To Spend or Not To Spend

To examine the effect the stimulus had on the economy, it’s necessary to understand the economic philosophy behind it while parsing the figures. The conflict between Democrats and Republicans on this issue is largely a debate over the economic theories of two men: Milton Friedman and John Maynard Keynes.

Mitt Romney called it “the biggest, most careless one-time expenditure by the federal government in history.” Paul Ryan characterized it as “a case of political patronage, corporate welfare, and cronyism at their worst.”

“It” was the American Recovery and Reinvestment Act of 2009, colloquially known as the “Obama Stimulus.” The Republican narrative is that Americans would have been better off not taking on more debt and allowing the omniscient markets to work themselves out. (This argument was noticeably absent in 2008 when President George W. Bush signed a stimulus bill for more than $150 billion.) Before  Obama signed his stimulus bill into law, House Republicans had voted against it. Every single one of them. In the Senate, only three Republicans approved the bill.

So we know where the parties stood in 2009—pretty much where they stand today. Democrats largely believe that the stimulus prevented the complete, Depression-like collapse of the economy. Republicans believe it had no effect on the economy and, furthermore, the additional debt will be our ultimate undoing. Republicans are correct to say that the stimulus had few offsetting revenues and blew yet another enormous hole in the budget deficit. They did not make this argument, however, when our country decided to wage two decade-long wars abroad while simultaneously reducing taxes. But the reality of the unfunded stimulus expense exists. So the question remains: Did the stimulus work?

Both Democrats and Republicans point to FDR’s New Deal to answer this question historically. Republicans take the short view that FDR’s programs had little effect on the nation’s economy as the economy double-dipped in 1937. Democrats take the long view that this date coincided with the Roosevelt administration’s decision to back off federal spending and that a resurgence of federal funding ultimately mitigated the decline. There is general consensus that the tipping point that put the nation back on a path toward prosperity was World War II and the wartime economy. Despite this philosophical harmony, Republicans are still loath to admit that the top marginal income tax rate in 1941 was 81 percent, and by 1945 it was 94 percent. That’s how you pay for war.

So while it can be instructive to look back and apply historical lessons to the present, the picture is incomplete because the circumstances are vastly different. To examine the effect the stimulus had on the economy, it’s necessary to understand the economic philosophy behind it while parsing the figures. The conflict between Democrats and Republicans on this issue is largely a debate over the economic theories of two men: Milton Friedman and John Maynard Keynes.

Born in 1912, Friedman would come to be recognized as one of the great economic minds of the modern era. A Nobel Prize-winning economist who taught at the University of Chicago, Friedman held a wide range of core libertarian views and is often credited as one of the principals of the ideology. Throughout his career he argued the benefits of monetary policy and the folly of fiscal policy. Think TARP versus stimulus. In other words, maneuvering liquidity through the system in a centralized fashion was an appropriate measure of government intervention whereas providing government funding for programs via the Treasury was not.

This is not to say that Friedman would have approved of President George W. Bush’s TARP “bailout” of the banks (Friedman died in 2006 before the financial world came unraveled) or even of the Federal Reserve itself. In a perfect world, Friedman would have abolished the Federal Reserve altogether, which is a common rallying cry among Libertarians who also promote a return to the gold standard no matter how economically or politically impossible this would be. Again, the theory being that private markets would be more efficient, accurate and apolitical with respect to pegging the value of currency in real time.

But if Friedman’s economic policies have dominated the years since Gerald Ford was in the White House, it was English economist John Maynard Keynes who dominated the years prior, beginning in 1933 with his paper, “The Means to Prosperity.” Keynes’ recommendations for dealing with recessions and depressions would fundamentally alter Europe and America’s approach to the Great Depression. Keynes’ first assumption, considered revolutionary at the time, was called the “paradox of thrift.” Simply put, if businesses and consumers collectively tighten their belts during difficult times, the effect would be a downward spiral in the demand for goods and services.

Under Keynes’ theory, this self-perpetuating loop of plunging demand would necessarily result in a decline of both profitability and confidence. Keynes believed the antidote was government spending. Specifically, the further the funding went down the economic chain the better. Businesses and consumers, those with the greatest need for liquidity, were likely to circulate government funds through the economy faster than institutions such as banks that might be more prone to hold onto liquidity. The net result, due to what Keynes coined the “multiplier effect,” would be spending that works its way through the normal economic channels via the purchase of goods and services at the consumer level, labor and equipment at the business level.

