Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

08 January 2014

Janet Yellen: Yankee Philosopher Queen

[For reasons why Janet Yellen is more like our Founders than her predecessors in her approach to human and societal perfectibility, click here.]

Three important things happened in finance yesterday.

First, the once-great bank JP Morgan Chase agreed to pay over $2 billion for failing to do anything about years of “red flags” from Bernie Madoff’s Ponzi scheme—that is, anything besides getting its own money out just before the scheme went bust. Second, PBS’ Frontline feature showed us all, up close and personal, just how little Wall Street hedge funds really cared about the rules—our own laws and regulations—that are supposed to govern their businesses.

In so doing, it showed us how easily perverse incentives can produce perverse people. No surprise there.

Finally, and most important, our Senate confirmed Janet Yellen as the first-ever female Chairman of our Federal Reserve Board.

These three events are not unrelated. The first two remind us just what caused the Crash of 2008, from which we are still struggling to emerge.

It wasn’t just an utterly rotten bankers’ culture, in which integrity, prudence, right and wrong, and even loyal clients got trampled in a headlong rush for big bucks. It wasn’t just a lax regulatory environment, in which even Democrats believed that foxes can run henhouses in the interest of the hens. And it wasn’t just a false and wishful ideology, under which even Alan Greenspan, then Fed Chief, believed that sick markets cure themselves.

No, it wasn’t just any one of these things. It was a perfect storm of all three. The extraordinary confluence of greed and stupidity in all concerned made the Polar Vortex, which has chilled our nation, look like a child’s practical joke.

Madoff’s Ponzi scheme was not, of course, a cause of the Crash. Nor was hedge funds’ assiduous flouting of the spirit of our insider-trading laws (while trying, often unsuccessfully, to follow their letter to avoid lawsuits and stay out of jail). These events were but minor symptoms, mere buboes on a victim of the Black Plague. But they remind us just how close we came to economic death.

Every cloud has a silver lining. Without all this, Janet Yellen would not be Fed Chief. We would have another in the so-far endless succession of brilliant, self-interested rationalizers from the Wall Street Boys’ Club. We would have boys like Tim Geithner or Larry Summers, whose primary concern was preserving the “system” and saving their cronies and members of their social class—taxpayers, ordinary people and our long-term economic future be damned. We might have someone like Lloyd Blankfein, who joked that destroying the global economy was “God’s work.” Or we might have another Alan Greenspan, whose presumed mathematical intuition and oracular utterances vanished like a fog of lies under the solar glare of his real motivation: simple, naïve faith in conservative dogma.

Fortunately for those of us who are not bankers, Yellen is not one of this crew. She appears to favor regulating people entrusted with astronomical sums of money who, throughout human history, have consistently used that money to enrich themselves without regard to consequences. She is a Keynesian. That means she sees the purpose of government—and government debt—not as fine-tuning some grand, abstract machine called “The Economy,” or subserving some abstract political dogma, but making real people’s lives better. And she’s a woman, a member of the gender that has always had to pick up the pieces and feed the kids when men’s grandiose schemes run amok.

We are in uncharted territory here. Congress created the Fed to tame the endless boom-and-bust cycle of (mostly) financial panics that have tortured capitalism and its subjects at regular intervals like recurring bouts of malaria. For most of a century, the Fed did just that. But then the Wall Street Boys’ Club, which has often been the disease’s principal vector, captured the Fed.

Now we have a new kind of leader, whose goal is to do what the Fed was set up to do. Yellen wants to damp the punishing cycles and realize the Fed’s initial promise. She wants to confine banking to what it was, in theory, always supposed to be: an instrument of capital formation and recycling for the benefit of real industry and ordinary people. And she wants to use her dual full-employment and inflation-fighting mandate to give ordinary people more and better jobs and better lives.

I won’t dwell on Yellen’s economic credentials, which are superb. I won’t mention her Yale Ph.D., her professorships at Harvard and Berkeley, her two years on the White House Council of Economic Advisors, her six years as CEO of a Federal Reserve Bank, or her three years as Vice Chairman of the Fed. She is qualified for her new job as few men in our history have ever been.

But in the end, expertise alone is not enough, as we saw so clearly with Greenspan. Although not as dismal as when John Maynard Keynes coined the phrase, the “dismal science” of economics is still in its infancy. It’s just now emerging from its physics-envy phase, in which it fancied itself a branch of thermodynamics, governing little atoms of perfect information, knowledge and reason.

