Detail from Ambrogio Lorenzetti's "Bad Government"

This week we got two more examples of a government that can’t remember how to function. Fed Chair Ben Bernanke can’t understand why consumers aren’t spending. Enforcement Chief Robert Khuzami of the SEC can’t figure out how to hold people accountable for securities fraud.

Naughty Consumers

Bernanke gave a speech in Minnesota on the state of the economy. It was substantially the same as the one he gave in Jackson Hole last month, but in Minnesota, Bernanke added a long paragraph chiding consumers:

One striking aspect of the recovery is the unusual weakness in household spending. … The temporary factors I mentioned earlier–the rise in commodity prices, which has hurt households’ purchasing power, … are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects. [My bold.]

He sees some problems, but he can’t understand why people who don’t have those problems aren’t spending more. We know why: it’s because all of us but the rich are scared that things won’t get better. We know that Obama and Congress intend to cut Social Security and Medicare to avoid taxing the rich fairly. We know we need to get out of debt and build up whatever savings we can. We know our kids are facing a miserable future, and we need to accumulate money so we can help them all their lives.

I wouldn’t expect him to empathize with the fears we all feel, partly because he believes in the school of economics that says people are rational decision-makers, and partly because he and his family and his friends are insulated from these pressures. But I would expect him to have an intellectual understanding. This bit, from John Maynard Keynes’ The General Theory of Employment, Interest and Money (p. 130) should help:

Even apart from the instability due to speculation, there is [market] instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Animal spirits, Mr. Bernanke. Frightened people don’t act rationally.

Naughty Fannie Mae and Freddie Mac

Dealbook at the New York Times tells us about the latest SEC fail.

The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case.

The agency is specifically looking at the way [Fannie Mae and Freddie Mac] reported their subprime mortgage portfolios and concentrations of loans extended to borrowers who offered little documentation.

Specific human beings at Fannie and Freddie lied, but no one goes to jail for securities fraud, no one pays any money, and no one is even sanctioned. This isn’t even a slap on the wrist; it’s a bald admission that the SEC is impotent.

Mary Schapiro, Chair of the SEC, and Robert Kuhzami must think that corporations like Fannie and Freddie are persons, and that they, and not the humans who work there, are the only actors. They ignore black letter law that the corporate shield does not protect officers, directors and employees from criminal liability. That rule is basic to an understanding of personal accountability in a bureaucratic world. Peterr reminds us of the words of Justice Jackson in the Nuremberg Trials:

Of course, the idea that a state, any more than a corporation, commits crimes, is a fiction. Crimes always are committed only by persons. While it is quite proper to employ the fiction of responsibility of a state or corporation for the purpose of imposing a collective liability, it is quite intolerable to let such a legalism become the basis of personal immunity.

The Charter [Articles 7 and 8] recognizes that one who has committed criminal acts may not take refuge in superior orders nor in the doctrine that his crimes were acts of states. … Under the Charter, no defense based on either of these doctrines can be entertained. Modern civilization puts unlimited weapons of destruction in the hands of men. It cannot tolerate so vast an area of legal irresponsibility.

Indeed. The people who worked for Fannie Mae and Freddie Mac wielded financial unlimited weapons of destruction. The SEC ignores Justice Jackson and allows them to act without legal responsibility.

Mary Schapiro, Robert Khuzami and Ben Bernanke should look to the past for help understanding how to do their jobs.



I read a lot of books.