A great deal of attention is paid to the short-term effects of spending on infrastructure as large public works projects during the Depression became the most visible and lasting testaments to Keynesian economy theory during the Roosevelt era. But many Keynesian theorists argue that these types of projects also contribute to the long-term health of the economy, with the best possible result being partnership with, and ultimately transition to, private industry. A great example of this is the Tennessee Valley Authority (TVA) established under FDR, which ultimately became a private utility. But long-term infrastructure projects don’t have the immediate effect of direct government spending at the bottom levels of the economy.

Larry Summers, the notoriously prickly economist, has had a remarkable career serving in both the Clinton and Obama administrations (Summers was Treasury Secretary briefly under Clinton) and as one-time president of Harvard University. Tapped to join Obama’s transition team, he is credited with determining the strategy for bailing out the faltering American economy. In his book, The New New Deal, Time magazine senior staffer Michael Grunwald writes, “At Brookings, [Summers] proposed a technocratic approach to Keynesian stimulus that has dominated the debate ever since. A stimulus package, he argued, should be timely, targeted, and temporary.”

This guiding philosophy would result in a three-tiered approach to Obama’s stimulus. The first would be accomplished through tax breaks for the vast majority of Americans. The second would be through entitlement spending such as extending unemployment benefits and prolonging health insurance coverage for laid-off workers. It also provided direct aid to states to help plug budget gaps to prevent the layoffs of teachers and reductions to Medicaid. The third was investment in programs deemed “shovel-ready.”

This last point is somewhat controversial because few, if any, infrastructure projects can begin work at a moment’s notice. But on this, Obama was clear that funds would be found to target America’s aging infrastructure and invest in new projects on the drawing board, even if their timetables weren’t immediate.

Keynesian economists such as Joseph Stiglitz quickly lauded Obama’s plan, though most of them  believed the $787 billion package was only about half of what was required to properly address the crisis. Another Keynes disciple, Nobel Prize-winning economist and columnist for The New York Times, Paul Krugman, has been extremely vocal that the stimulus, while swift and necessary, was “woefully inadequate.” Nearly everyone on Obama’s transition team would concur, but the thought of a stimulus package topping $1 trillion was politically radioactive. Besides, almost everyone involved at the time hoped for a second crack at stimulus funding in Obama’s first term. And while most of Obama’s political advisors understood how difficult this would be, no one could have predicted how hard the Republican Party was preparing to fight against any new proposal from the Democrats.

Perhaps the most astounding revelation in Grunwald’s book is how Obama’s inner circle — especially the most cynical among them like the explosive Rahm Emanuel or acerbic Larry Summers — understood that the package was political suicide. In fact, they were prescient in this regard as the stimulus provided the freshly-routed GOP with a rallying cry and a strategy to take back control of the House of Representatives during the 2010 mid-term elections.

In reality, the Recovery Act did more than just pump taxpayer dollars temporarily into the economy and drive up the national debt. It put federal funds into the hands of agencies and consumers who had the ability to spend them in a timely fashion. This came in the form of tax cuts for the middle class, an extension of unemployment benefits and medical coverage, state aid to support endangered Medicaid programs, healthcare and student loans. It was the ultimate return to Keynesian philosophy.

Opposition to blanket stimulus funding isn’t fundamentally misguided. After all, no government can sustain unlimited subsidies without someday having to recoup these costs. This brings us to the second half of Keynes’ theory. If the government is supposed to aid a recovery during a recession by pouring funds through the economy, then it must likewise increase revenue during the boom times that follow. There are only two ways to do this: raise taxes or cut spending. Or both. The problem is that we haven’t meaningfully done either in decades.

While cutting spending is very much a part of the Republican narrative, increasing taxes is anything but. In a perfect world of no government intervention or regulation, the markets would simply figure it out and restore balance because recessions and depressions are, after all, bad for business in the long run. Having said that, this type of “boom and bust” behavior creates great potential short-term benefits, as volatility is a savvy investor’s best friend. But Keynes never meant to eliminate the boom and bust nature of the economy. His policies were intended to mitigate the depths and the peaks.

