Lefties: The Death of Neoliberalism Has Been Greatly Exaggerated, Because Neoliberals Won!

My May-issue essay
about the new New Republic, in which I lamented the
“death” of liberal-on-liberal contrarianism, has triggered a
reaction from left-of-center commentators that might be summed up
as “That’s mostly not true, but if even it was that’s just because
Democrats fully absorbed so many neoliberal critiques.” Here are
three representative responses:

Jonathan Chait:

Those magazines once critiqued
Democrats from the right, advocating a policy loosely called
"neoliberalism," and now stand in general ideological
concord. 

Why? I'd say it's because the neoliberal project succeeded in
weaning the Democrats of the wrong turn they took during the 1960s
and 1970s. The Democrats under Bill Clinton -- and Obama, whose
domestic policy is crafted almost entirely by Clinton veterans --
has internalized the neoliberal critique. 

Welch never entertains this possibility. To a doctrinaire
libertarian like Welch, it's self-evidently true that the Democrats
are as left wing as ever, and that the lack of a critique from the
right by liberal writers proves they have moved left. But the
examples he holds up -- TNR writers endorsing universal health
care, gun control, and updating the minimum wage to keep pace with
inflation -- disprove his case. TNR and the Monthly always
supported those things. 

Ed Kilgore, Washington Monthly:

There is an awful lot of telescoping in Welch's account of brave
left-of-center heretics giving way to hacks. His appreciation of
WaMo "contrarianism" seems to be confined to the 1970s and 1980s,
which ignores the magazine's continuing efforts to "make government
work" amidst some wildly varying political and economic
circumstances. [...] Worst of all, he seems entirely innocent of
the endless discussion in center-left circles, continuing through
the 1980s and 1990s until the present, about how to promote worthy
liberal self-examination without descending into mere
"contrarianism," or providing regular material for the opposition.

One important reason the tone
of liberal "heresy" has changed is that the "contrarians" won a lot
of battles, from the "reinventing government" movement to a more
robust support for private-sector innovation to reforms of the
"welfare state" to more regular engagement with actual progressive
voters as opposed to self-appointed interest group representatives.
An equally important reason, which is entirely missing in Welch's
analysis, is what happened on the Right with the gradual triumph of
a conservative movement that was more inte rested in destroying the
New Deal/Great Society legacy than in reforming it. In Charlie
Peters' famous "Neoliberal
Manifesto" of 1983, which Welch quotes from selectively,
in the founding documents of the Democratic Leadership Council, and
in the better contribution of TNR, there was a constant emphasis on
maintaining progressive values and commitments but modernizing
their means in order to make them more effective in meeting their
stated purposes and in maintaining political support for them. The
most urgent progressive political task today is surviving the
conservative onslaught, so of course "contrarians" are a lot more
careful about making their fundamental allegiances clear.

Since no progressive wants to find his or her "critical
analysis" turned into Fox News talking points, even those most
willing to question this or that element of existing policy or
rhetorical practice (say, the reflexive opposition to means-testing
of Social Security and Medicare on grounds that universal programs
are easier to defend politically) need to constantly re-articulate
their values. If that annoys or aggrieves people like Matt Welch,
he can blame his friends on the Right.

Matthew Yglesias, Slate:

But the world of policy debates is so much wider and more
interesting than that! Is Obama's manufacturing boosterism is a
good idea? I
say no. Do municipalities
over-regulate food trucks? I say yes. Would single-payer health
care lead to catastrophically low incomes for American
doctors? I
say no. Should we try to reduce the level of online copyright
infringement to zero? I
say no. Do we need more expansionary monetary policy? I say
yes. And so it goes. All of these views are, I think, perfectly
compatible with being someone who regularly votes for the
Democratic Party. But if you held all those same views and also
thought legal abortion amounted to the legalized murder of unborn
children, they could easily be Republican views. None of them are
Barack Obama's views or Mitt Romney's views. I loved The
Bankers' New Clothes and so
did John Cochrane, even as Cochrane and I have very
different opinions about most economic policy matters. And, again,
as best I know, neither Harry Reid nor Mitch McConnell is eager to
embrace drastically higher capital requirements for banks. But
Sherrod Brown is, and so is David Vitter. There's a great big
economic policy debate out there that's a lot more interesting than
the question of who you should vote for in quadrennial presidential
elections.

You can assess their claims in the comments.

In possibly related news, a new Gallup poll shows that twice as
many Democrats as Republicans (37 percent vs. 19 percent) answer
the question “Please tell me one or two specific thinks you dislike
about [your party]” with the word “nothing.”

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DAVID STOCKMAN: We've Been Lied To, Robbed, And Misled

Then, when the Fed’s fire hoses started spraying an elephant soup of liquidity injections in every direction and its balance sheet grew by $1.3 trillion in just thirteen weeks compared to $850 billion during its first ninety-four years, I became convinced that the Fed was flying by the seat of its pants, making it up as it went along. It was evident that its aim was to stop the hissy fit on Wall Street and that the thread of a Great Depression 2.0 was just a cover story for a panicked spree of money printing that exceeded any other episode in recorded human history.

