Never Let a Serious Crisis Go to Waste
Page 40
Agnotological precepts suggest that the orthodox economics profession has been useful for neoliberal projects because it fills the sphere of public discourse concerning the crisis with excess noise and doubt. As long as it promulgates ineffectual “revisions” to core doctrine and keeps people distracted, looking for novelty (that will assuage their fears) where none is to be found, confusing even insiders about whether the crisis warrants changing the orientation of economics, then the NTC is getting value for money. The only thing that would give them pause is the genesis of a serious antineoliberal doctrine that began to draw the allegiance of significant numbers of economists, posing a real challenge to the neoliberal ascendancy. So far, nothing of the sort has happened.
What might be the evidence for the orthodox economics profession fulfilling this agnotological function? One place to look would involve the question of the grounds upon which the orthodox economics profession has managed to widen the pay gap between itself and almost every other discipline in the modern university during a period of retrenchment and austerity following the 2007–2008 crash, as demonstrated in Table 5.1. How can it be a straightforward return to human capital? If the economics profession has exhibited a glaring deficit of inventiveness concerning crisis explanations, recycling decrepit themes as novel insights, as we have argued here, then what can account for the lavish expanding remuneration? Is the marginal orthodox economist really that much more valuable than one more molecular biologist? It can’t be inertia, plus the veiled threat that they could always abscond to the (contracting) private sector for a better salary . . .
* * *
Table 5.1: How Much More (or Less) Full Professors Earned, by Discipline, than Average Full
Professor of English Language and Literature, 1980–81 to 2009–10
Discipline
1980–81
1985–86
1991–92
1996–97
2001–02
2005–06
2009–10
Fine arts: visual and performing
-8.8%
-9.6%
-7.9%
-9.7%
-11.1%
-12.2%
-12.4%
Education
-4.0%
-8.0%
-1.2%
-0.8%
-2.5%
-3.8%
-4.3%
Foreign language and literature
0.9%
-1.8%
-1.5%
0.5%
-3.9%
-4.5%
-4.1%
Communications
-3.3%
-6.7%
2.6%
1.9%
-2.9%
-3.3%
-3.2%
Philosophy
2.3%
-4.8%
2.0%
1.1%
-2.9%
0.0%
2.1%
Library science
-1.5%
-0.6%
9.9%
6.6%
3.5%
-2.1%
3.6%
Mathematics
7.6%
4.4%
11.0%
11.5%
6.8%
6.8%
7.2%
Psychology
5.0%
1.6%
9.5%
9.7%
8.3%
9.0%
8.9%
Physical sciences
7.7%
8.0%
14.9%
14.5%
12.8%
12.1%
12.9%
All-discipline average (including medical)
4.8%
5.1%
13.3%
13.9%
12.2%
12.0%
13.4%
Social sciences
4.8%
3.2%
9.0%
8.7%
9.2%
14.1%
16.8%
Health professions and related sciences
20.3%
19.8%
34.3%
36.4%
31.3%
18.1%
18.9%
Engineering
8.1%
14.3%
29.0%
27.8%
24.0%
24.3%
25.2%
Computer and information sciences
13.4%
17.6%
32.2%
28.1%
28.7%
27.5%
28.4%
Economics
13.9%
11.3%
28.4%
25.7%
26.4%
32.4%
41.2%
Business administration and management
11.4%
15.2%
33.8%
38.7%
40.8%
46.5%
50.9%
Law and legal studies
33.2%
41.0%
54.2%
58.4%
53.5%
54.0%
59.5%
Source: "Faculty Salary Survey by Discipline", Office of Istitutional Research and Information Management, Oklahoma State University
The most plausible answer lies instead in the passive recruitment of the profession for agnotological purposes. Whether they realize it or not, the kabuki of ineffectual disputations over irrelevant models is one of the more effective interventions in the public sphere, because it distracts attention from far more threatening prospective explanations. These include: the possibility that the financial sector has evolved to the point of cannibalization of the rest of the economy; or that the economics profession played an enabling role in inventing and justifying the most Rube Goldberg of securitizations and alterations of regulations; that neoliberal agnotology has filtered down to the very statistics everyone consults in order to make sense of economic events; that there is no such thing as the market, but only an array of different markets of varying capacities; that this ecology of markets bears inherent tendencies toward niche collapse that undermine system operation; and that “free trade” is the cover story for the policies of a class of the cosmopolitan rich who believe they can evade all local consequences of system breakdown. Perhaps it even exists to facilitate the full-spectrum neoliberal approach to policy discussed in chapter 6.
