When Politics Fails

by hilzoy

Ezra is absolutely right to say that our failure to respond in any coherent way to the economic crisis is a deep political failure:

"This is a failure of politics. Like with global warming, with health care, with the national debt, with immigration. It is further proof that we have a calcified political system incapable of responding to either long-term threats or short-term crises. The electoral and partisan incentives have made actual action too dangerous and rendered obstruction everyone's easy second choice. And in politics, you just about never get your first choice. And so the Republicans killed this bill. Without their cover, the Democrats couldn't save it, because politically, they couldn't take ownership of it.

It's easy enough to imagine a society running atop a stable economy even when it has an unhealthy politics. And it's simple enough to see how an unstable economy can be calmed through concerted action by an effective political structure. But an economy in chaos and a political system in paralysis? What happens then?"

Good question. Our dysfunctional politics places some good options off the table, makes others much more difficult to implement than they would be otherwise, and prevents us from adopting those decent options that remain to us. Consider, for instance, Brad DeLong's suggestion that we "go for the Swedish plan." I think that if we can't get a bill passed this week, we should do exactly that. But it would be a lot harder to implement here than it would there, and not just because our problems are much larger, and in certain ways more complicated.

More below the fold.

Here's a brief description of what Sweden did:

"As in the US, the Swedish financial crisis was also preceded by a property bubble, which was pricked by a rise in real interest rates. Severe stress in the financial system and the economy were to follow. In each of the three years 1991, 1992 and 1993 Swedish gross domestic product fell in real terms, at an accumulated rate of about 5 per cent.

In response, the Swedish government set up an agency to recapitalise the financial sector. Bank shareholders were not compensated. But the Swedish government did not bail out all banks, only a subset. They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged. And those that were bailed out had to write off their bad debts first. All depositors were covered by an explicit government promise of compensation. The goal was to minimise the cost to the taxpayer, and it succeeded. It turned out as one of history's most successful financial system bail-outs."

Leave aside the difficulty of getting something like this through a Congress significant numbers of whose members think that any intervention by the government would be the first step on the Road to Serfdom, and many more of whom, including some Democrats, would get very nervous about intervention on this scale. Just focus on one piece of this plan: "They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged."

The Swedes, that is, entrusted to their government the task of deciding which banks should be saved and which should be allowed to go under. Imagine what would happen if we tried that here. Hordes of lobbyists would appear, begging for special favors for their banks. The temptation for various officials to intervene in the process would be enormous. Even if they resisted that temptation, all sorts of people would probably assume that various decisions about which banks to let fail and which to bail out had been made on political grounds. Some commentators who made this case would be bought and paid for, but others would be either political opponents of whoever was in charge, or people who just assume that government officials are corrupt by definition.

Things would be all the more difficult because we would be very unlikely to get the kind of bipartisan cooperation that the Swedes had. Carl Bildt, who was Prime Minister at the time, believes that this was crucial:

"What is clear in both cases is that a rescue plan is not possible without achieving bipartisan consensus, which is indispensable for regaining confidence in the markets.

We were able to achieve this in Sweden. Consensus lasted throughout the whole process of restructuring the banking system. We never faced demands for going back to the heavy regulated markets of the past or for permanent state involvement in managing the financial sector. On the contrary, due to an organized and well-managed restructuring, it was possible to preserve the advantages of the deregulation of the 1980s, and, when the market conditions made it possible, privatize the banks as well as the credit stocks."

Note that the reason Bildt mentions demands for heavily regulated markets, etc., is that the opposition in this case was the Social Democrats, who would have made just those sorts of demands had they tried to use all their bargaining power to extract concessions. Compare that to House Republicans' attempts to use the present crisis to force further cuts in the capital gains tax, and ask yourselves just how likely it is that they would conduct themselves like grown-ups if we tried to do what Sweden did.

Stefan Ingves, now a Director of Sweden's Central Bank, and Director General of the Swedish Bank Support Authority during the crisis, adds:

"A very basic issue for the success of any systemic bank restructuring is the ability to get political decision makers to recognize that there is a problem, that the problem is severe, that it requires quick and resolute actions, and that the problems largely are technical rather than political in nature. How lucky we were in the Nordic countries to have governments able to make tough decisions and leaving most of the implementation to a group of civil servants (statstjansteman) and technical experts. In other countries, vested bank owner and borrower interests sabotage such actions through political interference, corruption and intimidation of courts and officials, etc. Necessary political decisions such as loss sharing and the allocation of public support funds are hard to come by, even in cases where the governments have the financial capacity to provide the resources. It is much easier to do nothing and wish the problems away."

