Brilliantly Played

In a move that should surprise exactly no one, the GOP has unified it’s opposition to financial reform.  It has successfully filibustered the bill into legislative oblivion.  What may surprise quite a few is that I think this is brilliant.

Not brilliant in the sense this is good for the country.  It absolutely is not.  Failure to enact tough financial reform and bring the US financial system under the regulatory stability it enjoyed from the 1930s to the 1980s will invite a repeat of boom/collapse cycles typified by the S&L crisis and more recently the depression narrowly averted by the TARP program.

Rather, this is a brilliant bit of marketing engineered by the financial institutions themselves.  Oh sure, GOP stalwarts like Mitch McConnell are the mouthpieces of this plan, but there is little doubt the banks are pulling the strings.  What’s brilliant is that the strategy is not simply to oppose reform.  It makes sense that the banks don’t want anything to impede their ability to continue to reap the obscene profits they’ve come to enjoy.  But the alternative plan they are pushing is to let capitalism run its course.  The claim in hindsight is to simply let the banks fail.  Think about that.  The banks are advocating for their own demise. Or are they?

Well of course they aren’t.  They know full well that they cannot be allowed to fail.  And that isn’t just because they are too big.  The finance system might better be thought of like the power grid for business.  It is a fundamental part of the infrastructure.  If it goes dark, business comes to a standstill. And the reality of modern banking is that much like the power grid, it’s all interconnected and interdependent.  Whether it’s organized as a few really huge companies or lots of tinier ones, small failures will quickly cascade and bring the system down.

The larger question is, why does this “just let ’em fail” message sell?  The reason is essentially the same reason that the movement to stop stimulus spending sells.  Simplicity.  Macroeconomics is mind bogglingly complicated.  But boiling economic strategy down to household economics makes it all seem so clear.

Opposition to stimulus spending is fueled by the simple analogy that if your family lost a big chunk of its income, it would reduce its spending.  Therefore, the federal government should be tightening its belt during rough economic times.  On the surface, this makes lots of intuitive sense.  You can’t spend your way out of unemployment.  But the reality is that the federal government isn’t financially structured like your family, or even like a state government.  It’s debt isn’t like your debt.  And ultimately, as the creator of the currency, it has levers to pull you do not.  Most importantly, it is the spender of last resort.  The economy runs in no small part on spending.  It is the flow of money, rather than the existence of it, that drives the economy.  When the economy turns south, if everyone tightens their belts, things just get worse.  Hoover proved this with a remarkable demonstration called the Great Depression.  Still, it’s hard to prove the catastrophe that was averted.  So there is political hey to be made by opposing the stimulus, as long as it’s working.

The rationale for letting the banks fail works along similar lines.  On a small scale it’s easy to see that if your mom & pop organic tea shop makes some bad business decisions and gets in financial trouble, it should just be allowed to go under.  No argument.  But because of the interconnectedness of the banking system and its role in the economy as a whole, that argument absolutely does not scale up to financial institutions.  But the analogy sells.  And again, there is political hay to be made by advocating for letting the banks risk failure, as long as they do not actually fail.

Thinking again in terms of the power grid, which incidentally is a heavily regulated industry, would we seriously want to remove those regulations?  Would we be wiling to accept the risk that we would be left in the dark because a bunch of executives made some bad business decisions for their own personal gain?  I suspect not.  The difference is that while we have a tangible notion of what life without electricity is like due to occasional local failures, we have no palpable sense of what a comparable banking failure is like.  Not since our great-grandparents has anyone been allowed to lose money in a bank or be personally wiped out because a bank failed.  It would be as if no one had experienced a blackout in 75 years.  It would be easy to be cavalier about the power industry.  It seems indestructible on a whole, so why not spend less effort to control it?  And that will seem like a great plan, right up until the lights went out.  Then everyone would freak.

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