Thus the injection of surplus noise into public discourse concerning the crisis is Phase One of the agnotological project, and its performance is a substantial justification for the otherwise unaccountable contemporary bounty of the bulk of the orthodox economics profession. But that is only half the story. The other half is amenable to being documented much more precisely.
Phase Two materializes when economists openly struggle with the contradiction between beseeching the public to place their Trust in the Market and insisting the public Trust the Economists. It was made starkly manifest in at least two incidents during the crisis: the public justification of the TARP bailout, and the subsequent whitewash of the Federal Crisis Inquiry Commission.
In both instances it involved the fabrication and promulgation of an alternative narrative concerning the crisis; nicely honed and simplified so it can fit on a placard, or a stump speech teleprompter; one that has the fingerprints of the NTC all over it.
Of course, it was all the government’s fault.
Repent, Harlecons, Cried the History Man
Chapter 2 made some effort to insist that neoliberals don’t really hate the government; it is just politically convenient for them to demonize it when it suits their purposes. It turns out to be doubly convenient for them to tar and feather government when some prior governmental/market innovations that have gone awry may have grown out of their earlier neoliberal occupations of the very same government—say, for instance, the privatization of some prev
iously nonprofit governmental entity; in such instances, politics means never having to say you are sorry. This suggests that neoliberal stories concerning the crisis don’t develop organically out of any particular economic theory, but instead grow out of the proleptic (but dependable and time-tested) neoliberal playbook: attack the legitimacy of government→assume power→impose various neoliberal market/government “reforms”→wait for failures→rinse→repeat. Phase One of the whitewash cycle therefore sets the perimeters within which any neoliberal crisis explanation must operate; but that still leaves the details open for negotiations. As we observed in chapter 1, the New York meeting of the Mont Pèlerin Society was an early arena for negotiations over what shapes the party line might assume; evidently there was little agreement or focus at that stage. Perhaps this had something to do with the wise Mont Pèlerin precept that general principles often have to be tailored and adjusted to fit local political circumstances. Nevertheless, a full-spectrum response was collated and normalized, based on previous doctrines enumerated in chapter 2. The lyrics might be different, but the hymn remains the same.
We shall now set about to observe the catechism in action in the genesis of the now-dominant neoliberal accounts of the crisis. Not unexpectedly, “government” was fingered as the culprit in all successful variations; but the detailed narratives have been recast to appeal to particular nations or geographical areas. In the United States, the neoliberal touchstone has become “Blame it all on Freddie Mac and Fannie Mae,” whereas in Europe the cry has become “Blame it all on the PIIGS and Brussels bureaucrats.” If tempers grow heated, blame it all on technological change and its rancid doppelganger, financial innovation. When all else fails, blame it on a dead man (John Maynard Keynes) or blame it on China (global imbalances). Never, never, ever concede for a moment that the crisis was created and nurtured by market participants themselves.
A) Flipping Over the TARP119
We have briefly recounted the preliminary response of the neoliberal wing of the economics profession to the Troubled Asset Rescue Plan in the United States in the previous chapter; but here we subject the technical rationale of the program to scrutiny. In particular, we shall examine the circumstances surrounding the promotion (and subsequent demise) of the idea that the government could deliver us from financial calamity by devising a novel auction to remove “toxic assets” from the balance sheets of large banks. Most relevant from the present perspective was that the role of volunteer hazmat team was to be played by a small band of “market designers”—game theorists and experimental economists who were experts in the construction and deployment of specialized auctions.
The basic narrative goes like this in summary: In a little-noted sideshow to the catastrophe, economic theorists were called in to assist with the justification and passage of the Troubled Asset Relief Program in the confusion of late 2008. However, the U.S. Treasury rapidly decided it did not require their services, and in response, they turned their wrath against the TARP, all the while insisting it always lay within their power to rectify the whole bloody crisis, for a fee. In order to execute this reversal, market designers needed to modulate their public message, initially stressing the need to trust the market designers to correct flaws or imperfections with markets, yet subsequently, they altered their stance to insist upon the need to trust markets themselves as against the inept government. While speaking as public intellectuals, in retrospect they were persistently misrepresenting the nature of the problems involved, primarily due to strategic considerations of their own private profit. The net result turned out to be an infusion of surplus public confusion in an already chaotic situation. This is what agnotology in the crisis looks like.