How lucky they were, indeed.

It is not impossible to get political decision-makers who can come together in crises, evaluate their options clearly, and act. It just takes a citizenry who insist on being represented by adults, media who actually inform them, and politicians who do not drive them to cynicism by abusing their trust.

Until then, though, a lot of good options will be much, much harder to implement than they would be otherwise. The Swedish model is one of them.

Comments

[david kilmer]

So what was it about the Nordic countries that they didn't have a problem with political interference and corruption?

[spartikus]

Sounds like they're going to take another kick at the can. A far worse sounding can...

[cleek]

it didn't fail. it did exactly what it's supposed to do: the people made their desires heard and their representatives acted accordingly. we have a representative democracy, and that's what we saw. in fact, it's one of the few times i remember seeing the system work so quickly and clearly.

that the people, in general, don't know a fncking thing about what they're telling their representatives to do is a different matter.

[hilzoy]

spartikus: actually, from your link:

"The tax plan passed the Senate last week, on a 93-2 vote. It included AMT relief, $8 billion in tax relief for those hit by natural disasters in the Midwest, Texas and Louisiana, and some $78 billion in renewable energy incentives and extensions of expiring tax breaks."

If it's AMT relief plus renewable energy tax breaks, plus hurricane relief, I'm OK with that. The renewable energy tax breaks, in particular, need to get done -- as does the AMT fix, come to think of it. (We do not need the AMT kicking in in full force in the middle of a recession/depression/whatever.)

[efgoldman]

Remember the military base closings commissions (official name: Base Realignment and Closure Commission, known as BRAC)? They gave cover to both parties. "Not my fault that our cash cow base closed. Blame it on the non-partisan commission." It got something done, in several rounds, that had been politically impossible when Congress alone made the decisions.

The problem, as Bildt quoted by Hilzoy pointed out: "that it requires quick and resolute actions".

Commissions aren't quick. And sometimes their reports don't matter (the 9/11 commission).

I think our best hope now, in this and every other problem/crisis we face, is not for a bipartisan solution; it is for a Democratic landslide and an Obama win. The GOP/"conservative" way hasn't worked. Let the other guys try.

This is what would happen in a parliamentary system. Not saying that's "better", but the reaction is quicker.

[Bernard Yomtov]

This post is nothing but Swedish triumphalism!! :-)

[now_what]

"This is a failure of politics."

No it isn't. This is democracy. The House of Representatives listened to what their constituents were telling them and voted NO to a bill their constituents detested.

Of course, Comrade Paulson and Comrade Bernanke, as well as our glorious commentariat believe they know what is best for the naive proles, so they describe the functioning of a working democracy as a failure. Give the people responsible for causing the crisis 700 billion dollars and they will be sure to fix it. That was the bailout/blackmail plan, as best as I can tell.

No dice. There are plenty of ways to deal with a credit crisis that ameliorate the pain experienced by the electorate without rewarding the incompetence of bankers and speculators. All the pro-bailout arguments I've heard amount to a gigantic false dichotomy seasoned with a hint of panic.

[Nell]

OT: Holy cow. Only something the scale of the financial bailout/rescue/intervention could have resulted in this being lost in the mists:

Prime Minister Ehud Olmert said in an interview published on Monday that Israel must withdraw from nearly all of the West Bank as well as East Jerusalem to attain peace with the Palestinians and that any occupied land it held onto would have to be exchanged for the same quantity of Israeli territory.

A small voice within said, "Gary's probably blogged about this. And he < href="http://amygdalagf.blogspot.com/2008/09/what-israel-should-do.html">has.

It's on-topic because it's a sad illustration of what makes it safe to speak the truth.

[Nell]

Sorry, Gary's post is here.

[xanax]

re cleek @9:03 "that the people, in general, don't know a fncking thing about what they're telling their representatives to do is a different matter."

Sounds vaguely like the dynamic at work in a presidential election.

[hilzoy]

Actually, I didn't mean the failure of Congress to pass the bill, but "our failure to respond in any coherent way to the economic crisis". Much broader.

