Economists without answers

A RECENT forum at the University of California (UC)-Santa Cruz boasted a panel of world experts addressing "The current financial crisis and the economic prospects for an Obama administration."

The event seemed like a promising place to find answers as to why the world's wealthiest nation is poised on the brink of official recession, and is dragging the world's economy down with it.

Instead, what was on offer was precisely the sort of "mystification" of the markets that Karl Marx complained about bourgeois economists trading in back in the 1860s. Because they insist on ignoring the most illuminating framework for understanding capitalism--for instance, the idea of a crisis of overproduction--these analysts rely on complicated terminology, outright distortions and suppression of facts. And they wind up with some pretty kooky conclusions.

The most alarming comments were presented by Daniel Friedman, a specialist in applied economic theory and author of a recent book Morals and Markets. He began by acknowledging that markets have been crashing since the 1720s, and that bubbles and busts are regular features of a market economy.

But after quickly outlining the chronology of events that led to the stock market's October crash, he offered a non-sequitur "moral of the story": Our government should produce policies to limit the damage of this disaster, but we should be extremely careful not to introduce "heavy-handed" regulation. When we attempt to regulate markets according to our morals, Friedman argued, we end up with deeper problems.

His case was that, although imperfect, the free-market system is still the crowning achievement of human civilization. It's nice, even preferable when markets and morals suggest the same course of action, but when in doubt, morals must take a back seat. Therefore, we all ought to read his book and understand that moderation is the key to a more blissful marriage between markets and morality.

Michael Hutchinson, an expert on international finance, took up the job of explaining the U.S. Treasury's response to the collapse. He explained how self-interest had propelled all of the real estate agents, banks and securities traders to blow up the housing bubble. And of course, he included the average homebuyer among the culprits, as they were also supposedly corrupted by a greedy self-interest--in obtaining housing.

But leaving the premise of self-interest altogether, he then asserted that Treasury Secretary Henry Paulson has backed off from his original plan for the TARP--the Troubled Asset Relief Program--in favor of buying equity in troubled financial corporations more or less out of his own sense of reason. Even the $700 billion extorted from U.S. taxpayers would not have offered Paulson enough resources to accomplish the job of reasserting market values to troubled assets, so Paulson just came up with a better plan.

There was no mention of the competitive pressure introduced by British Prime Minister Gordon Brown's dramatic injection of capital into British banks, or of the self-interest of Paulson and his fellow Wall Streeters in initially plotting a bailout that came without strings attached.

Carl Walsh, whose expertise is in monetary policy and central banking, outlined the very grim picture ahead of us now, with the contagion of deflation raising challenges that he was less than confident the Fed could conquer. But he also argued that the failure of the Fed to act effectively as a "lender of last resort" pushed the crisis of the 1930s into a depression--thus validating the bailout and the opening of many new lines of credit to different markets, like the commercial paper market as necessary steps to stabilize the system.

Overall, the panel simply explained that no one knows the answers to some of the most pressing questions of the day, from what kind of relationship the Treasury will now have with the banks in which it has purchased equity, to what kind of model will or should follow the failure of the free market running wild.

By far the most intelligent words spoken at the forum came from a question during the brief question-and-answer period, when 18-year-old freshman Ian Steinman asked the panel to consider the economic turbulence of the 1970s and 1980s, resolved by a "wholesale attack on the working class."

Steinman enumerated the many ways in which wages, benefits and living standards were slashed in order to stabilize capitalism by raising the level of exploitation, and indicated that more of the same lies ahead in resolving the current crisis. He asked, therefore, what possible reason there could be for continuing to defend a system where economic progress depends on a regression in the living standards of the vast majority of people.

The flummoxed panel essentially declined to answer, and the chair jumped in to "rephrase the question," in fact abandoning it to ask a more complicated one about industrialization. (Remember: the working class only exists in factories).

Several other audience members raised questions critical of 30 years of neoliberalism, and so, in their final comments of the evening, the panelists presented a few more pearls of wisdom about what they called "neoliberalism, whatever that means." They acknowledged that, at times, the rule of free markets creates situations that may seem unfair.

Friedman harkened back to school days, when, he claimed, he used to think that the answer was to "overthrow" the capitalist system in favor of something more equitable. However, he cautioned, we should remember that the track record of those who argued for such an alternative hasn't been very good, posing phony, Stalinist versions of socialism as the only known alternative to free-market capitalism.

Happily, many of the students, faculty and community members in attendance were quite capable of knowing a straw man when they saw one, and purchased copies of Socialist Worker to read up about what a genuine socialist alternative is all about.
Rachel Cohen, Santa Cruz, Calif.