Disaster Capitalism 101 June 27, 2010Posted by Dwight Furrow in Dwight Furrow's Posts, politics.
Tags: Robert Kuttner
In would not be misleading to name our current age the age of disaster capitalism. The financial collapse, the prolonged recession, and the oil spill in the gulf are our current preoccupations with the effects of climate change right around the corner. But the factors that led to these human-made catastrophes have been building for many years.
Economist Robert Kuttner has a brief but comprehensive summary of how we got here:
At issue are two interconnected failures of the economy and politics: what economists call market failure, and what political scientists call regulatory capture — and their cause and cure.
The financial and oil blowouts were spectacular cases of markets failing to price risks correctly. While market fundamentalists still insist that all markets eventually correct their own errors, fewer economists maintain that view in the face of recent events.
Oil companies pursuing short-term gains did not invest enough in safety precautions, and their shareholders didn’t care. Only government could compel action — but it failed to act.
Financial markets priced risky securities disastrously wrong. How could mortgages — whose distinguishing feature was that they were unlikely to be paid back — possibly have been converted into investment-grade securities?
There is a revealing expression in the world of hedge funds that you won’t find in most economics textbooks — “IBGYBG,’’ or “I’ll be gone, you’ll be gone.’’ Translation: by the time the dumb money finds out that it has been sucker-punched, we’ll both have made our fortunes and we’ll be out of here.
The ordinary forces of supply and demand that accurately price tomatoes can’t fix market myopia when it comes to pricing complex financial securities or risks of a drilling rig explosion.
So how do we prevent short-term thinking from overwhelming our capacity to reason. Government regulation is one answer, but that isn’t sufficient.
But to say that market failures require government regulation is only the beginning of the story — because regulation requires competent and honest regulators. And if private business invests serious money in the corruption of regulation, then a market incentive trumps government’s capacity to correct the market’s mistakes.
So who keeps the regulators honest? The answer takes us back to politics.
More than half a century ago, the late economist John Kenneth Galbraith coined an important concept — “countervailing power.’’ Big business, Galbraith observed, had immense economic influence. But countervailing forces such as the trade union movement or activist citizens groups could neutralize that economic power by harnessing government to keep business’s less savory tendencies from overpowering its benign ones.
But that was then. Despite a seemingly formidable environmentalist movement, the oil industry overwhelmed its regulators. Americans for Financial Reform, the coalition of consumer groups pushing for better banking regulation, is outspent by Wall Street lobbyists by at least 100 to one.
We have a tendency to think that when disasters occur they are unpredictable and thus there is not much we can do about them. That is true up to a point; I have blogged recently about the problems inherent in complex systems. But as Kuttner points out, there is no point in our current political system where anyone has an incentive to be cautious or think about what is best in the long run.
There has been a lot of commentary lately contending that we have a tendency to underestimate risk. Truly catastrophic events occur only rarely — they are “black swans.’’ In the meantime, a lot of money can be made by betting that disaster won’t occur, or that it will occur on somebody else’s watch.
But who, in this account, is “we’’? In fact, plenty of voices in the wilderness were warning against the risk of a catastrophic oil blowout, or a financial one. These critics did not lack prescience or insight. What they lacked was political power.
It’s true that technologies, both financial and oleaginous, are becoming ever more complex; and this does create new kinds of risk. But the cure is less technical than political.
Citizens need to act more vigorously to restore Galbraith’s countervailing power. Otherwise, private business acting in its short run self interest will ruin us twice — once when private markets pay no heed to the risks they are imposing, and a second time when they corrupt our regulatory institutions.
A look at our current political environment does not leave one hopeful. One party is afraid of its shadow and led by a President who seems genetically disposed to tinker with regulations rather than push for structural change. The other party is just insane. And the only activists who get any attention want to make disaster capitalism the norm. They would make even the sainted Ronnie Reagan blush with embarrassment.
Where is this countervailing power?
For political commentary by Dwight Furrow visit: www.revivingliberalism.com