David Stockman, The Great Deformation

David Stockman, former director of the OMB under President Reagan, former US Representative, and veteran financier is an insider's insider. Few people understand the ways in which both Washington DC and Wall Street work and intersect better than he does.

In his upcoming book, The Great Deformation: The Corruption of Capitalism in America [37], Stockman lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few. And when trouble arises, these few are bailed out at the expense of the public good.

By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct.  And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued -- in full -- at all costs. 

Of course, history shows that our markets and economy would have been better off had the system been allowed to correct. Most of the "too big to fail" institutions would have survived or been broken into smaller, more resilient, entities. For those that would have failed, smaller, more responsible banks would have stepped up to replace them - as happens as part of the natural course of a free market system:

Essentially there was a cleansing run on the wholesale funding market in the canyons of Wall Street going on. It would have worked its will, just like JP Morgan allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the AIG bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan [Stanley], and they should not have been. As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games, such that Goldman Sachs got $10 billion dollars for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs generated what I call a $29 billion surplus – $13 billion of net income after tax, and on top of that $16 billion of salaries and bonuses, 95% of it which was bonuses.

Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system. These firms are supposed to come and go, and if people make really bad bets, if they have a trillion dollar balance sheet with six, seven, eight hundred billion dollars worth of hot-money short-term funding, then they ought to take their just reward, because it would create lessons, it would create discipline. So all the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values – which for most of these partners is tens of millions, hundreds of millions – when they formed a new firm, I doubt whether they would have gone back to the old game. What happened was the Fed stopped everything in its tracks, kept Goldman Sachs intact, the reckless Goldman Sachs and the reckless Morgan Stanley, everyone quickly recovered their stock value and the game continues. This is one of the evils that comes from this kind of deep intervention in the capital and money markets.

Stockman's anger at the unnecessary and unfair capital transfer from taxpayer to TBTF bank is matched only by his concern that, even with those bailouts, the banking system is still unacceptably vulnerable to a repeat of the same crime:

The banks quickly worked out their solvency issues because the Fed basically took it out of the hides of Main Street savers and depositors throughout America. When the Fed panicked, it basically destroyed the free-market interest rate – you cannot have capitalism, you cannot have healthy financial markets without an interest rate, which is the price of money, the price of capital that can freely measure and reflect risk and true economic prospects.

Well, once you basically unplug the pricing mechanism of a capital market and make it entirely an administered rate by the Fed, you are going to cause all kinds of deformations as I call them, or mal-investments as some of the Austrians used to call them, that basically pollutes and corrupts the system. Look at the deposit rate right now, it is 50 basis points, maybe 40, for six months. As a result of that, probably $400-500 billion a year is being transferred as a fiscal maneuver by the Fed from savers to the banks. They are collecting the spread, they've then booked the profits, they've rebuilt their book net worth, and they paid back the TARP basically out of what was thieved from the savers of America.

Now they go down and pound the table and whine and pout like JP Morgan and the rest of them, you have to let us do stock buy backs, you have to let us pay out dividends so we can ramp our stock and collect our stock option winnings. It is outrageous that the authorities, after the so-called “near death experience" of 2008 and this massive fiscal safety net and monetary safety net was put out there, is allowing them to pay dividends and to go into the market and buy back their stock. They should be under house arrest in a sense that every dime they are making from this artificial yield group being delivered by the Fed out of the hides of savers should be put on their balance sheet to build up retained earnings, to build up a cushion. I do not care whether it is fifteen or twenty or twenty-five percent common equity and retained earnings-to-assets or not, that is what we should be doing if we are going to protect the system from another raid by these people the next time we get a meltdown, which can happen at any time.

You can see why I talk about corruption, why crony capitalism is so bad. I mean, the Basel capital standards, they are a joke. We are just allowing the banks to go back into the same old game they were playing before. Everybody said the banks in late 2007 were the greatest thing since sliced bread. The market cap of the ten largest banks in America, including from Bear Stearns all the way to Citibank and JP Morgan and Goldman and so forth, was $1.25 trillion. That was up thirty times from where the predecessors of those institutions had been. Only in 1987, when Greenspan took over and began the era of bubble finance – slowly at first then rapidly, eventually, to have the market cap grow thirty times – and then on the eve of the great meltdown see the $1.25 trillion to market cap disappear, vanish, vaporize in panic in September 2008. Only a few months later, $1 trillion of that market cap disappeared in to the abyss and panic, and Bear Stearns is going down, and all the rest.

This tells you the system is dramatically unstable. In a healthy financial system and a free capital market, if I can put it that way, you are not going to have stuff going from nowhere to @1.2 trillion and then back to a trillion practically at the drop of a hat. That is instability; that is a case of a medicated market that is essentially very dangerous and is one of the many adverse consequences and deformations that result from the central-bank dominated, corrupt monetary system that has slowly built up ever since Nixon closed the gold window, but really as I say in my book, going back to 1933 in April when Roosevelt took all the private gold. So we are in a big dead-end trap, and they are digging deeper every time you get a new maneuver.

Click the play button below to listen to Chris' interview with David Stockman (56m:33s):

iTunes [3] | Download [4] | Report Problem [5]

Click here to read the full transcript

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