By Stephen Bindman

Randall Forsyth is an unusually clear-sighted fellow, but one who up to now has defended the bailouts as absolutely necessary in Barrons, Dow Jones’ theoretical journal.  He comes out saying what I and a few others have been saying.

“How can you expect to find solutions in the crowd that caused the problems?”  says the sub-headline in his Jan. 27, article in Barron’s online. 

He compares this year’s bash at Davos, World Economic Forum “coming just a couple of days after European and American corporations announced the sackings of over 75,000 workers,” with the deteriorating world economy

“Monday, Caterpillar said it will cut 20,000 jobs while Pfizer said its acquisition of Wyeth will pare the payroll of the combined company by 19,500 workers. Sprint Nextel said it will let 8,000 people go while Home Depot said it would trim 7,000 workers. In the Netherlands, banking giant ING said it would cut 7,000 jobs while Philips would lop off 6,000 jobs.”

The recent disclosure that Merrill Lynch paid out $4 billion in bonuses in December while arranging to be bought out by the Bank of America makes him well – wild.  What happened was that  Merrill Lynch had $15 billion of losses in the fourth quarter, but its purchaser,  BofA didn’t disclose this to its stockholders but clearly knew it.  BofA also knew that it would receive $45 billion from the Troubled Assets Relief Program after it receives an additional $20 billion the Treasury committed to this month to make this a done deal.

BofA has been getting other gifts from the government as it consolidates its power.  It gets exceptions to the laws about tax credits in its previous mergers.  Who does it know in the government.  Why is it so favored?

My response is that the idea that stockholders control most large companies is a Free market delusion. The company is run by its officers, part of the predatory elite that dominate the economy through its links through lobbyists with legislatures and bureaucrats, bribing each other, and largely ignoring its fiduciary responsibilities.  They set the economic priorities to suit their personal needs.

Forsyth concludes, “Does it occur to anybody it was the high and the mighty who head to Davos every January that got us in the fix we’re in? They were the ones who ran the banks that made billions from the reckless credit binge that has destabilized the financial system and for which taxpayers now are footing the bill.”

The only thing lacking in his analysis is the explicit recognition that this is our new dominant class.  He seems to recognize that they need to be reined in however.

That is why having Timothy Geither be the new Treasury Secretary reflects poorly on president Obama’s understanding of the problems facing our statist economy collapsing from the stupid policies generated by a largely predatory elite blinded by its wishful – or lazy and delusional – thinking.  Geither was in trouble for a while because he failed to pay taxes on his income from his stint at the IMF! This despite the fact that he clearly knew about the taxes he owed. Having him in as Treasury Secretary says business as usual. I described these developments in my recent book, Pseudo-Capitalism: Socialism for the Rich.

In passing it should be remarked the problems facing Obama have something in common with those facing Putin and Medvedev, the dual leadership of Russia that echoes a similar pairing under Stalin and after. There of course the head of Russia’s largest company Gazprom, is also often a cabinet minister.  Does this save the cost of lobbyists?  Can such a dual functionary  just talk to himself? Once under Eisenhower we had the former head of General Motors as commerce secretary saying “the business of the United States is business.”

Obama faces a conundrum: to redirect the American economy into productive channels he needs simultaneously to have the government  set goals for investment, employment, and educational support, disabuse people of the idea of the dominance of the free market, while not inflicting too much pain on the American public.  Hard to do. We probably are rich enough to do it, if we get it right early enough but I don’t know if it can be sold from his centrist position. Nor will it be possible to do it indefinitely if money keeps being wasted on the banks and the self-deluded pseudo capitalists.  Meanwhile, we are keeping taxes low on the rich.  

Obama wants to coast with the status quo.  Having a more openly planned economy is hard to do.  Many attempts have failed.  We don’t have a ready-made structure to do it.  The last time we openly did it was during World War II. At that time we instituted both wage and price controls.  In some ways however we did it better than the German statist economy.  The Nazi government was still placating its own people by producing cars and baby carriages well into 1942, fearing that wholeheartedly converting to war  production would make its own people too anxious about the outcome.  

Stalin eliminated one of his important but not-Marxist economists  Nikolai Kondratieff, a long cycle theorist who said that capitalism was going to survive because it continually could re-create itself.  This weak, forked tongue, predatory,  narcissistic elite however may well destroy the interrelated economies of the world if it is not  reined in.  Erlier theorists, imagining what awell educated, inteligent, technocratic, scientific and managerial elite could do, thought they could identify with a general interest of the nation at large.  It would be this type that could be of great help to make a society work.  

