States can have Alzheimers, apparently

Jared Diamond's book Collapse is subtitled "How societies choose to fail or succeed", but if you actually read the book, the argument is that societies fail by avoiding tough choices and not making necessary changes. So, it's not that the Greenland Norse woke up one morning and said "Gee, I think I'll starve to death", but rather (Diamond argues) he woke up and refused to recognize that the climate in Greenland was changing for the worse, and that major lifestyle changes (becoming more like the Inuit) would be necessary to persevere.

The larger argument, for modern society, is that building state capacity to deal with social problems is not only about proposing and adopting smart policies. It is an inherently politicized process, and one that requires we challenge entrenched interests and abandon previously-held beliefs that are crippling our ability to react today.

In that vein, I suggest you read Kevin Drum's piece in Mother Jones about the finance lobby's successful efforts to not only avoid any accountability for the smoking ruin they made through 2008, but actually increase their dangerous activities.

Unlike most industries, which everyone recognizes are merely lobbying in their own self-interest, the finance industry successfully convinced everyone that deregulating finance was not only safe, but self-evidently good for the entire economy, Wall Street and Main Street alike. It's what Simon Johnson, an MIT economics professor and former chief economist for the IMF, calls "intellectual capture." Considering what's happened over the past couple of years, we might better call it Stockholm syndrome.

Like all the other products of the industry's three-decade lobbying spree, the change to the net capital rule ended up in disaster when the overleveraged financial system nearly collapsed on itself. By October 2008, even former Fed chairman Alan Greenspan, one of the country's biggest cheerleaders for self-regulation, was admitting the obvious: There was a "flaw" in the free-market worldview. "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity, myself especially, are in a state of shocked disbelief," he said in testimony before the House oversight committee.

If the case against self-regulation was strong then, it's stronger now. Far from being chastened by last year's meltdown, banks are back to their old tricks. The sliced-and-diced mortgage securities that caused so much trouble during the credit bubble are being re-sliced and -diced via something called a RE-REMIC (resecuritization of real estate mortgage investment conduit)—and business is booming. At Goldman Sachs, leverage in the first half of 2009 was at its highest level in its history. Even more astonishingly, the Wall Street Journal estimates that overall pay on Wall Street will rise to record levels in 2009, higher than at the height of the bubble. It's as if the global collapse that nearly destroyed them has been completely forgotten.

Meanwhile, Daniel Davies gives us a perfect quote to explain at least one aspect of the North American liberal Stockholm Syndrome:

the production of more or less mendacious intellectual smokescreens for policies which favour the interests of rich and powerful men isn’t a sort of industrial pollution from the modern economics profession – it’s the product.

The purpose of that quote is to lead us to an article by James Galbraith, writing about the economists who correctly predicted the crisis we are still living in, and how they did it. One trick seems to be not having any particular theory. But what struck me in the article was this particular line:

In the present crisis, the vapor trails of fraud and corruption are everywhere: from the terms of the original mortgages, to the appraisals of the houses on which they were based, to the ratings of the securities issued against those mortgages, to gross negligence of the regulators, to the notion that the risks could be laid off by credit default swaps, a substitute for insurance that lacked the critical ingredient of a traditional insurance policy, namely loss reserves. None of this was foreseen by mainstream economists, who generally find crime a topic beneath their dignity. In unraveling all this now, it is worth remembering that the resolution of the savings and loan scandal saw over a thousand industry insiders convicted and imprisoned. Plainly, the intersection of economics and criminology remains a vital field for research going forward.

A thousand bankers in jail? It reads like something from another age -- like Spartacus' defeated soldiers crucified on the road to Rome. The idea that we might actually punish the people responsible for our current predicament is so totally foreign to us that it might as well be ancient history.

Every time the continued power and influence of the United States is raised in discussion, there's an easy, complacent dismissal of the idea that the US could possibly collapse in any meaningful way. But America has lost, and continues to lose, the capacity to deal with difficult problems. Not because institutions have been disbanded, or because any of the absolute measures of power have declined: America has, if anything, many more jail cells in 2010 that could theoretically hold bankers. It's just that nobody of any consequence thinks that there's a snowflake's chance in hell of that ever happening. This, despite the fact that the crisis the bankers brought on has literally erased the last decade of economic growth in America -- while it might be nice for us all to be a decade younger, instead we've all become a decade poorer.

People like myself hoped that Barack Obama's election would herald an end to the age of self-loathing government -- that the Democrats, with both houses of Congress and the Presidency, would be able to actually reverse the mental deterioration of American state capacity. Indeed, Obama's acceptance speech at the 2008 DNC held this critical passage:

Tonight, I say to the American people, to Democrats and Republicans and Independents across this great land - enough! This moment - this election - is our chance to keep, in the 21st century, the American promise alive. Because next week, in Minnesota, the same party that brought you two terms of George Bush and Dick Cheney will ask this country for a third. And we are here because we love this country too much to let the next four years look like the last eight. On November 4th, we must stand up and say: "Eight is enough."...

For over two decades, [McCain]'s subscribed to that old, discredited Republican philosophy - give more and more to those with the most and hope that prosperity trickles down to everyone else. In Washington, they call this the Ownership Society, but what it really means is - you're on your own. Out of work? Tough luck. No health care? The market will fix it. Born into poverty? Pull yourself up by your own bootstraps - even if you don't have boots. You're on your own...

Ours is a promise that says government cannot solve all our problems, but what it should do is that which we cannot do for ourselves - protect us from harm and provide every child a decent education; keep our water clean and our toys safe; invest in new schools and new roads and new science and technology.

Our government should work for us, not against us. It should help us, not hurt us. It should ensure opportunity not just for those with the most money and influence, but for every American who's willing to work.

That's the promise of America - the idea that we are responsible for ourselves, but that we also rise or fall as one nation; the fundamental belief that I am my brother's keeper; I am my sister's keeper.

In August of 2008, Barack Obama's followers filled an arena to hear him speak, and heard those words, and believed them. But in January 2010, it feels like a long time ago, in a galaxy far, far away.