[Warren Terra]

Heh, Bernard nails it. It's obvious now, and we all should have seen it coming: Hilzoy's secret Swedish agenda revealed! She's a mole, a plant! Today, it's government involvement in the banking sector, tomorrow it's lutefisk! Wake up, ObWi readers, before it's too late!

[Frank Wilhoit]

The last time our political system worked was when it expelled Richard Nixon. Unfortunately, the effort was just too much for it and it collapsed of a stroke before it could seal that achievement by sending him to prison. Since then it has sat listlessly in its wheelchair, vocalizing incomprehensibly -- now in a mutter, now a near-scream. It is not dead, but there is no hope for its recovery. What to do?

[now_what]

Actually, I didn't mean the failure of Congress to pass the bill, but "our failure to respond in any coherent way to the economic crisis". Much broader.

The broader part must be in some other post that I didn't read. The one I read only talks about legislative actions. Pretty narrow.

I'm not sure who the "our" is that you refer to, but businesses, banks, investors, individuals, mortgage holders, manufacturers, etc., have all responded to this economic crisis in ways that could be predicted ahead of time by anyone familiar with what deleveraging looks like. I know that there are those who would like the government to wave its magic fairy deleveraging wand and allow an insanely leveraged economy to unwind with no pain to anyone at all, but you know what? It's not going to happen.

People are going to get hurt. The bailout plan was all about making the taxpayer the sole hurtee. The taxpayers apparently decided they could use some company.

[Gary Farber]

Thanks, Nell. It's nice not to have to point these things out myself, for once. :-)

The special prosecutor for the DOJ U.S. Attorneys firings is also pretty big news, or should be, that's kinda gotten lost in the background of the past couple of days. Alberto Gonzalez must be pleased.

[Gary Farber]

It should also be noted that among the various things Olmert said was this:

[...] He also dismissed as “megalomania” any thought that Israel would or should attack Iran on its own to stop it from developing nuclear weapons, saying the international community and not Israel alone was charged with handling the issue.

The rest is worth reading, as well.

[BlizzardOfOz]

This description of the Swedish response to their crisis leaves me even more disappointed with what the Pelosi, Dodd and Frank did. Instead of coming up with a fair plan that the voters, Democrats and sane Republicans could support, they started with Paulson's crooked proposal, which everyone hated, and tried throwing crumbs to various interest groups to buy their votes. It's like they wish they were still the opposition.

What really makes me wonder, though, is how poorly the Democrats fared with their chosen "cut a deal" approach. First they responded to Paulson's somewhere-right-of-Stalin proposal with a moderate counterproposal (isn't a basic principle of bargaining that your first offer should ask for more than you want?); then managed to negotiate themselves back to essentially the original proposal anyway.

All of which makes me think Democrats were primarily interested in bailing out their lobbyists and saving their own $millions worth of stock, and that their "counterproposal" was basically a show for their constituents. It's as if Democrats are the "good cop", sweet talking us in tandem with the Administration's message of fear and hate, with the common purpose of pillaging us for all we are worth.

Finally, in announcing a bill which would give away $700 billion to Wall Street, Pelosi announced, "The party is over for Wall Street." (say what?!) Where does this madness end? My current pipe dream is that Obama is secretly a radical like the Republicans claim, and will really shake things up.

[ThatLeftTurnInABQ]

Just focus on one piece of this plan: "They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged."

The Swedes, that is, entrusted to their government the task of deciding which banks should be saved and which should be allowed to go under. Imagine what would happen if we tried that here.

It seems to me that we've already in fact done this, and it is all more or less going according to plan, so I don't see what your problem is here.

Our microeconomic model to determine which of the banks is to survive is a little bit more pro-active than the one the Swedes used. We decide in advance which one of the pigs is more equal than the others.

Anyone who hasn't figured out by now that Goldman Sachs will be the last of the big investment banks left standing hasn't been paying attention to the fact that while 2 legs are bad and 4 legs are good, having your former CEO appointed as the Treasury Secretary is even better.

[Nell]

"Our" dysfunctional politics has some structural roots.

Do the Swedes allow corporate money to dominate political life, or are election campaigns publicly financed? How about the lobbying -- are there 700 corporate lobbyists for every one of their legislators? I'd guess their Supreme Court hasn't declared that "money is speech", in a perverse interpretation of the first amendment, if they have such a consitutional provision at all.

