“[...] we are accustomed to judging the truth of a claim by the moral status of the group making the claim.”

That’s Tyler Cowen speaking of “Climategate” in his post “The limits of good vs. evil thinking.” Normally I would put something like this in a links post, but “The limits of good vs. evil thinking” is so good that I’m emphasizing it with an independent post.

The major problem is that sometimes people we perceive as morally palatable can make untruthful or not optimally useful claims, while the opposite—people we perceive as morally unpalatable can make truthful or optimally useful claims—can also occur. Notice that I’m intentionally not providing examples of either phenomenon. As Paul Graham says in the notes to “What You Can’t Say:”

The most extreme of the things you can’t say would be very shocking to most readers. If you doubt that, imagine what people in 1830 would think of our default educated east coast beliefs about, say, premarital sex, homosexuality, or the literal truth of the Bible. We would seem depraved to them. So we should expect that someone who similarly violated our taboos would seem depraved to us.

If I said this kind of thing, it would be like someone doing a cannonball into a swimming pool. Immediately, the essay would be about that, and not about the more general and ultimately more important point.

The more important point is about avoiding ad hominem attacks and being able to consider claims independently of the person making the claims in some circumstances. As Cowen says, this is really hard.

Tyler Cowen gives his view:

Krugman writes: “Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.”

I would interpret this evidence differently.  A high deficit often is an unfavorable symptom of bad politics, even if you think the high deficit is economically OK on its own terms.  It’s a sign that you have dysfunctional institutions and decision-making procedures, as indeed they do in Belgium and Italy.  I believe that the not-always-swift American voter in fact understands high deficits — correctly — in this light.  They don’t hold theories about “crowding out,” rather they sense something in the house must be rotten.  And so they rail against deficits, as do some of their elected representatives.  It’s a more justified reaction than the pure economics alone can illuminate.

When water regularly overflows from your toilet, you want the toilet fixed, whether or not the water is doing harm.

[GASTPOST door COLLEGA P] 

Martin Bril, de veel te vroeg overleden maar bekende Nederlandse columnist lanceerde ooit de term rokjesdag. ‘Rokjesdag is die ene dag in het voorjaar dat alle vrouwen als bij toverslag ineens een rok dragen, met blote benen eronder. Een jurk kan ook, maar er mogen geen panties om de benen zitten. Dat is bedrog’.

Zo moet er ook ergens een dikkejassendag zijn. De dag waarop de pret over is. Waarop de winter weer begint en al dat lekkers voor een maand of zes verstopt wordt. Deze sombere dag moet ergens in de voorbije weken gepasseerd zijn, ontdek ik wanneer mijn blik deze dagen over het straatbeeld glijdt.

Tyler Cowen, econoom en uomo universale in bijberoep, beweert dat de mooiste vrouwen in landen wonen met grote inkomensongelijkheid. En dan komt Brazilië ergens helemaal bovenaan. Daar is het dan ook elke dag rokjesdag. Die wijsheid heeft Tyler geleerd uit zijn persoonlijke ervaring. En er schuilt een economische redenering achter. Je kan hem zelf bedenken. Gebruik de woorden competitie en inkomen. Misschien hebben Tyler en ik verschillende smaken, als het over vrouwen gaat. Ik heb het niet zo voor nouveau riche huppelkutjes. Armani brillen, en Chanel riem, om de rijke man van hun dromen te strikken, en zich omhoog te … werken.

Ik klaag trouwens helemaal niet over de kwaliteit van het vrouwvolk in ons egalitaire kikkerlandje. Logisch, kikkerlandjes moeten noodzakelijk toch ook veel prinsessen hebben. Bijna onveranderlijk wanneer ik in het buitenland heb vertoefd, ben ik prettig verrast bij mijn terugkomst. In de mooiemeisjesfabrieken in ons land worden volop overuren gedraaid, daar ben ik zeker van.

Toch moet ik deemoedig toegeven dat de Russische (nog zo’n land vol ongelijkheid)  jongedame die op dit moment bij mij in de trein zit eveneens zeer licht verteerbaar voor het oog is. Brede Slavische jukbeenderen en wildernisogen, die je enkel terugvindt bij mensen die jarenlang elke ochtend na het ontbijt even over toendra of taiga kunnen staren. Zo wordt het nog maar eens bewezen: de trein, altijd een beetje reizen, in dromenland. En, omdat ze mij inspireerde voor deze post, zo bedenk ik al schrijvend met een glimlach op de bank tegenover haar, mag ik haar met recht en reden mijn muze noemen.