Shedding all government spending and letting the markets work it out was precisely the advice President Hoover received from Treasury Secretary Andrew Mellon after the market crashed in 1929. Hoover didn’t actually follow his advice. Instead, he set in motion many of the public works projects and federal spending plans continued by Franklin Roosevelt. The Depression was hung around Hoover’s neck in part because he chose to portray an aura of calm and confidence even though Rome was indeed burning.

Hoover fought vigorously behind the scenes for some of the programs that would make Roosevelt one of the most popular presidents of all time. Hoover’s biggest problem was actually Roosevelt. Because Hoover rarely took the opportunity to point out that the economy collapsed as a result of his predecessor’s policies and then failed to defend himself against Roosevelt’s subsequent attacks, he became unfairly synonymous with the Great Depression. This little bit of history was not lost on Obama.

Today, comparisons abound between the circumstances surrounding both the Great Depression and the (dare I say) current depression. Politicians and historians will forever debate their similarities and how they both arrived. But there are also current comparisons we can draw relating to Keynes’ paradox. In Europe today, where austerity is the mainstay of the economic recovery attempt, unemployment remains untenably high. In both Spain and Greece it hovers around a bruising 24 percent. Before the stimulus, the US economy shed 800,000 jobs in January of 2009 and GDP growth was negative. Since the beginning of 2010 America has added an average of 143,000 jobs every month and experienced positive GDP growth, although everyone acknowledges it’s a slog. But this kind of forward momentum amply defends the stimulus.

Beyond facts and figures, be sure to listen closely for what you cannot hear. Perhaps the most incredible aspect of the stimulus is the lack of fraud associated with the spending. The oversight has been so rigorous and the process so astoundingly transparent that almost no one is crying foul at the veracity of the disbursements. Instead, opponents gnash their teeth and shout at the rain about Solyndra, the failed California solar plant manufacturer, at every turn. And that’s about it. Forget the fact that the mechanism for funding Solyndra was established in 2005 and Solyndra was selected to participate in the program in 2007; if opponents of the stimulus want to make this their Alamo, so be it. Out of nearly $800 billion invested, one failed solar manufacturer is all you’ve got? Even Bain Capital would have relished this level of success.

So, did it work? I side with Krugman. The answer is that the stimulus package was a good start, but it should have been bigger. Nearly all of those involved in creating the stimulus recognized at the time that it would prevent catastrophe but fall short of prosperity. Unfortunately, our politics are so poisoned today that uttering the phrase, “should’ve been bigger,” is truly the third rail. There is no more room for a reasoned debate in America. But the fact remains that without the stimulus several state budgets would have collapsed, all but bankrupting Medicaid, far more roads and bridges would have fallen further into disrepair, middle-class Americans would have had less in each paycheck and millions more people would have fallen off of the unemployment rolls and into poverty.

All told, Ryan’s claims of  “patronage” and “cronyism” fell apart the moment he lobbied to divert federal funds to his district; Romney’s claim that the stimulus was “careless” underscores either a deep misunderstanding of the shrewd, tactical and successful nature of the program or a further illustration of his belief that no person, corporation or municipality deserves financial support, even under the most severe economic circumstances. Romney’s recent disdainful comments about “47 percent of Americans” may give weight to the latter sentiment, which should give us all pause.

Obama’s Iago – The ‘Indispensable’ Man

True to his Harvard Law School roots, the current occupant of the White House opted for an elitist approach to the worst economy since the Great Depression. He signed up central banker types, including a former Treasury Secretary and a former Fed Chairman.

“In following him, I follow but myself.”

“Your legacy,” the newly installed Treasury Secretary counseled the recently elected President, “is going to be preventing the second Great Depression.”  Quite a legacy if one ignores on-going recession, permanent high unemployment, rampant health care and higher education costs, legislative gridlock, China ascendant, all played out to the distant fiddling of the inflamed Euro-economy.

“Your Money, Your Vote” debate kicked off by asking Republican presidential wannabes what they would do to buffer America’s anemic economy against the bunga, bunga of Italy’s economy, the world’s seventh largest.  One-time frontrunner Herman Cain announced he would “assure that our currency is sound. Just like — a dollar must be a dollar when we wake up in the morning. Just like 60 minutes is in an hour, a dollar must be a dollar.”  Dollars to donuts, most folks wouldn’t be hiring a financial advisor based on fortune cookie advice.  Clearly, though, there is an element out there that has no problem subjecting the world’s biggest economy to master plans scribbled on the back of bev-naps.

