Thursday, June 8, 2017

Book Review: 'ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism' by Yves Smith

Review by Brett (Last name withheld)
ECONned takes the reader through 60 years of economic debate in the United States, and of the gradual rise to prominence of those who support unregulated "free markets". The book is polemical, but any kossack should feel comfortable with the positions taken here. What causes discomfort is the helplessness and impending sense of inevitable doom while reading of this history unfolding, as well as the realization of just how deep in the hole this country's economy truly is - and just how skewed the debate over aims and methods lies in favor of those same free market believers.

One note: If you already know how debt is securitized, how credit default swaps work, and the murky world of derivatives trading, this will be a fairly easy read. If you don't, then you'll have to resort to Google, just like I did. The book rewards careful reading quite well, and it is much broader in scope than the mechanics of derivatives.


Of course the rise of free market orthodoxy, whether one calls is the "Chicago School of Economics" (where again, did our president teach law?) or the "Washington Consensus," entailed an undermining of those banking safeguards which were put in place after the Great Depression. Every kossack knows of the repeal of Glass-Steagal in the late 90's, but what I hadn't realized, until reading this book, was just how regularly economic crises have cropped up:
  • late 70's - early 80's: The Latin American Sovereign Debt Crisis
  • 1980's: The Savings and Loan Crisis (which was the result of three pieces of legislation in the 80's as well as a deliberate relaxing regulatory standards)
  • late 80's: The beginning of Japan's Lost Decade
  • 1995: Mexico
  • 1997: Asian Crisis
  • 1998: Russia Sovereign Debt Crisis
  • 1998: collapse of Long Term Capital Management
  • 1998 - 2001: the Dot-Bomb
  • 2008: Lehman Brothers goes bankrupt.
It's not enough to point at these episodes and shout, "See? Free markets are unstable!" and so the author digs deeper. As she describes it, the heart of debate in US economic policy rests on the issue of honest, vigorous regulation. Not only regulatory capture is at fault, because by now, there is little alternative being considered to fix the mess we've been dealt. Cognitive regulatory capture is a far more insidious peril - the notion that regulators themselves don't know of any alternatives but to support TBTF banking, or let the entire economy fall apart.
It's a truism that all economic crises tend to look alike, and it seems to apply now more than ever. In fact, the Bank of International Settlements, the "central bank for central banks" estimates that US public debt will rise to over 400% of GDP by 2040. So how did we get here?
We were lied to. We've been lied to for 60 years. The book looks at how economics theory in the US developed in the 1940's to the 1960's, then takes a critical look at the choices in methodologies used in economics theory. Which leads to an essay on the development of financial risk management at arm's length, and how this rests on assumptions that fall apart when markets dip (indeed, these can even make things worse as traders begin dumping their holdings into the already sinking markets).
Yves Smith then details just how "free market" ideologues began selling their ideas, and this chapter was an eye-opener to me. Kossacks will easily recognize some of the tactics used many, many years ago.
The anger will mount as the discussion moves to the deliberate relaxation of regulatory controls, the rise in predation in financial markets, and that this last bailout, though the most massive by far, is by no means the first time Treasury and the Fed have stepped in to save the markets. By the time Smith finishes, one comes to think that Geithner, Bernanke, John Dugan (Comptroller of the Currency, and ex-bank lobbyist - from the same law firm Eric Holder came out of, btw) are engaged in either one of two things:
"The failure to do any sort of sustained investigation into crisis causes, be it Pecora style, or the more disciplined process of the Brady Commission, formed in the wake of the 1987 crash, suggests that authorities do not want to know how widespread the rot is. That in turn points to two further possibilities. One is that an effective investigation would show that quite a few powerful people were culpable. A second is that exposing the full extent of problems would call many findamental operations of the financial system into question, confirming that the current paradigm is no longer viable. That revelation, even if true, is politically unacceptable."
A good kossack is an informed kossack, and ECONned is one of the better books to have read while the financial reform debate ramps up. The endnotes contain nuggets of pure gold as well.




Editor's note: This review was originally published at the Daily Kos, which notes that its "content may be used for any purpose without explicit permission unless otherwise specified." The original page can be found here. Like what you read? Subscribe to the SFRB's free daily email notice so you can be up-to-date on our latest articles. Scroll up this page to the sign-up field on your right. 

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