that Krugman believes that by creating a Bigger Financial Cartel, he is going to get the moral hazard out of the system. Right.

Of course, Krugman also believes that the Federal Reserve System has "saved" our economy when, in fact, it is making it even more unstable and vulnerable to future meltdowns. Unfortunately, a nanny-state liberal like Krugman simply cannot bring himself to believe that government run by People Who Think Like Him actually can run an economy -- instead of running it into the ground.

Yes, It's a Republican Plot

Most of the economists I have known have been associated loosely with the Republican Party or maybe the Libertarians. (Mark Thornton and John Sophocleus, two of my favorite economists and writers, both ran for statewide offices in Alabama as Libertarians, and both did better than most other Libertarian candidates have done. Neither are kind to the Republican Party.)

That being said, I never have dealt with any economists that were hyper-partisan Republicans, and at most economic events dominated by my friends, I heard more criticism of Republicans than I heard praise. Then there is Paul Krugman.

Even though the Republicans are nearly endangered species in this Congress, Krugman still insists that they are like Goldstein, falsely convincing us that we are at war with Eurasia when, in reality, we are at war with East Asia. For example, as I have pointed out many times before, he continues to claim that it was Reagan and the Republicans that gave us financial deregulation when the most important deregulation bill, DIDMCA, was passed in 1980 when Jimmy Carter was president and Democrats had the same majority in the Senate and an even bigger one in the House.

So, I hardly am surprised when Krugman insists that Goldstein, er, the Republicans, might kill the present "financial reform" bill. Now, if this is anything like the "reform" that gave us Sarbanes-Oxley or the Patriot Act that "reformed" how the government conspires against its citizens, then I am not sure I am in the market for such an act and would cheer on anyone willing to filibuster it.

Krugman writes:

I have a theory about the problem here. My understanding is that Obama officials have looked at the polls, which show that the public overwhelmingly favors cracking down on Wall Street; so they assumed that the GOP wouldn’t dare stand in the way. But they seem not to have learned, even now, that the right has an awesome ability to create its own reality: that Mitch McConnell et al would stand in the way of reform while claiming to be taking a stand against Wall Street.

that is a most interesting theory, actually. Now, what does he mean by "cracking down" on Wall Street? What he means is that Wall Street becomes the repository for buying government bonds (after the Chinese decide they don't want any more of that junk).

Furthermore, what he wants is to create what essentially would be a large financial cartel held together by the wise regulators from the SEC (who, on application, would have to pledge that they, like Krugman, "believe in government"). I doubt Krugman will use the "C"-word, but that is what he wants, and he forgets that the last SEC-run financial cartel fell apart about 1980, whether or not he wants to believe it. Furthermore, if he believes that giving the Federal Reserve System even more power than it has now is "reform," well, Lucy van Pelt has a football she wants you to kick.

Of course, he could not resist hinting that not falling into line with his view of "reform" is racist. In his own words:

And let’s be clear: there’s a sort of tribal thing going on (and I don’t necessarily mean race, although that’s part of it). The hard right has managed to convince a large number of Americans that it consists of people like them, whereas progressives are alien and untrustworthy; in the face of that, rational arguments don’t make much of a dent.

That the "Progressives" are our friends reminds me of the scene in "The Unbearable Lightness of Being" in which dissidents are being interrogated after the Soviet crushing of the Prague Spring, with the interrogator shouting, "Don't you know that we love you?!?