Super-Duper Failure

As many of us have been hoping and praying, the Super Committee fell of its own weight, making room for a much better debate about where budget cutting fits into a recovery strategy (if at all), and how to raise taxes progressively in order to finance the investments and jobs that America needs.

President Barack Obama was unwise to make this devil’s bargain in the first place; he has since moved on to emphasizing jobs and recovery. The Super Committee crack-up should be the last gasp of the “bipartisan” folly about deficit reduction as key to recovery—which the president himself gave a big boost with his appointment of the late Bowles-Simpson Commission.

Now, mercifully, the Republicans stand exposed as the party that would ravage Social Security, Medicare, Medicaid, and other valued social outlays in order to spare the richest 1 percent any tax increases. Republicans have been in their own echo chamber for so long that they don’t quite grasp that most of the voters oppose this idea. Democrats, in spite of their intermittent death wish, are the big winners from the Super Committee’s collapse.

Much of the mainstream media, however, is still treating the committee’s failure as (a) tragic, (b) symmetrical, and (c) hazardous for the recovery—all mistaken premises. Paul Krugman had a fine column on this last week, making fun of centrist pundits who call for Obama to make more compromises to appease Republicans who won’t compromise at all.

But, true to form, John Harwood’s analysis in The New York Times this morning imagined a happy world of bipartisan compromise, in which Republicans bravely agreed to raise taxes and Democrats bit the bullet and cut cherished social programs. He then quoted several third-way types, bemoaning the deadlock.

Politically, the fallacy in this view is that the playing field has already been tilted so far to the right that “splitting the difference” is only more of a victory for Republicans. Domestic spending is now back to its lowest level since Eisenhower was president. Taxes on the rich are at their lowest level since before World War II.

Economically, the fallacy is that the kind of belt tightening imagined by Wall Street-oriented elites clamoring for “bipartisanship” would only set back the recovery. The Times also ran a full-page ad this morning by the Investment Company Institute, the lobby for the mutual-fund industry, calling on the Super Committee to keep at it. “Last summer,” warns the ad, “we saw how harmful it is when America’s failure to resolve our fiscal crisis is put in doubt.”

Now, this is almost too rich (literally) for words. “Last summer” refers to the Republicans’ totally gratuitous blockage of a routine extension of the debt ceiling, creating an artificial crisis that they hoped to exploit. The implication is that another failure to pursue austerity would be bad for the stock market, another theme repeated through today’s media coverage of the deadlock.

But those in the mutual-fund industry are the very people who have lobbied for the financial deregulation that caused the collapse. They have blood on their hands. Now, they want the rest of the economy to suffer for their sins—or rather, for their bonuses.

Sometimes, Congress blunders into doing the right thing as a last resort. The failure of the Super Committee is one of those times. Let us rejoice, and redouble the pressure on our leaders for a real recovery program.

Comments

I'm Mike McNamee, writing from the Investment Company Institute.

Bob Kuttner misses two points in his unsupported slam at the mutual fund industry:

First, mutual funds did not blindly lobby for financial deregulation, before the financial crisis or since. Funds are among the most thoroughly regulated financial products in the world, and we recognize effective, efficient regulation as a foundation for investor confidence and trust.

Second, our letter to the Joint Select Committee focused on the impact of fiscal crisis and uncertainty on 90 million Americans who are not part of Wall Street or among the financial elite. These are investors planning for a secure retirement, a better education, or a solid financial future. They were hurt badly by the market turmoil last summer when America’s resolve to address our debt and deficit crisis was cast into doubt, and they need responsible action by their government to put our nation on a path of fiscal responsibility.

Helping 90 million Americans meet their financial goals should be a cause we all share.

Learn more the comprehensive framework of fund regulation here: http://www.icifactbook.org/fb_appa.html#core. And learn more about how ICI has supported Congress’ efforts to strengthen financial services regulation here: http://www.ici.org/reg_reform.

Mr. McNamee misses (at least) two points in his poorly supported slam at Mr. Kuttner's slam at deficit hawks:
First, last summer's market turmoil was not caused by a "fiscal crisis." It was caused by concern about a possible collapse of the Euro.
Second, there is no deficit crisis. There is an employment crisis due to a lack of demand in the economy. Until demand is restored, we should be running larger deficits, not smaller ones.
Helping tens of millions of Americans meet their employment needs should be a cause we all share.
Learn more about how econmics work by reading everything Dean Baker, Robert Kuttner, and Robert Reich write. And learn more about Political Economy by reading the writings of the late David M. Gordon (whom we sorely miss).

I was impressed by Mr. McNamee's concern for the 90 million, but for whom does he speak? What entities make up the Investment Company Institute?

* Goldman Sachs
* JP Morgan Chase
* Morgan Stanley
* State Farm
* AIG Strategic Hedge Fund of Funds
* Citigroup Alternative Investments Trust
* Goldman Sachs Hedge Fund Partners Registered Fund LLC
* ING Closed-End Funds
* Lehman Brothers/First Trust Income Opportunity Fund
* Neuberger Berman Closed End Funds
* Smith Barney, Inc.
* UBS Financial Services, Inc.

..among many others.

And here is a sample of what their services provided for the financial goals of a portion of that 90 million Americans...

http://www.nysun.com/new-york/nyc-pension-funds-lose-on-lehman-aig/86313/
http://money.cnn.com/2009/01/07/news/madoff.fortune/index.htm

...and here is how this industry treated their fiduciary responsibility to their clients and shareholders:

http://open.salon.com/blog/kent_pitman/2009/03/16/the_ethical_bankruptcy_of_aig_bonuses

Of those who claim to speak as prophets, we are told, "Ye shall know them by their fruits. Do men gather grapes of thorns, or figs of thistles?" I should not necessarily judge financial firms by such standards; however, as the Chairman and CEO of Goldman Sachs claimed that mantle, it perhaps is not out of place to look at the fruits that resulted from their works. Was impoverishing pension funds and setting off an ongoing global economic crisis even as they continued to enrich themselves truly doing God's work for the 90 million to whom they held a fiduciary duty, or to the 300 million present and future taxpayers of this country, or to the billions around the globe whose lives and children's lives have been blighted by their work?

One could of course spend all day on this (or several days, or years), and maybe someday someone will. Or maybe in despair more people will dig up a copy of John Kenneth Galbraith's *The Great Crash* (1954), as I did recently, and come across this prescient (or perhaps Sisyphean) conclusion, which implies that there is indeed little new under the sun:

"Wall Street, in recent times, has become, as a learned phrase has it, very 'public relations conscious.' Since a speculative collapse can only follow a speculative boom, one might expect that Wall Street would lay a heavy hand on any resurgence of speculation. . . . It will not come to pass. This is not because the instinct for self-preservation in Wall Street is poorly developed. On the contrary, it is probably normal and may be above. But now, as throughout history, financial capacity and political perspicacity are inversely correlated. Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.

One can only hope that capitalism continues to be saved from itself. But Mr. McNamee, I am afraid you are not helping.

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