The imperial presidency is a feature of the militarily and (formerly) economically hegemonic U.S. That means that any coherent response to a developing Bad Situation is going to have to come from the executive branch, and stands the best chance of getting fairly implemented when there are decent majorities in the House and Senate from the same party.

Hilzoy, your use of the word 'crisis' in the opening makes it sound as if you are talking about this weeks's events. A coherent response to the long-term unsustainability of the U.S.'s economic situation is literally inconceivable from this administration.

It's only barely conceivable from the next, and not because of the shamelessness and pettiness of Republican opposition. It's barely conceivable and not at all likely because it would require taking on the corporate control of our politics, media, and society.

What we have any reason to expect is better technocratic management: a willingness to put some regulations in place, support for a less hostile organizing environment for unions, avoiding obviously insane tax policies that further concentrate wealth in the most unequal country in the G-8. And maybe, if we're lucky, a universal health insurance scheme. With the emphasis on scheme.

[hilzoy]

Nell: I think I meant something in between. Not as narrow as the failure to pass the bill, where I completely see both sides, nor something as wide as 'the long-term unsustainability of the U.S.'s economic situation', but something like: the failure to come up with a serious response to the events that began with, say, the takeover of Fannie and Freddie. (I'd be happier, of course, if we'd started earlier, and happier still if we had adopted decent regulation so that this didn't happen at all, but "the current round of calamities" is more or less what I was thinking a response should be to.)

[Gary Farber]

"With the emphasis on scheme."

That's a perfectly neutral synonym for "plan" in British English, he noted in passing.

[JayS]

The political failure arises out of the lack of upside in voting for the proposed plan. Paulson couldn't explain how the plan would actually work. Even if it did work, it would largely be in the absence of a credit freeze, but with an economy that was still slowing down. It would be hard to show that the lack of the freeze was caused by the plan. "Trust me, it could have been worse" isn't a good line to explain putting up 700 billion and still having a slowing economy.

In part that's because of the lack of trust built up on years of crying wolf, but even without that it would have been a tough sale.

It appears that the political plan now is to make the no votes experience political pain to force vote switching. I'm not sure it's going to work. The public sense is that we need a solution, but are split in thirds in support, opposition and don't know about this plan. The support is tepid, and the opposition vehement.

This seems to be an environment that would cry out for a new plan that is believable. Throwing in FDIC increases is a good move, but I don't think it is sufficient to get the current plan passed. They seem to be playing small ball, but they need to swing for the fences.

[Mike Schilling]

Today bank nationalization, tomorrow lingonberry jam and cheap assemble-it-yourself furniture. By next Monday, the entire country's going to overrun with 6-foot-tall blonde women.

Not that there's anything wrong with that.

[Nell]

@Hilzoy: In that case, then, the timing was particularly unfortunate. April-May 2007 might have been more the ticket -- almost as far from the elections as possible.

Right in the heat of the campaign: no way.

From my comment in a previous thread that fits better here:

Ara: our response this week was as unthinkable as a failure to mobilize, born of an inability to muster the political will to mobilize

The 'failure to mobilize' starts with the people who proposed the intervention. They needed to have a humbler approach: let's work this out together, here are the protections to address legitimate concerns, etc. Instead, spring it on Congress as a deadline approaches and use threats rather than explanations. Given the context and history, who could trust that the whole thing wasn't just taking advantage of a real-world problem to spring another power grab?

Even if the provisions for equity, transparency, etc. were b.s., if they'd been included in the original proposal, the thing could have passed on the first go-round.
...
I'd like some serious acknowledgement that if the crisis is as severe as they say it is, the administration's representatives ought to have come to Congress with a considerably humbler approach, including an admission that the Treasury Secretary and Fed Chairman had made some mistakes that they needed help to correct.

[Turbulence]

Today bank nationalization, tomorrow lingonberry jam and cheap assemble-it-yourself furniture.

1. Lingonberry jam is some damn tasty stuff.

2. Anyone who has never set foot in an Ikea really should try walking through one sometime. The experience reminds me of being in Europe and the balls these guys have for keeping vaguely Swedish sounding names for their merchandise impresses me. I don't think I could do that if I was selling stuff to a market as xenophobic as America.

