Financial Magic Thinking Dies Hard

Since the early supply-side days of Ronald Reagan, the Right has pretended that slashing taxes on the rich will generate extra revenue, thus more than paying for itself. The reality has turned out differently, but Michael Winship says that hasn’t changed the determination to bend reality to politics.

By Michael Winship

Facts are stubborn things, said founding father John Adams, a basic truth Ronald Reagan famously mangled at the Republican National Convention in 1988, when he tried to quote Adams and declared, “Facts are stupid things,” before correcting himself.

Nonetheless, in practice, certain of our financial and political leaders seem to embrace Reagan’s verbal misstep as closer to reality than Adams’s original aphorism. Witness the resistance on the part of banking institutions and certain members of the congressional leadership, despite regulations demanding that they allow facts and figures to be reported, information that could keep us from the edge of yet another economic meltdown.

John Adams, the second president of the United States

The March 5 Wall Street Journal reported that as the Federal Reserve prepares to release the results of the latest round of stress tests, evaluating how banks would respond in the event of another severe financial crisis, “Bankers are pressing the Fed to limit its release of information — expected as early as next week — to what was published after the first test of big banks in 2009.

“Three years ago, as the financial crisis was abating, the Fed published potential loan losses and how much capital each institution would need to raise to absorb them. This time around, the Fed has pledged to release a wider array of information, including annual revenue and net income under a so-called stress scenario in which the economy would contract and unemployment would rise sharply.”

The banks cite competitive concerns but regulators “view full disclosure as critical to assuaging investor concerns about banks’ capacity to withstand a market shock or economic setback.”

Add to the mix the banks’ fear of further government interference – when it’s of the non-bailout variety, that is – and continued resistance to the new rules imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In any case, they’re being assured by the Fed that it won’t release data “that rivals could mine for future acquisitions or other moves,” such as quarterly breakouts of projected losses.

Banks also are dragging their heels over a requirement that arose from last November’s G-20 meeting. Representatives of 19 of the biggest industrial and emerging nations, plus the European Union, decreed that the world’s largest banks – including eight from the United States – must create “living wills,” plans that lay out what they would do in the event of another crisis, including how banks could be stabilized or even shut down.

The wills are an idea that makes perfect sense. Think of them as a business model for the apocalypse. But drafts of the banks’ projected scenarios are due by June and must be completed by the end of the year, and the Financial Times reports, “Independent research showed only one bank out of 29 globally considered itself to have finished a draft recovery and resolution plan, according to a survey by Ernst & Young…

“Living wills form a critical part of global efforts to avoid a recurrence of the 2008 financial crisis, when governments in the US, UK and elsewhere were forced to shell out billions of dollars in taxpayer funds to rescue troubled financial institutions. Some bankers also hope that regulators will reward institutions that write credible plans that allow an easier wind up with lower capital requirements.”

Off the record, bankers in the United States and the UK told the Financial Times that “cross-border disagreements among regulators were proving to be the biggest hurdle to writing comprehensive plans.”

Meanwhile, Simon Johnson, the savvy MIT and former International Monetary Fund economist, warns that if the Republican Party takes over both the House and Senate, they may attempt to force the heretofore non-partisan Congressional Budget Office (CBO), which evaluates the impact of the Federal legislature’s fiscal proposals, to switch to a scoring system “that would attach magical growth implications to tax cutting.”

At The Baseline Scenario website, Johnson writes, “If you cut taxes, revenues will fall and deficits will increase. If you change the CBO’s scoring process to hide this fact — as is under consideration by leading Republicans on the House Budget Committee and the House Ways and Means Committee — you are engaging in exactly the same sort of deception that brought down Greece.”

So whether bankers or politicians, it’s those at the top and not the facts that are being stubborn. And maybe they’re being that other thing Ronald Reagan said facts were, too.

Michael Winship, senior writing fellow at Demos and president of the Writers Guild of America, East, is senior writer of the weekly public television series, “Moyers & Company.” Comment at www.BillMoyers.com.

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4 comments on “Financial Magic Thinking Dies Hard

  1. Gregory L Kruse on said:

    It is clear from any study of history that we survive in spite of our stupidity. Only 18% of Republican primary voters stated that they would vote for a candidate who’s religious position was not the same as theirs, according to exit polls. This was reported by Lawrence O’Donnell on MSNBC, but apparently nowhere else. These are the same people who are deeply committed to the constitution. It must be some other constitution.

  2. g saint on said:

    …thank you, Mr. Winship. neo-liberalism seems a faith-based and fundamentalist economic practice that only gets nuanced (vague) when equation-wielding enablers create dodgy financial instruments to mask inherent fraud. inclusive democracy requires transparency that is exquisite. financial and political elites have known what we begin to surmise: capitalism and democracy are mutually exclusive. perhaps, in future these elites will utilise the reactionary rank and file to enforce a full-throated plutocracy. they understand thugs have a use. in the interim, the current system works well enough. it barely maintains the colour of legitimacy. people still vote. we begin to know them for what they are, and the rigged system the political and monied classes have wrought. it should have a name. i call it: jiveocracy…g. saint

  3. wouldn’t it just be ez error 2 “just” audit thy treasury, I kno i dropped that brick pile around haire somewhares, hmm

  4. Jim Faubel on said:

    ALL magical (faith-based?) thinking dies hard. We LIKE believing that we’re right, even when we’re dead wrong. As Mark Twain said, “It’s not what people don’t know that causes the most trouble. It’s what people think they know that ain’t so.”