True to his Harvard Law School roots, the current occupant of the White House opted for an elitist approach to the worst economy since the Great Depression.  He signed up central banker types, including a former Treasury Secretary and a former Fed Chairman.  Timothy Geithner, whose five years heading the NY Fed placed him at the helm for the economic meltdown of ’07-‘08, was named T-Sec.  Given his renowned intimacy with New York financiers, Geithner knew how to serve his masters by covering them with a $700 billion TARP at crunch time.  No man is a hero to his valet and Geithner says he could’ve “cared less about Wall Street.” But he had to get credit flowing again, even it went to core perpetrators of the meltdown.

The docudrama “Too Big to Fail” portrayed current Fed chair Bernanke, dropping the D bomb on congressional and banking leaders: go along with the Bush economic team or detonate the next Depression.  Exiting from the actual meet, John Boehner looked drawn and quartered as if he had just faced the Grim Reaper.  But Depression prevention was “not enough” for the incoming President, so he set about to reform a bloated, inefficient health care system by extending it to the 45M uninsured.  The jury is literally still out on that aspect of Obama’s legacy and, like almost everything else in America today, subject to slow death by deadlock.

Meanwhile, Treasury actually realized a profit on the widely despised TARP bailout, even as the banks have opted to sit on trillions while taking record bonuses for themselves.  Mad Money’s Jim Cramer gushed recently that “Tim Geithner did a lot to make our institutions stronger…. He’s one of the greatest Treasury Secretaries we’ve ever had!”  He has become this Administration’s Indispensible Man, the President beseeching him to stay on through the end of his first term.

Geithner’s bank-centric approach has not come without collateral damage.  Bloomberg reported that Geithner-led NY Fed instructed crippled mega-insurer AIG to cross out references to $62B in swap payments to banks like Goldman Sachs, which were made at 100 cents on the dollar, no haircut.  Geithner reportedly assured the banks that the dreaded doyenne of consumer financial protection, Elizabeth Warren, would never head the newly formed bureau.  Though he denied “slow-walking the President,” the T-Sec reportedly ignored Obama’s early directive to dissolve troubled Citigroup (which had previously offered Geithner CEO).

Nothing has suffered more in T-Sec priorities than jobs.  Geithner has intermittently lip-serviced the problem, lately with a Jobs Bill he knows is not getting past Republican blockades.  In fact, the most arbitrary job barrier was thrown up on Geithner’s own turf by federal agencies closely interconnected with Treasury.  On July 6, 2010, OCC, FDIC, NCUA and FHFA, the conservator for mortgage giants Fannie Mae and Freddie Mac, unloosed a coordinated strike against Property-Assessed Clean Energy (PACE) programs.  PACE obligations, they contended, would pose a threat to “the safety and soundness” of mortgage products.

Launched in 2008, Long Island Green Homes was the first operational residential energy efficiency retrofit program in the nation.  A typical retrofit is $9,400, averaging yearly savings of $1,114 that generally covers the homeowner’s monthly obligation, secured by the property.  Energy use and emissions are cut over 25%, saving homeowners money, enhancing property value all while putting hard-hit tradesmen to work.

None of this matters much to the holders of a couple of trillion dollars of toxic subprime mortgages.  In PACE, legislatively affirmed in 27 states and promoted by a Vice-Presidential White Paper, they imagined the second coming of toxic instruments and the chance to demonstrate what tight-fisted regulators they’d finally become.  Fact is that if 5% of the nation’s 80M houses were retrofitted it would amount to a 0.6% rounding error of Fannie & Freddie’s total exposure.  At the same time, this shovel-ready work would create 435,000 job years nationwide never to be outsourced.

The Town of Babylon, along with the State of California and several counties, filed suit against FHFA who fundamentally argued that they were accountable to none, even the courts.  A Federal judge in California’s Northern District ruled otherwise and appeals are heading to the next level.  In its suit, Babylon argued that FHFA had unilaterally abrogated state and local sovereign rights in determining what infrastructure could be remediated for a public purpose.  In an aberrant departure from Washington gridlock, a bipartisan group of congressmen (23 Reps/29Dems, with Peter King the sole Long Islander to date) has embraced this principle by sponsoring the PACE Protection Act.  Message to Feds: ‘Hands off our incandescents and back off of our local energy efficiency programs!’  Go figure.