Zoals steevast op de trein, dommel ik in, maar de Russische schoonheid blijft op mijn netvlies gebrand. Wat later word ik opgeschrikt door de nasale stem van de kaartjesknipper die onze aankomst in zone Antwerpen aankondigt. Mijn muze is verdwenen. Ik klap mijn computer dicht, grabbel mijn spullen bijeen en rep me naar de uitgang om een laatste glimp van haar op te vangen. Daar is ze niet, maar van op het perron zie ik haar uitstappen uit de volgende uitgang. Ik herken haar nauwelijks, omdat haar schoonheid verhuld wordt in een dikke jas. En weg is de magie.

Cultural pessimism has existed as long as culture itself. Just few weeks ago, I met with some friends over a party who bemoaned how new technologies, like GPS for instance, have made us less “intelligent” as compared to the prior generation(s) that did not have access to such technologies and had to rely on their own intuitions, knowledge and other (non-technical) resources. Although we didn’t talk about cultural or economic degradation, but this “google-makes-us-stoopid” mindset can be observed and generalized into these paradigms as well. The general belief and conviction is that things are going from good to bad, or bad to worse.

In a thought-provoking book The Myth of Rational Voter, economist Bryan Caplan calls it “pessimistic bias”. Virtually every generation has believed that people are not up to the standards of their parents and grandparents. Glorifying the past, and looking down at the present (and the future) is probably going on ever since the first caveman settled in a cave!

It is not improbable conjecture that the feeling that humanity was becoming over-civilized, that life was getting too complicated and over-refined, dated from the time when the cave-men first became such. It can hardly be supposed – if the cave-men were at all like their descendants – that none among them discoursed with contempt on the cowardly effeminacy of living under shelter or upon the exasperating inconvenience of constantly returning for food and sleep to the same place instead of being free to roam at large in wide-open spaces. [From Primitivism and Related Ideas in Antiquity, by Lovejoy and Boas]

In reality, the effects of technology and industrial progress on our collective intelligence, economy and culture have hardly been detrimental. Consider, for example, this question by Stephen Pinker from the recent issue of Edge online magazine:

Take the intellectual values that are timeless and indisputable: objectivity, truth, factual discovery, soundness of argument, insight, explanatory depth, openness to challenging ideas, scrutiny of [perceived] dogma, overturning of myth and superstition. Now ask, are new technologies enhancing or undermining those values?

The answer is clear that the new technologies are, in fact, enhancing those core intellectual values. Still, the pessimistic illusion prevails – probably because it has strong roots in the human nature itself. In this decade-old article, Tyler Cowen defends against this myth and explores some reasons behind this wide gap between objective conditions and subjective perceptions:

It is easy to perceive the loss of what we know and harder to discern new developments and surprises. Even if long-term trends are positive, culture may appear to be deteriorating.

Observers often judge present culture against the very best of past culture, causing the present to appear lacking in contrast. But comparing the best of the past against the entirety of the present is unfair. No matter how vital contemporary culture may be, our favorite novels, movies, and recordings were not all produced just yesterday.

The past is always going to contain more accumulated achievements than a particular point in time (i.e. the present). Hence, present almost always pales in comparison to the ‘good old days’. Moreover, strong forms make us “open minded” to paranoid fantasies:

Some part of human nature connects with the apocalyptic. Time and again, pessimists among us have envisioned the world going straight to hell. Never mind that it hasn’t: A lot of us braced for the worst. Whether the source is the Bible or Nostradamus, Thomas Malthus, or the Club of Rome, predictions of calamity aren’t easily ignored, no matter how many times we wake up in the morning after the world was supposed to end. [Cox and Alm]

To end this post on a positive note, check out (1) the Flynn Effect – the consistence rise of I.Q. scores over generations, and (2) this illuminating TED talk (video below) by Stephen Pinker in which he convincingly argues that we are probably living in the most peaceful time in our species’ existence!