Now we know better. People are not atoms, all the same and all responding rationally and predictably to external stimuli. We are incredibly complex biological and psychological organisms, prone to stampedes of greed and fear, and acting together in even more complex organizations known as “societies,” “firms” and “markets.”

The new field of “behavioral” economics is just now beginning to come to grips with these basic facts. It’s exploring what happens when people, in large numbers, are subject to greed, fear, doubt and uncertainty, which most of us are most of the time.

Economics will never be the same again. Nor will its practitioners ever again be quite so disastrously cocksure as Greenspan was about the perfection of markets or Summers apparently is about everything, including women’s alleged difficulties with science.

It goes without saying that, when you base your theory on a completely asinine view of the world, you get odd results. And so we had the spectacle of our highest expert, charged with damping market cycles and preventing crashes, telling us—and then recanting—that they would cure themselves.

If so, why even have a Fed? Logically, Greenspan’s own dogma should have put him out of his job. But he, like the bankers he was supposed to supervise, loved the power and the spotlight.

Yellen is not like that. She’s not gunning for a Nobel Prize by forcing our fragile lives into some grand abstract theory. She’s no devotee of simplistic ideology. She knows what the Fed is for. She’s a practical person, focused on human and societal needs.

We ought to thank Providence that she’s now safely in office, where nobody but Providence can remove her for four years. We ought to thank the President, who finally saw the light and dumped Summers, with some encouragement from his best and most loyal constituency, women.

And we ought also to thank our intelligently designed system, a product of continuing social engineering. We should thank it for putting an expert of Yellen’s caliber, empathy and vision in the second most important job on Earth.

And we should thank it doubly for doing so at a time when Congress is still mired in mud-wrestling, and people like Sarah Palin can credibly strive to be a heartbeat away from the top job. Sometimes Providence does indeed work in mysterious ways.

Human Perfectibility and Social Engineering: Candide, Yellen and the Pope

The tragicomedy of our species’ undeserved self-regard, and of the inevitable Fall that follows, would be hilarious if its consequences weren’t so terrible. Despite our best efforts to enlighten ourselves, our flights of vanity and ensuing catastrophes recur regularly, like clockwork.

In 1759, the French author and philosopher Voltaire described the phenomenon in his famous comedy, Candide, ou l’Optimisme. He debunked the notion, then current among Europe’s elite, that this is the best of all possible worlds because we are the best of all possible species.

When we humans lose ourselves in orgies of undeserved self-congratulation, the best antidote is humor. Sometimes it’s the only effective one. Voltaire used humor to great effect, but not enough to stave off the bloody French Revolution. Marie Antoinette lost her head for announcing the logical conclusion of that absurd “best” philosophy: if the people can’t find bread, then “let them eat cake!”

Candide offers a great many laughs. But the best comes near the conclusion, as the credulous, naïve heroine recalls her narrow escapes from many trials, tribulations and tortures. Referring to her mentor and teacher, who inculcated in her the then-current rage of self-congratulation, Candide declares:
“Oh Pangloss, Pangloss! How happy you would be if you had not been hanged!”
When I first read that line, at the age of 17, I fell into spasms of laughter that lasted minutes. It is still the single most cogent comment I know on abstract theories of human perfection and perfectibility, and on the inevitable divergence of theory from practice.

By the skin of our teeth, we Yanks have just (nearly) come through a financial catastrophe of our own making caused, in essence, by an equally absurd philosophy. Is there any real difference between the ideas that our world is perfect and that our markets are perfect and self-correcting? Voltaire could have told us, long before any banker, regulator or hapless consumer, how stupid was (and still is, for some) that “conservative” dogma.

Our Founders knew better. They had no illusions about the perfection or easy perfectibility of us or our society. They knew that even approaching perfection would require unrelenting discipline, vigilance and effort. That’s why they bequeathed us checks and balances and a Bill of Rights.

Our Founders saw us as flawed creatures, driven from the Garden for our imperfections and having to work hard to correct them. Today, a better analogy might be spouses working hard, every day, to save their marriage. It takes effort, humility and diligence, every hour of every day.

When we coast on our presumed laurels, we should know we are headed for a cliff. And so it was with the Great Depression, the Great War, and (more recently) the Crash of 2008.