Watching this mountain be made out of a mole hill, Geithner has held himself back behind the wizard’s curtain, as if PACE could conceivably be the straw that breaks the economy’s back.  The Indispensable Man, who corralled the world’s most powerful bankers, could put the leg in legacy by delivering a swift kick to his in-house regulatory bureaucrats.  As Othello’s Iago knew, so should Obama’s Iago, that, “Reputation is an idle and most false imposition; oft got without merit and lost without deserving.” 

The Fundamentals of Fundamentalism

The circumstances that promoted the rise of the evangelical Christian doctrine in the 1920s and ’30s bear a striking resemblance to our current situation.

The sight of so many conservative Christian presidential candidates attempting to out-holy one another during the GOP debate this past weekend was curious but not without precedent. The role of Christianity in the American political system predates the formation of the nation itself, with the more fundamentalist aspects playing a larger part during difficult economic periods. While it can be said that religion informed the political ideologies of the men who established the framework of our nation, fundamentalism was largely relegated to the fringes of American politics until the first part of the 20th Century.

The circumstances that promoted the rise of the evangelical Christian doctrine in the 1920s and ’30s bear a striking resemblance to our current situation and help to explain—as history often does—why right-wing religious views are influencing the social, political and economic platforms of the GOP candidates.

Prior to the Great Depression, the evangelical set were more like babbling mystics than an influential political force. Think Jimmy Swaggart or Jim Bakker. The mainstream transformation came when successful, white Christian men who accumulated and maintained great wealth during this time were looking for absolution of the guilt they felt while their fellow countrymen fell upon hard times. Enter Abraham “Abram” Vereide, the man perhaps most responsible for the modern fundamentalist Christian movement in America.

Vereide was able to coalesce the successful strategies and teachings of other soul-surgeons and evangelists of his era. By rationalizing the financial success of his followers as the earthly manifestation of Christ’s will, he was able to mold a new Christian doctrine that recognized wealth, power and influence as deliberate and divine endowments. As it turned out, mass absolution and wider acceptance came in the form of Jesus Christ as seen through the lens of Bruce Barton’s bestselling book, The Man Nobody Knows.

Barton, who is more enduringly known as the second “B” in the ad agency BBD&O, which exists even today, published The Man Nobody Knows in 1925. It was an instant phenomenon. Barton’s Jesus was the ultimate winner, the consummate salesman. The book was a pocket guide to winning with Christ that helped extricate Christianity from purely religious constraints and bring it to a wider audience as only a professional adman could.

By 1933, when the nation was in the throes of the Depression, Vereide’s organization began to take shape. The political outgrowth of his movement was formalized in Seattle with the creation of the New Order of Cincinnatus. The parallels between the New Order and the Tea Party today are undeniable. Like the Tea Party, the New Order cherished free market ideals and conservative morality, and organized against taxes and big government.

Vereide’s followers heartily rebuked then-President Herbert Hoover for bailing out Wall Street bankers whom many Americans believed to be responsible for the stock market crash of 1929 just as the Tea Party chastised the Bush administration for doing the same with the Troubled Asset Relief Program (TARP). Both groups found their footing, however, railing against the subsequent administrations for battling economic downturns with public works projects, specifically FDR’s New Deal and Obama’s Stimulus Package. Likewise they share similar views regarding social welfare programs, and were able to elect candidates to battle these reforms. Even the great adman Bruce Barton went on to secure a seat in Congress under the slogan “Repeal a Law a Day.”

Vereide’s organization lives on today through the efforts of a rather enigmatic figure named Douglas Coe, who took over the group upon Vereide’s death in 1969 and transformed it into one of the most influential and highly secretive organizations in the modern era. The only public recognition of the group known today simply as “The Family” is the National Prayer Breakfast held every year in Washington, where political and business leaders assemble to pay tribute to Douglas Coe’s cabal. Most of what transpired beyond the breakfast remained a complete mystery until Jeff Sharlet, a reporter and expert on religion, stumbled upon Coe’s secret world, which he unraveled in his 2008 book titled The Family: The Secret Fundamentalism at the Heart of American Power and his 2010 follow-up C Street: The Fundamentalist Threat to American Democracy.