If you liked this post, you might enjoy some of my older related posts:

The Myth of Rational Voter

Cognitive Biases and Nudge

Cognitive Illusions

Exact tweeduizend en veertig dagen geleden droomde Nele dit:

We hebben beslist om in Irak te gaan helpen. Op het vliegveld van Bagdad besef ik dat dit de grootste fout van ons leven is.

De reden waarom ik dit mij nog haarscherp herinner, is dat ik Nele op 1 januari 2005 een boekje cadeau gedaan heb met al haar dromen van het voorbije jaar. Op het moment van het vertellen ingeprent, daarna stiekem opgeschreven. Echt, als je nog om een cadeau verlegen zit voor 1 januari 2011, ik kan het je ten stelligste aanraden.

Maar stel nu, dat het echt was. Dat we gaan hulpverlenen waren in Irak. En stel nu ook nog een keer dat we gevangen genomen werden door een troepje terroristen. Niet omdat ze of een bom losgeld willen, maar omdat ze ons verkeerdelijk aanzien voor een soldaat of een geheim agent. Omdat soldaten al eens gevoelige informatie hebben over de vijand, zullen ze ons folteren tot we onze geheimen prijsgeven. Hoe zouden we dan in godsnaam kunnen uitleggen dat we geen soldaten zijn, maar brave hulpverleners?

Onze onschuld staande houden, hoor ik u zeggen. Of pittige details over ons leven geven waaruit moet blijken dat we geen soldaatjes zijn. Maar het probleem van dat alles is dat een soldaat net hetzelfde zou doen. Hij wil ook niets liever dan als onschuldige vrijgelaten worden. Elke strategie die wij bedenken om maar te doen geloven dat we geen soldaat zijn, kopieert de échte soldaat ook. Onze gijzelnemers geloven dus op geen enkele manier dat wij géén soldaten zijn. Ze zullen ons net zo hard folteren als de echte soldaten.

Een van de oplossingen die de bloggende econoom Tyler Cowen aanreikt: pas een strategie toe die veel te pijnlijk of te kostelijk is voor een echte soldaat. Verkondig luidkeels dat je nooit in het gezelschap van soldaten zou vertoeven omdat ze een ongelooflijke spruitjeslucht verspreiden. Of roep dat alle soldaten watjes zijn en dat ze het Belgisch leger beter afschaffen. En ja, ze mogen dat gerust op video zetten.

Maar de vraag is maar zeer of dat zoden aan de dijk zet. De soldaat zou net hetzelfde doen. Zijn collega’s zullen hem misschien een mietje vinden, maar ze zullen het hem zeker vergeven als dit hem in staat stelde om vrij te komen. (Deze strategie zou wel werken als je verward wordt met een religieuze fanaticus: zij zullen niet snel geneigd zijn om lelijke dingen over de Oppergod te zeggen, of om op het Heilige Schrift te plassen.)

Het ziet er hopeloos uit. Als ik het probleem aan collega en signalling-specialist Tom voorleg, brengt hij de vakterm “pooling equilibrium” ten berde. Of dus: onmogelijk om je van het andere type te onderscheiden. Of simpeler: dik gejost.

En toch is er misschien een uitweg. David Rhode, journalist van de New York Times, werd gegijzeld in Afghanistan. Hij werd in de val gelokt door de krijgsheer die zich wilde laten interviewen en Rhode bescherming bood. Een sterk staaltje Afghaanse gastvrijheid. Gezien die heer perfect wist wie Rhode was, hoefde folteren niet. Maar wat wel opvalt in het verhaal is dat de rebellen probleemloos Rhode opzoeken op het wereldwijde web, in zijn geval om een realistische inschatting te kunnen maken van het potentiële losgeld.

Mijn suggestie is om op het internet subtiel duidelijk maken dat je helemaal geen soldaat bent, weliswaar vóór je vertrekt. Door je lid te maken van de Facebookgroep “Het leger moet opgedoekt worden” bijvoorbeeld. Voor jezelf is dat maar een kleine moeite, maar voor een soldaat in functie is dat nogal vervelend. Vooral omdat zijn werkgever dat niet zal smaken. Op het moment dat de soldaat gegijzeld wordt, doet hij die uitspraak probleemloos, maar doet hij het ook als hij weet dat het hem veel miserie kan opleveren en de kans maar heel klein is dat hij gevangen genomen wordt?

