Thoughts on bottoms

The dust is starting to settle from the economic crisis that started last year, and it is time for a government commission to figure out what went so horribly wrong. Luckily, just such a commission is forming; its chair, former California insurance commissioner Phil Angelides, says they will “leave no stone unturned.”

Unfortunately, the commission’s makeup is not terribly conducive to really getting to the bottom of things. Notorious smart person Albert Einstein once said, “We cannot solve our problems with the same thinking we used when we created them.” Einstein was not an economist, but this quote seems designed as a warning about this commission.

The commissioners are all insiders, half appointed by Democrats and half appointed by Republicans. They all have been successful in the system that they are now tasked with investigating. All but two are affiliated with regulators, corporations – including Merrill Lynch(!) – and politicians, or they are politicians themselves. The exceptions are a director from the American Enterprise Institute (a conservative think tank) and a “Las Vegas businessman.”  (just who we need to investigate a financial system that failed due to excessive speculation!)

Where are the people who are at least a little bit outside of the system? Where are voices from outside the political-economic mainstream? Who will ask whether it is wise to have will point out that maybe an economic downturn is better than the alternative, in which we keep burning up our resources until they are gone and we face a catastrophic economic collapse?

In any case, the commission is tasked with figuring out the causes of the crisis by Dec. 15, 2010. We will hopefully be spared further crises while we wait 17 months for their recommendations to Congress, which will then launch into another round of problem solving that will presumably last well into 2011.

The Anglelides commission is already being compared to the 9/11 commission. That is the first major flaw: One big difference between this an 9/11 is that the show ain’t over yet. The looming failure of CIT, a commercial lender that is absolutely central to the operations of about a million businesses, shows that this is very much an ongoing crisis.

Another key difference is that terrorist attacks are criminal actions by a few people, but this crisis grew out of widespread legal activities that generally took place in close consultation with lawyers, regulators, and politicians.  Shadowy figures were not the major players.

Consider the role of Henry Paulson, who led Goldman Sachs for eight years before becoming Treasury Secretary. Oddly enough, the program that he engineered allowed Goldman to repay the $10 billion bailout, declare huge profits and executive “bonuses” and emerge as one of the new giants of Wall Street (the other, JP Morgan Chase, got $25 billion despite its lack of a Treasury Secretary in their corner).

The problem was not an assortment of Bernie Madoffs; it was the revolving door between government and business that created a system that rewards risk-taking and greed. The Angelides commission appears to be part of that problem.

The stakes are  high. The BBC reports that the various bailouts have exposed the U.S. to $23.7 trillion dollars in risk. For some reason, the domestic media doesn’t seem to think this is big news, even though that number should make everyone sit and think for a moment about how far we are from a truly market-based economy: In the unlikely even that this worst-case scenario comes to pass, it would take 20 months of our gross domestic product ($14.3 trillion in 2008) to pay back the losses. That is, we could all work at pre-recession rates of production and it would take until the spring of 2011 before we get back to zero (assuming the impossible scenario that we have a functioning economy without a single penny spent on actual consumption). And that is not even counting the extra year it would take to pay back our $13.6 trillion in external debt, which would put us well into the next presidential election.

So what the heck do we do with this mess?

Ordinarily, I write about positive grassroots solutions, but I have to admit that this one has me stumped. It is just not clear where the bottom is, or even whether there is a bottom. In any case, we cannot afford to wait around for a couple of years. Especially in California, where government services are rapidly dwindling, we need to find ways to take care of each other, without relying on a global system that looks more precarious by the week.