I don’t want to be screaming alone, like a wild man in the woods, nor do I predict the immediate collapse of the world. However, I notice how some dissident economists like Mark Faber have begun to talk about the United States economy as a giant Ponzi scheme waiting to be discovered by the rest of the world who will stop therefore trusting our bonds and dollar bills.  Here are a couple of others who seem very worried. And there worry doesn’t help me believe that now that sentiment is gloomy, the Free market has reached its bottoming out and our future will become assured and glorious once more because the free market has its ups and downs.

John Mauldin, another usually optimistic believer in Capitalism and the Free market writes in www.fallstreet.com Jan. 19, “currently the number of defaults is high and rising — throughout the developed world. It is likely to be 2011 before the housing market finds a real bottom and housing construction can begin to rise.”

The credit markets are still in disarray. While there are some signs that the frozen markets are thawing, the Fed and the US Treasury are having to provide more bailout capital to large US banks. Citigroup is breaking up. Bank of America needs massive amounts of capital to digest Merrill. The hole that is AIG just keeps getting deeper. It is going to take several years for the credit markets to function at anything close to normal, as we simply vaporized a whole credit industry worldwide.”

Nobel Laureate Paul Krugman writes in a Jan. 18, column in the New York Times his fears about current policy. “What I suspect is that policy makers…are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.”

He is afraid of the result.  Others point out that if we exhaust our capital, the next experiment will be harder, done from a weaker state.

“Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word – nationalization. The truth is that Gothamgroup [a code name for Citibank] and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.”

As usual, professor and Nobel laureate Krugman describes the situation correctly – as far as he goes.  Columnist Krugman knows not to go too far ahead of his audience.  From my perspective the pseudo-capitalist elite, call it what you will, is trying to keep from drowning.  The economic model that has been the basis for its social and economic power is broken.  They are pouring money into broken banks acting as if private capital can once again revive the system. But how crazily contradictory is this?  It is government money, taxpayer money.  This makes it a statist economy without clear popular goals except to keep things going, and those who benefit the most must therefore continue to benefit the most.  The guys who are running the system live in bad faith.  They know its not capitalist, just like the Russian nomenclatura knew their system wasn’t socialist.  They kept their puny privileges while salivating over the grander privileges  exercised by the dominant strata in the United States and Europe.

unfortunately social science, political science, and history are not the same kind of science as physics or even animal psychology.  Therefore people commit themselves to ideas that are hard to experimentally demonstrate and depend too much on idiosyncratic interpretations of the evidence.  When peoples lives and fates depend on the interpretation, the situation becomes even more complex.
What then are the minimum requirements to halt the current economic crisis?  There are a few that clearly emerge.  

One is that different people must run the system. Obama has called for this by saying that public servants must realize that they serve the people and not use public service as a launching platform for their greedy hopes for personal advantage.  Having Geither as treasury secretary sends the wrong message.  And of course Geither natirally  believes that this Humpty Dumpty model of economic progress can be patched up.  He is the wrong choice on both counts.

Another is that the economy needs to be run on an honest basis. Obama has called for transparency.  However, not every governmental discussion can be public.  More importantly economic planning by the biggest economic player, the government, needs to be more openly addressed from an economic point of view.  Government investment should reflect some defined form of economic justice, even if incomplete.  Current practice of allowing 4 billion dollars of bonuses for a bankrupt Merrill in order to once again keep confidence in the already laughable banking system is what should not be.    

Additionally, the government should allow itself to set some ideological goals that are new.  We set some, but usually in emergencies.  We have the war on cancer, No Child Left Behind, littering. I am for some others like Against Excessive Consumerism, Fund What Benefits All before what only benefits a few.  We need to drop the goal of having so many arms in peacetime, with no military challenger.  The world has allowed us to waste our patrimony on unnecessary armaments.              

While turning the ship of state to new values is necessarily a slow process the changes we must make are fundamental. They go to the root. They ought not to be mainly cosmetic, as unfortunately No Child left behind apparently has been. There is a possibility that the collapse of the system will be more sudden and dramatic than expected and will suggest to many more dramatic and utopian changes. Let their utility first be demonstrated through some kind of experiment.  Massachusetts for instance has instituted a mandatory health plan, and it seems to be working and making people happy.  Past history has shown that Utopian moves when confronting disaster are generally only temporarily effective.

Stephen Bindman is a clinical psychologist based in Los Angeles. His most recent book is Pseudo-Capitalism: Socialism for the Rich.