The plan to run an auction for toxic assets originated in the immediate aftermath of the March 2008 Bear Stearns collapse, and from the conviction among market participants and some Treasury and Fed staff that it would be wise to have a plan to “pull off the shelf” in the case of another Bear Stearns–type emergency. Following several rounds of discussion between staff at the Treasury and the New York and D.C. Feds, Neel Kashkari and Phillip Swagel drafted a memo entitled “Break the Glass: Bank Recapitalization Plan.”120 In this memo, Kashkari and Swagel identified alternative emergency measures, argued in favor of using asset auctions to remove mortgage-related assets from bank balance sheets, and set forth a timeline for completing the asset purchases. Secretary of the Treasury Henry Paulson would eventually second their judgment to purchase on ideological grounds, but at that juncture essentially ordered that the plan be set aside.121
So when the emergency did eventually arrive, following the September collapse of Lehman Brothers, breaking the glass was something Paulson and the Federal Reserve chairman, Ben Bernanke, attempted to do. They began to make rounds to convince members of congress of the need for an emergency asset purchase plan, solicited an auction plan from the New York Fed, and approached academic market designers to fill in the details.122 But they almost immediately began to encounter difficulties. Bernanke gave a performance at Congress for which he was “much ridiculed”: during a hearing on the impending asset purchase plan, Bernanke laid out a plan to purchase troubled assets from banks at “close to the hold-to-maturity price,” a slippery magnitude that was highly disputable, but certainly meant paying prices much higher than currently prevailed on asset markets.123 Serious criticisms immediately surfaced: Didn’t this purchase plan just boil down to giving Wall Street a bailout? Then why bother with the circumlocutions? Given the nature of the emergency, was it realistic to believe that a relatively small asset purchase plan would do the job? While these objections were gaining intensity in the press, the Treasury worked behind closed doors to craft the original “Break the Glass” memo into a legislative proposal. The initial effort, which totaled only about 2⅔ pages, was viewed by many as so insubstantial as to be insulting; the House voted down the initial bill based on the proposal. Clearly the plan was in jeopardy.
It was in this context—with skepticism about the asset auctions abounding, and financial disaster looming—that market designers were recruited to fulfill a public role in the debate over TARP. Market designers soon found themselves in the public spotlight when Bernanke and Swagel referred to market designers’ expertise when fielding concerns about the prices to be paid in their plan, and in short order two of the academic mechanism designers approached by the Treasury, Lawrence Ausubel and Peter Cramton, emerged publicly to defend the legitimacy of the asset purchase plan.124 They publicly claimed they could design an auction that would improve upon the Treasury’s approach in the sense of establishing lower “competitive market prices,” a prospect that did not sound very salubrious from the standpoint of Bernanke, Paulson, and the bevy of Wall Street lobbyists who had already gone on the record with their concerns about the consequences of driving prices too low.125 If these microeconomists were to be politically useful, they had better manage to get on the same page as the Treasury officials and the Fed. Ausubel and Cramton responded by creatively interpreting “competitive market prices” to mean prices that were “reasonably close to value,” by which they meant basically the same thing as Bernanke’s “hold-to-maturity” prices.126 The plan purported to allow for the Treasury to manipulate its demand for securities, thereby manipulating the price paid, while preserving the ability to claim that the prices paid were still “market” prices, at least in some sense, an intention that has been subsequently acknowledged:
A concern of many at the Treasury was that the reverse auctions would indicate prices for MBSs so low as to appear to make other companies appear to be insolvent if their balance sheets were revalued to the auction results. This could easily be handled within the reverse auction framework, however . . . we could experiment with the share of each security to bid on; the more we purchased, the higher, presumably, would be the price that resulted.127
The claim that, armed with the right technique, the Treasury could in effect “go the market one better,” while not ba
ldly implausible, did look like they were claiming that the circle could, in fact, be squared: the government could pay greater than market prices, and yet the act of doing so could be rendered “transparent” by the notional market setup.128 But to the extent that it was possible to ignore this little detail, that would pave the way toward accepting the Treasury’s position: issues ranging from executive compensation to reform of the structural composition of the financial sector to direct banishment of certain formats of derivatives immediately fell by the wayside. At a time when the many well-organized economists were arguing against the TARP, as documented in chapter 4, the endorsement of these market designers was surely welcome.129
According to the market designers, if you understood the crisis from the correct microeconomic perspective you would come to realize how necessary their intervention was. Market designers claimed the problem stemmed from an absence of liquidity, not—crucially— pervasive insolvency. In their frame, banks possessed a variety of assets, some worthless but most others pretty valuable, and it was the inability to distinguish between the two that caused the crisis. By purchasing these assets, the government would reestablish liquidity, not merely by removing toxic assets from the banks’ balance sheets, but by releasing information that would establish the assets’ true values. One immediate consequence of this view was that the imposing magnitude of the toxic asset problem was not necessarily worrisome, nor was the possibility that the TARP program would be unable to remove the vast majority of the toxic assets from banks’ balance sheets: