Op-Ed: Finally, some sense about how that $700 billion will be spent, and regulation

It’s true. Somebody is supposed to know what’s going on. The word "regulation" does exist. There’s even some actual concept of risk management, somewhere out on the windswept psychological prairies of American finance. What’s gone wrong?

The New York Times

The head of a new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the billions it has already spent in that effort.

The good news is that Ms. Warren and her fellow panelists do seem to have a few ideas. The novelty of functional mental processes may take a while to catch on in Washington, and the panel’s powers aren’t too well defined, but it looks like somebody is supposed to be minding the store, for once. Acronyms are strange things. The panel’s abbreviated name is TARP:

A Harvard law school professor and a consumer bankruptcy expert, Ms. Warren was named by Senate Majority Leader Harry Reid to the new five-member panel, created as part of the $700 billion Troubled Asset Relief Program, known as TARP, enacted in October. She was elected chairwoman at the group’s first meeting last Wednesday.

In that role, she will have a strong voice in shaping the mission of the panel and the content of the regular reports it will deliver to Congress as long as the TARP exists.

This means TARP will be monitoring and making recommendations to Congress, and it also involves a regulatory recommendations report next month. There are two other monitors of the bailout effort. The General Accounting Office, and an Inspector General, Federal prosecutor Neil M. Barofsky, are also covering the bailout. This apparently isn’t a duplication of roles. Ms. Warren points out that policy and procedure aren’t the same thing, and as a matter of fact, having several sets of eyes on the ball isn’t a bad administrative move. Correlations between the information provided by the TARP, the GAO and the Inspector General will be available to Congress. In complex economic and fiscal environments, having extra perspectives is a healthier approach than a single eye on a single subject. There are a few worrying elements: Ms. Warren seems concerned that Treasury isn’t making the association between households and the macro economy. That’s a bad habit in economics that seems to have come from the original hyper capitalist “ethos” of the monetarist era in the 1980s, which effectively assumed that the capital machinery would keep running forever. We’ve just seen what happens when it stops running. It’s a bit like saying the wheels run the car, not the engine. The US economy’s wheels were flattened The housing sector, securities, credit, and finance sectors all crashed at once. The economic vehicle's mobility has been pretty iffy, since. So the hyper capital model didn’t work any more. The US domestic economy is the biggest pool of working capital on Earth. It dwarfs corporations, states and even the Fed. The big capital version of America was originally powered by the domestic economy, not the financial monsters of the recent past. That’s what’s gone wrong, at the most fundamental level. The engine isn’t getting gas from the household economy, which has been absolutely gutted, in any possible sense of the words. Ms. Warren and her colleagues may have a bit of trouble explaining the problems to people who probably weren’t trained in the idea that a domestic economy was even relevant. It’s more than likely recent policy, (or lack of it) was written by people who have quite probably not even been trained in the concept or reasons for having a functional domestic economy. The ridiculous wages and cost structures for things like health which plague America are the classic examples of the lack of any understanding of household economics. Meaning, they don’t understand how the engine works. The constant drain of charges, rampaging prices and user pays pseudo economics have been massacring the wealth of Middle America for decades. The need is for a complete reversal of that process, and a return to rational costing. TARP has a huge mess to cover. Good luck, Ms. Warren, and good luck, America.