Sharlet painstakingly details the roots of fundamentalism in America and illustrates the many ways in which The Family’s perversion of Christianity as a doctrine of power has transformed modern political life in America. The ultimate testament to the work of The Family is fully on display in the platforms of candidates such as Michele Bachmann, Rick Perry and Rick Santorum—not to mention the political juggernaut waiting in the wings that is Sarah Palin. But before Bachmann there was Frank Buchman, founder of “Moral Re-Armament,” whose closeted reputation was more Marcus Bachmann than Michele, if you catch my drift. Before Palin there was Arthur Langlie, figurehead of the New Order of Cincinnatus, and before Perry there was Bruce Barton.

When placed in historical context, the great revelation of the Tea Party is that there’s nothing particularly innovative about it. As young as our nation is, we’re now old enough that everything old is new again. In Vereide’s time Vladimir Lenin was the Osama bin Laden of the day and Communism was today’s Islam. The rise of the German economy and the grand display of Nazism in the 1936 Olympics openly mocked America’s failing economy in the midst of the Depression just as China’s present-day ascension and the grand pageantry of the 2008 Olympics in Beijing taunted Americans during the Great Recession. And just as FDR became the bête noire of the New Order of Cincinnatus, so too is Barack Obama to the conservative, evangelical wing of the Tea Party.

What I find interesting about the parallels between our past and present circumstances is that there is room for both sides of the debate to find comfort. Christian fundamentalists can take heart in the notion that their wing of the Tea Party is an idea whose time has finally come while opponents of radical evangelicals may take solace in the fact that fundamentalism ebbs and flows with the vagaries of the economy. It’s simply a matter of perspective, or perhaps it’s a lack thereof.

Capitalism and Regulation Are Not Mutually Exclusive

Deregulation became the mantra of free market capitalists who view all government intervention into the markets as a complete affront to our democratic principles, as though the two are somehow connected. It sounded sexy and even seemed to be working for a while until our speculative chickens came home to roost and laid rotten eggs in all of our coops.

John Boehner NY Economic Club
House Speaker John Boehner speaking in New York

Osama bin Laden’s body has barely come to rest on the ocean floor and the Republicans are back in attack mode against the Obama administration. Speaker of the House John Boehner is taking his spending-cut crusade on parade again in the run-up to the vote to raise the nation’s debt ceiling. In doing so the Ohio Republican is not only acquiescing to the clamorous Tea Party faction of the GOP but to the special interests that define their politics.

The debt ceiling debate is the ultimate diversion from the more genuine debate that should be taking place in Congress. This is not to say it is without merit. But like so many political disputes, our politicians are intent on examining the symptoms of a crisis instead of deconstructing the root causes. The fact is our enormous national debt is a result of fighting two costly, protracted wars abroad and bailing out hooligans on Wall Street who engineered the greatest heist in American history. The problem is the GOP wants to fix everything else they deem to be wrong with the system without addressing these two key components of our indebtedness. 

Boehner and company are continuing the charade begun when Ronald Reagan was king and Alan Greenspan was God. Deregulation became the mantra of free market capitalists who view all government intervention into the markets as a complete affront to our democratic principles, as though the two are somehow connected. It sounded sexy and even seemed to be working for a while until our speculative chickens came home to roost and laid rotten eggs in all of our coops.

In a speech earlier this week to the Economic Club of New York, Boehner returned to the key conservative talking points, excoriating Washington for pandering to banks that are too big to fail without addressing the deregulatory fever in the Beltway that created this situation. He criticizes instead the government’s bailout response, saying that our “debt mostly borrowed from foreign investors caused a further erosion in the economic confidence of America and increased uncertainty for millions of private sector job creators.” If you asked these so-called job creators why they aren’t adding more people to the payroll or taking on more capital projects, I highly doubt the resounding answer would be America’s debt. Under President Reagan our debt skyrocketed but these same job creators doubled-down and invested in America, making the logical question: Why not now? Boehner went on to claim that the “massive borrowing and spending by the Treasury Department crowded out private investment by American business of all sizes.” That’s funny. I could have sworn that by keeping interest rates at practically zero, business owners would have been encouraged to borrow and invest in their companies with alacrity. 