Als u mij binnenkort lid ziet worden van de feestboekgroep “Leve de Creminaliteit“, dan weet u hoe laat het is. Dan vertrek ik alsnog als hulpverlener naar Irak, ook al droomt iemand op datzelfde moment dat het een vergissing moet zijn.

In yesterday’s LA Times:

Backed by some of the most powerful members of the Senate, a little-noticed provision in the healthcare overhaul bill would require insurers to consider covering Christian Science prayer treatments as medical expenses…While not mentioning the church by name, it would prohibit discrimination against “religious and spiritual healthcare.” It would have a minor effect on the overall cost of the bill — Christian Science is a small church, and the prayer treatments can cost as little as $20 a day. But it has nevertheless stirred an intense controversy over the constitutional separation of church and state, and the possibility that other churches might seek reimbursements for so-called spiritual healing.

A couple weeks ago Tyler Cowen warned us not to forget the mandate creep. You may spread risk by coercing the young and healthy into the same insurance pool as the old and poor, but, he asked, what constitutes adequate coverage? Once a mandate is on the table, highly motivated coalitions will clamor for a piece of that pie:

A further problem is “mandate creep,” which we’ve seen at the state level, as groups lobby for various types of coverage — whether for acupuncture, alcoholism and fertility treatments, for example, or for chiropractor services or marriage counseling…Because mandates don’t stay modest for long, health insurance would become all the more expensive. The Obama administration’s cost estimates haven’t considered these longer-run “political economy” issues.

“But ahhh,” so the democratic prayer treatment goes, “surely legislators will know real medicine when they see it. Surely they will know what constitutes reasonable coverage. After all, everyone knows chiropractors are quacks! The so-called mandate creep is a red herring.”

When the highly motivated few impose highly distributed costs on the many–this is a feature, not a bug, in democratic governance. (Cue Mancur Olson.) The LA Times article worries about the separation of church and state. I worry about the separation of democratic fundamentalism and state. I weep over the slow, steady erosion of freedom by millions and millions of $20-a-day prayer treatments. Spiritual healing today, subsidized sexual healing tomorrow!

News

• Following up on Harry Reid’s Senate health-care bill, Nancy Pelosi and House Democrats unveil their $894 billion health-care bill. Here’s the BBC’s coverage.
• Jon Stewart takes on the White House vs. Fox News battle.
• A big change is coming to internet addresses: Internationalized Domain Names.

Health care

• Does Focus on the Family fund abortions?
• Looking to get health care done by Christmas.
• Tyler Cowen considers why other countries care more about health-care cost control than America.

Human trafficking

• Sex trafficking is real.

Green

• The EU strikes a climate funding deal.

Tyler Cowen explains.

Recently there have been a number of observers from all corners of the political spectrum increasingly worried about the growing collusion between Washington, DC and the powerful economic interests in our country. The discourse on this issue reminds me of the “governmental support” German economist Wilhelm Röpke spoke of in A Humane Economy: “The market and power do not go well together, and anyone who wished to use his strong position vis-à-vis some buyer or seller to establish a dominating relationship of more than transitory duration would find it difficult to do so unless he could count on governmental support.”

One observer worried that we are inching towards Ayn Rand’s nightmarish vision in Atlas Shrugged, wherein the government takes over the economy. I reject that comparison, as Rand’s novel framed business as an unwilling partner in her economic coup d’état; in the present circumstances, big business is an all-too-willing partner, despite their occasional bluster to the contrary.

The reporters Cho, Mufson and Tse, in their Washington Post article, “In Shift, Wall Street Goes to Washington,” noted:

Washington has become a dominant player. Over the past year, the Federal Reserve and the Treasury have injected trillions of dollars into frozen financial markets, snapping up unwanted bonds, extending guarantees to banks and slashing interest rates.

Three times as much U.S. taxpayer money has gone into propping up a single firm, insurance giant American International Group, as the world spent a decade ago during the financial rescue of South Korea, then the world’s 11th-largest economy. And the emergency bailout of financial firms that Congress approved last year has cost nearly as much as the first five years of the war in Iraq.

