And a disconnect of the worst sort, in my opinion. Catherine Rampell remarks on some of the expert conclusions concerning the Great Recession of a decade ago in WaPo:
Second, the financial system is complex and hard to understand. It was, in fact, at least partly the growing complexity of the system that got us into such a mess in the first place.
And third: No amount of oratorical flair, they say, would ever convince the public to support a policy that felt so offensive.
“The core of the political problem and the communication problem is the deep conflict, to any normal human, between what it takes to break a panic and protect from a Great Depression, and what people think is moral and just in the moment,” [former Treasury Secretary Timothy] Geithner says. “And that is not a reconcilable thing. It can’t be solved with eloquence.”
Davis argues: “We need to be very clear that winning public opinion should not be your measure of success, because you’re setting yourself up for failure.”
I disagree. The top priority in the short run is preventing Armageddon. But public opinion absolutely matters in the longer term, as voters act upon their fury. And if winning public opinion over any time horizon really is hopeless, what happens next time there is a crisis?
Look, one of the central tenets of the general citizen is that they be treated fairly in the context of a capitalistic liberal democracy. From this viewpoint, then, the economic system should embody that desire for justice. We have discovered that a rules-based system is far more likely to lead to just outcomes than, as they say, the Rule of Man, i.e., a monarchy, so long as the rules are of a just nature.
So the rules in the economic system should reflect that fact and be followed. Consider the predecessor to the quasi-meritocratic capitalist system we think we have, the mercantile system. In this system, the status quo is deeply entrenched, basically resulting in a system where winners and losers are selected based not on their performance, but on the whim of the elite currently in power – and those last three words sums up why status quo is such a popular phrase for mercantilists. This leaves the common citizen meager opportunity to improve one’s situation, and the entire situation becomes moribund at all levels of society, until some other nation-state that happens to have better technology moves in and wipes them out.
The bailouts are equivalent to picking winners, and, as Catherine points out, Lehman Bros didn’t get a bailout – they were a loser. But the entire economic system was perceived as being abused by the players who were too clever by half for their own good. By the precepts of justice, if they’re going to dance on the edge of the cliff and take a misstep, they should be permitted the pleasure of plunging to their deaths.
But, as numerous economists and a couple of Treasury Secretaries pointed out, this might have wrecked our economy.
This confluence of facts – the urge to fairness and justice, the dangers of a deeply interlocked economy – brings us to an easy and definite conclusion, that we need a regulatory regime where the sudden collapse of one or more foolishly managed companies (particularly banks) isn’t going to overly[1] endanger the economy. If the common citizen perceives the economic system as a way to reap great rewards while avoiding the responsibilities that go with them, then why should they have any great use for it?
Sure, there are highly pragmatic reasons for regulating the banking system. But perhaps the most important reason is not immediately pragmatic, but actually begins as a moral reason which then transmutes into a pragmatic reason: if people do not see the economic system as a fair, then they’ll repudiate it.
And then where will we be?
1 I say overly because there is a certain value to the economy being somewhat endangered from time to time, a reminder that the economy is not a self-regulating mechanism which requires little attention as to its internal structures, but instead a highly useful mechanism which can run out of control if not properly regulated.