This is where the GOP message gets into funky territory. You would be hard-pressed to find an economist who would deny that pumping bailout funds through the financial sector prevented a total collapse of our economic system. Everyone won in the short run. But because Congress was too cowardly to fix the structural regulatory issues in the banking industry, the big winner overall was Wall Street. The bailout allowed the banks to partake in riskless arbitrage (borrowing money at no cost and investing it in guaranteed government bonds for example) and bypass the private sector and individuals in desperate need of lending support. It’s one of the primary reasons the Dow Jones Industrial Average continues to rise despite a still-flagging economy; the dollars are flowing at the top with very little pulsing through the rest of the economy. But the concept of arbitrage is largely lost on Americans and our politicians are reluctant to talk about it in a meaningful way, instead choosing to focus on the national debt.

What’s worse is that the banks have presumably used a good portion of this money to invest in opaque investments that have artificially created crises in the agriculture and energy sectors. I say “presumably” because no one can really be sure where some of this money is being invested because the regulatory environment is still so broken and corrupt that the funds are impossible to track directly. It’s the pricing and behavior of these markets that gives them away. Energy supply is at an all-time high, demand is still perilously low yet the markets are soaring because unknown companies are pouring billions of dollars through small commodities exchanges and wildly impacting the prices of these investments. This phenomenon translates directly into high gasoline prices and rising food costs, thereby suppressing the recovery and obliterating household savings. Here again Boehner changes the subject, suggesting that the Obama administration is somehow keeping “energy resources under lock and key.” Further, he accuses Democrats in Congress of “creating more uncertainty for those who create American jobs” by raising “the specter of higher taxes.” Another direct attempt to divert the conversation from reality. After all, didn’t we just extend the Bush-era tax cuts? And weren’t these the same tax cuts that were in place prior to and during the economic meltdown?

This year Forbes added 214 new billionaires to its list of the world’s richest people. That’s up from 97 new billionaires last year. In perusing the list of the richest Americans, it’s interesting to note where the wealth of those whom Boehner touts as “job creators” is derived. Hedge funds, investing, oil, pipelines, retail, chemicals and pharmaceuticals are the industries that dominate the roster. Most of these companies employ relatively few people compared to the billionaire industrialists of old. No infrastructure companies, few manufacturing companies, and a handful of high-tech companies appear on this list. And of the ones that do appear, most of them manufacture overseas. I guess in Boehner’s world a job created in Bangalore is equal to one created in Scranton. What many of these industries do have in common is that they represent the vast majority of campaign contributors to people like John Boehner.

So it begs the question: Who is Boehner trying to protect? In his New York address he repeatedly refers to the “arrogance of Washington” even though that’s where he’s been working since 1990. Arrogance is not trying to pay for past transgressions by taxing those who devastated the economy. Arrogance is cutting the government’s primary funding source via an extension of the Bush-era tax cuts and attacking entitlement programs instead of the regulatory issues that brought down America’s entire economic system.

Where the White House fails is by indulging in debates over the debt ceiling and releasing oil reserves while bickering over entitlements. Our economy cannot, will not, improve until our elected officials have the courage to restore sanity to the marketplace by re-implementing the regulations that properly governed debt, equity and commodities trading for decades.

In recent testimony to the Congressional Oversight Panel on the impact of the TARP, Columbia University professor and former Clinton advisor and chief economist of the World Bank Joseph Stiglitz argued that “we have not repaired our banking system, and indeed, with the enhanced moral hazard and concentration in the financial sector, the economy remains very much at risk.”

Joseph Stiglitz

These arguments are nothing new to the Nobel Prize-winning economist, who in 2008 warned of the enduring negative consequences of deregulation. At a hearing held back then by the House Committee on Financial Services, Stiglitz invoked Adam Smith, saying that “even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions to this is to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standard of our highly regulation financial entities.” For emphasis, he notes that “we have shown that we can do this when we want, when terrorism is the issue.”

He’s right in every aspect. This is economic terrorism that Americans are unwittingly enabling by allowing politicians in Washington to skirt the issue of financial reform and to skip tighter regulations in favor of continuing tax breaks, cutting spending on infrastructure and demonizing programs that provide security for the sick, the aged and the unemployed.

Yet no matter how often people of Stiglitz’s ilk provide testimony, no one on these committees either understands or cares what is being offered. I suppose that just because we call them “hearings” doesn’t mean anyone is necessarily listening.