Now the Treasury and the Federal Reserve are embroiled in everything from credit cards and home loans to auto manufacturing, from overseeing executive pay to shaping boards of directors.

In response, senior executives of major financial companies are traversing the Beltway to meet lawmakers in person for the first time. Firms such as Fidelity Investments, BNY Mellon and even Goldman Sachs, which has prospered in the crisis relative to many other banks, are opening additional offices or bulking up their staffs in the capital….

At first blush this may seem to be nothing more than the old story of DC lobbying, now ratcheting up lobbying efforts to new levels, but there’s more at stake, as the story reports:

Three decades ago, (BlackRock’s chairman Laurence) Fink was a pioneer in bundling large numbers of mortgages, then slicing up these packages and selling off shares as securities. More recently, firms packaged subprime loans, which soured when the housing market collapsed, igniting the crisis.

So the Treasury and Fed have tapped Fink’s expertise. BlackRock emerged as one of their principal advisers as the agencies bailed out major companies and tried to put a price on their toxic assets. BlackRock is also managing tens of billions of dollars worth of AIG assets for the government. In August, officials selected the company to help arrange the purchase, partly using taxpayer money, of toxic assets from banks….

“We are going to be spending more time inside the Beltway, either by helping the government or, if we are asked, shaping policy and decisions,” Fink said. “It is beholden on us on behalf of our clients to have input in Washington.”

Of course, some have been forced to DC:

Take Citigroup, which has allowed its general counsel to move his office from Midtown Manhattan to (Washington DC)… Citigroup received $45 billion in infusions from the Treasury and in return gave the government a majority ownership.

While other firms bring DC to their door:

The revolving door between government and business is not new, and connections inside Washington have long been a calling card in the private sector. But some executives say the qualification Wall Street now covets is a fine-grain understanding of how regulators are managing the mortgage market and planning for its transformation.

And former Federal officials are quick to set up their own lobbying shops once out of government:

The office door of their firm, the Collingwood Group, still has no sign. The walls are bare. Last week the coffee machine arrived, but not the filters. But calls are coming in from bankers….

(Note how the principals of the Collingwood Group, former government officials and accustomed to bureaucratic procurement procedures, cannot solve the mystery of buying coffee filters.)

And more ominous is this insight:

…the federal government has been using its new leverage to demand intelligence from Wall Street about prospective deals, major hirings and executive compensation.

Tyler Cowen, a professor of economics at George Mason University, recently decried these developments in an opinion piece on the DealBook blog in The New York Times:

For years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy.

Cowen pointed to a history of our Federal government promoting moral hazard, including the bailout of Long-Term Capital Management in 1998. “Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill,” Cowen goes on to say, noting that many of the largest investment banks on Wall Street have either failed or have been absorbed, giving major players like Goldman Sachs and JPMorgan the ability to suck up the recently freed investment banking business and then declaring heady profit results, a short-term anomaly. In addition:

We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

And that “next time,” as I have maintained in other posts, is not in the distant future, but upon us now. We are still not out of this economic calamity… in fact, we simply witnessed round one, as losses from commercial real estate pile up and mortgage defaults continue to climb, as attested to by this Bloomberg News report:

U.S. losses on shared loans owned by banks are deteriorating at worse-than-anticipated rates, indicating that a rally in bank stocks has been based on “too optimistic expectations,” FBR Capital Markets Inc. said.

The Shared National Credit Review survey released yesterday by several regulators, showed “classified assets,” or loans that regulators deem substandard, doubtful or a loss, rose to $447 billion from $163 billion, or 174 percent, from a year ago. That rise exceeded the expectations of FBR.

Inevitably, we will learn that bailout money thrown into the Too Big To Fail institutions will prove to be one of the biggest fleecings of the American taxpayer ever committed. As Cowen observed:

(In both the financial and health care markets) we’re making the common mistake of digging in durable political protections for special interest groups.

One disturbing portent came over the summer when it was reported that the Obama administration had promised deals to doctors and to pharmaceutical companies under the condition that they publicly support health care reform. That’s another example of creating favored beneficiaries through politics….

In finance and health care, a common political dynamic has created similar trends, namely, out-of-control costs, weak accountability, and the use of immediate revenue patches to postpone dealing with fundamental problems.