[Nell]

@Gary: Yes, I know, that was the basis of my feeble pun.

[Gary Farber]

"Today bank nationalization, tomorrow lingonberry jam and cheap assemble-it-yourself furniture. By next Monday, the entire country's going to overrun with 6-foot-tall blonde women."

Is there an Ikea build-your-own-bank kit? Named "Inga"?

[ThatLeftTurnInABQ]

I think I've reached the point where if we can scrape up the $700 billion, I'd rather see it used to capitalize an entirely new lending institution (initially a public entity, but destined to be sold off at some point in the future when the economy is more stable).

At a standard commerical bank leverage ratio of 10:1, this brand new bank could extend 7 trillion in credit. I'd like to see that credit by charter be extended preferentially to the brick and mortar economy and to average citizens first (obviously based on traditional qualifications using the 3 C's).

Use the money for that, to protect the Main St. economy from the worst effects of the deleveraging on Wall St., and let the latter seek the best deals they can get to attract private capital without the govt. involving itself. Most of the IB's and hedge funds will not survive - but at this point it is increasingly clear that the big ship is going down and there aren't enough lifeboats for all the passengers. Let those who will lead our economy back to health in the next generation be taken care of first, which means scientific and engineering R & D firms, manufacturers, and small businesses - that is where our next growth phase will come from. We need to get out of the business of just moving money around inside the electronic hive, and back into the business of making and inventing new things.

To mix metaphors, better that than eating our seed corn. I fear the latter is what the Paulson plan will lead to in the end.

[now_what]

I think I've reached the point where if we can scrape up the $700 billion, I'd rather see it used to capitalize an entirely new lending institution (initially a public entity, but destined to be sold off at some point in the future when the economy is more stable).

Exactly.

If there has to be a "bailout", then this, along with the federal government as the employer of last resort is to be preferred to the Japanese style idea of spending taxpayer money to keep the zombie banks from disappearing.

[JayS]

I don't know about a bank, but there is a flat pack house to help with the housing crunch;)

[JayS]

And the house is named Abod. Sort of a South African Inga.

[Nell]

Have very much appreciated your comments over the last few days, TLT. Thanks.

Bedtime.

[ThatLeftTurnInABQ]

Thanks Nell, and right back at ya'

I'm sorry I haven't had enough time to quote everybody on these threads who has been posting excellent ideas and observations, so consider yourselves very much appreciated, in toto.

[magistra]

I also think there's a problem here about decisions being made by 'experts'. I think that in the US and also in the UK there is a distrust of finance experts and economists that goes beyond simple anti-intellectualism (I share it). Even if you leave aside that percentage of experts who have a significant financial stake in the system, and so who can't really be impartial, there is a genuine concern that economics is full of 'experts' who are simply ideologues, who have already decided what the solution is to any economic problem based on their prior beliefs, not any evidence (e.g. that markets are always right).

Maybe Sweden also has the advantage that its economists and other financial experts seem more trustworthy?

[Hartmut]

Be careful. We can't risk the compromise passing Congress to be the http://www.crimespot.net/Spotted/Images/SwedishChefSmall.jpg>Swedish Chef model!
(not to forget the Swedish Chef Translator)

[Harry b]

There's a difference between distrusting experts and distrusting civil servants. For something like the Swedish plan to work you need a highly competent and un-corrupt civil service with a robust professional ethic of resisting political interference in the implementation of tasks. Sweden still has this; the UK still has the remnants of it (though first Thatcher, and then, more destructively, Blair, undermined it). The US Federal government (or any of the states except a handful in the midwest)? Forget it.

[Michael Drake]

"it did exactly what it's supposed to do"

Cleek, you're confusing the accidental fact that an outcome is desirable (assuming it is) with the idea that the outcome was due to a reliable political process.

If Congress had flipped a coin to pass or not to pass the legislation, things might have come out the right way. But leaving policy outcomes up to a coin toss obviously isn't "Congress doing what it's supposed to do."

[cleek]

Cleek, you're confusing the accidental fact that an outcome is desirable (assuming it is) with the idea that the outcome was due to a reliable political process.

i don't think i said anything about it being "desirable". in fact, in my opinion, the bill's failure was a bad thing.

my comment was about the fact that millions of voices cried out in anger, and Congress suddenly reacted. for a change.