So-called “conservatives” claim to revere our Founders, our Constitution, and our traditional culture more than others. But they often forget the clear message all these left to us. From its inception, our Yankee society has been an unabashed and deliberate experiment in social engineering. It still is.

Every aspect of our government and our lives has been deliberately engineered. Our checks and balances force us to work together. Our Bill of Rights keeps us free. Our national banks, which Alexander Hamilton fought so hard for, support the muscular and flexible capitalism which has made us the world’s strongest and richest society. Our Federal Reserve system and other regulators keep those banks and their immense financial power in check, working for the good of all.

“Our Federalism” devolves much power to our states and their municipalities. It lets localities manage their own affairs. It also urges our states to serve as experimental laboratories. Through them, we can seek perfection not with any grand, overarching abstract theory, but step by step, with practice, patience and hard work, through trial and error. At the same time, our federal government and our federal Constitution keep our gazed fixed on our lode star: the values of Western Enlightenment that once made us unique among nations, until the advent of the EU.

None of this is an accident. None of it relies on absurd notions of inherent perfection or perfectability. All of it involved engineering, self-conscious and deliberate, by the more far-sighted among us.

All of it is also much like modern science. It finds what works in practice, step by patient step, based not on abstract reasoning, but on facts, evidence and data derived from practice, careful observation and experience.

It is no accident that, while Congress is hog-tied by disputes over perfect abstractions, our state governors are making progress in practice, step by step. They are innovating with social engineering, in feeding and housing our poor, in creating jobs, in insuring health, in exploiting solar and other renewable energy, and in improving criminal justice.

This is where Janet Yellen comes in. Although superbly educated in all the most current economic theory, she is no Candide. She knows why we have the Fed: because private bankers, acting in their own self-interest, have caused regular financial panics throughout the history of capitalism. So they must be managed, regulated and, when necessary, controlled.

In this respect, she is not much different from Ben Bernanke, who saved our economy with a brilliant experiment in “quantitative easing.” A practical man, he used the power he already had as Fed Cheif, rather than asking a feckless, divided and dysfunctional Congress for more. Bernanke also used his regulatory power to rein in bankers’ continuing excesses with stricter and stricter capital-reserve requirements. Our Founders, including Alexander Hamilton, would be proud.

Yellen is similar but different, and not just because she is female. From all reports, she has more empathy for those who fell to absurd abstractions than any previous Fed Chief. She has less credulity for theory, and more respect for data and practice. And she has among the best, if not the best, education and practical training of any Fed Chief so far. So she is perfectly situated to continue the tradition of careful social engineering that our Founders began and that has made us supreme among nations, despite having less than 5% of the world’s population.

So where does the Pope come in? To the delight of enlightened Catholics and the immense respect of all others, Pope Francis has reminded all of us of the power of humility.

With his humbly human, “Who am I to judge?,” he put the trials of homosexuals in proper perspective. They are not some abstraction, to be dealt with according to some abstract theory, whether from the Bible or from an all-too-human fear of the other.

They are people, and they are here among us, in large numbers. So we must deal with them humbly, tenderly and lovingly, as Jesus advised. If the Pope can try hard to do that despite being bound by two millennium of hardened Church doctrine, surely the rest of us, not so burdened, can permit and even celebrate gay marriage.

More broadly, the Pope’s humility is just the antidote to our recent orgy of self-regard and self-regarding abstractions.

We Yanks thought we “won” the Cold War. We thought we did so because our abstraction (capitalism) was better than the Russians’ (Communism). Our God was stronger than their God.

What bunk! No one “won” the Cold War. Both sides lost.

Our self-delusion with simplistic abstract ideology just followed the Russians’. We are slowly emerging from it right now. The notion that sick markets cure themselves is no less absurd than the contradictions of Communism or the “best of all possible worlds” philosophy of Europe’s bloody eighteenth century.

We Yanks are the beneficiaries of a society founded on the the values of the Western Enlightenment and built upon two centuries of self-conscious and deliberate social engineering. We should have known that simplistic abstractions are neither our heritage nor our future.

Pope Francis’ humility reminds us of that basic truth. Janet Yellen knows it. Now we Yanks can return to what made us great as a people: engineering our own betterment, step by patient step, with a humble heart and an eye on current data.



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