This phenomenon has been supported by Federal government spending which suffers, as David Sirota noted in his salon.com piece, from “Selective Deficit Disorder”:

Where, for instance, were conservative organizations marching on Washington when President Bush vastly expanded the deficit with his massive tax cuts for the wealthy? Where was Sen. Lincoln’s concern for “deficit neutrality” when she voted to give $700 billion to the thieves on Wall Street? Where was Obama’s “dime standard” when he proposed a budget that spends far more on maintaining bloated Pentagon budgets than on any universal healthcare proposal being considered in Congress? Where were demands for “fiscal sanity” by Brooks and other right-wing pundits when they cheered on the budget-busting war in Iraq? Where were any calls for raising taxes from these supposed “deficit hawks” when they backed all this profligate spending? And where were the journalists asking such painfully simple questions?

They were nowhere, because those plagued by Selective Deficit Disorder (as the name suggests) are only selectively worried about deficits.

In his editorial, Sirota was championing the cause of health-care reform with a public option. The high costs involved in the public option, Sirota maintains, could have been offset by cutting wasteful spending in other federal-government projects. That, I believe, is a spiraling argument downward, as any special-interest group could champion its favored project while labeling other government spending that threatens its lobbying endeavors as “pork.” In fact, it is all pork, as the Federal government has yet to show it is capable of properly managing anything it oversees, public health insurance or Wall Street. As Cohen observed in his ending note:

If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis….

Recently there have been a number of observers from all corners of the political spectrum increasingly worried about the growing collusion between Washington, DC and the powerful economic interests in our country. The discourse on this issue reminds me of the “governmental support” German economist Wilhelm Röpke spoke of in A Humane Economy: “The market and power do not go well together, and anyone who wished to use his strong position vis-à-vis some buyer or seller to establish a dominating relationship of more than transitory duration would find it difficult to do so unless he could count on governmental support.”

One observer worried that we are inching towards Ayn Rand’s nightmarish vision in Atlas Shrugged, wherein the government takes over the economy. I reject that comparison, as Rand’s novel framed business as an unwilling partner in her economic coup d’état; in the present circumstances, big business is an all-too-willing partner, despite their occasional bluster to the contrary.

The reporters Cho, Mufson and Tse, in their Washington Post article, “In Shift, Wall Street Goes to Washington,” noted:

Washington has become a dominant player. Over the past year, the Federal Reserve and the Treasury have injected trillions of dollars into frozen financial markets, snapping up unwanted bonds, extending guarantees to banks and slashing interest rates.

Three times as much U.S. taxpayer money has gone into propping up a single firm, insurance giant American International Group, as the world spent a decade ago during the financial rescue of South Korea, then the world’s 11th-largest economy. And the emergency bailout of financial firms that Congress approved last year has cost nearly as much as the first five years of the war in Iraq.

Now the Treasury and the Federal Reserve are embroiled in everything from credit cards and home loans to auto manufacturing, from overseeing executive pay to shaping boards of directors.

In response, senior executives of major financial companies are traversing the Beltway to meet lawmakers in person for the first time. Firms such as Fidelity Investments, BNY Mellon and even Goldman Sachs, which has prospered in the crisis relative to many other banks, are opening additional offices or bulking up their staffs in the capital….

At first blush this may seem to be nothing more than the old story of DC lobbying, now ratcheting up lobbying efforts to new levels, but there’s more at stake, as the story reports:

Three decades ago, (BlackRock’s chairman Laurence) Fink was a pioneer in bundling large numbers of mortgages, then slicing up these packages and selling off shares as securities. More recently, firms packaged subprime loans, which soured when the housing market collapsed, igniting the crisis.

So the Treasury and Fed have tapped Fink’s expertise. BlackRock emerged as one of their principal advisers as the agencies bailed out major companies and tried to put a price on their toxic assets. BlackRock is also managing tens of billions of dollars worth of AIG assets for the government. In August, officials selected the company to help arrange the purchase, partly using taxpayer money, of toxic assets from banks….

“We are going to be spending more time inside the Beltway, either by helping the government or, if we are asked, shaping policy and decisions,” Fink said. “It is beholden on us on behalf of our clients to have input in Washington.”

Of course, some have been forced to DC:

Take Citigroup, which has allowed its general counsel to move his office from Midtown Manhattan to (Washington DC)… Citigroup received $45 billion in infusions from the Treasury and in return gave the government a majority ownership.

While other firms bring DC to their door:

The revolving door between government and business is not new, and connections inside Washington have long been a calling card in the private sector. But some executives say the qualification Wall Street now covets is a fine-grain understanding of how regulators are managing the mortgage market and planning for its transformation.

And former Federal officials are quick to set up their own lobbying shops once out of government:

The office door of their firm, the Collingwood Group, still has no sign. The walls are bare. Last week the coffee machine arrived, but not the filters. But calls are coming in from bankers….

(Note how the principals of the Collingwood Group, former government officials and accustomed to bureaucratic procurement procedures, cannot solve the mystery of buying coffee filters.)

And more ominous is this insight:

…the federal government has been using its new leverage to demand intelligence from Wall Street about prospective deals, major hirings and executive compensation.

Tyler Cowen, a professor of economics at George Mason University, recently decried these developments in an opinion piece on the DealBook blog in The New York Times:

For years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy.

Cowen pointed to a history of our Federal government promoting moral hazard, including the bailout of Long-Term Capital Management in 1998. “Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill,” Cowen goes on to say, noting that many of the largest investment banks on Wall Street have either failed or have been absorbed, giving major players like Goldman Sachs and JPMorgan the ability to suck up the recently freed investment banking business and then declaring heady profit results, a short-term anomaly. In addition:

We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

And that “next time,” as I have maintained in other posts, is not in the distant future, but upon us now. We are still not out of this economic calamity… in fact, we simply witnessed round one, as losses from commercial real estate pile up and mortgage defaults continue to climb, as attested to by this Bloomberg News report:

U.S. losses on shared loans owned by banks are deteriorating at worse-than-anticipated rates, indicating that a rally in bank stocks has been based on “too optimistic expectations,” FBR Capital Markets Inc. said.

The Shared National Credit Review survey released yesterday by several regulators, showed “classified assets,” or loans that regulators deem substandard, doubtful or a loss, rose to $447 billion from $163 billion, or 174 percent, from a year ago. That rise exceeded the expectations of FBR.

Inevitably, we will learn that bailout money thrown into the Too Big To Fail institutions will prove to be one of the biggest fleecings of the American taxpayer ever committed. As Cowen observed:

(In both the financial and health care markets) we’re making the common mistake of digging in durable political protections for special interest groups.

One disturbing portent came over the summer when it was reported that the Obama administration had promised deals to doctors and to pharmaceutical companies under the condition that they publicly support health care reform. That’s another example of creating favored beneficiaries through politics….

In finance and health care, a common political dynamic has created similar trends, namely, out-of-control costs, weak accountability, and the use of immediate revenue patches to postpone dealing with fundamental problems.

This phenomenon has been supported by Federal government spending which suffers, as David Sirota noted in his salon.com piece, from “Selective Deficit Disorder”:

Where, for instance, were conservative organizations marching on Washington when President Bush vastly expanded the deficit with his massive tax cuts for the wealthy? Where was Sen. Lincoln’s concern for “deficit neutrality” when she voted to give $700 billion to the thieves on Wall Street? Where was Obama’s “dime standard” when he proposed a budget that spends far more on maintaining bloated Pentagon budgets than on any universal healthcare proposal being considered in Congress? Where were demands for “fiscal sanity” by Brooks and other right-wing pundits when they cheered on the budget-busting war in Iraq? Where were any calls for raising taxes from these supposed “deficit hawks” when they backed all this profligate spending? And where were the journalists asking such painfully simple questions?

They were nowhere, because those plagued by Selective Deficit Disorder (as the name suggests) are only selectively worried about deficits.

In his editorial, Sirota was championing the cause of health-care reform with a public option. The high costs involved in the public option, Sirota maintains, could have been offset by cutting wasteful spending in other federal-government projects. That, I believe, is a spiraling argument downward, as any special-interest group could champion its favored project while labeling other government spending that threatens its lobbying endeavors as “pork.” In fact, it is all pork, as the Federal government has yet to show it is capable of properly managing anything it oversees, public health insurance or Wall Street. As Cohen observed in his ending note:

If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis….