False Profits: Recovering From the Bubble Economy

By Dean Baker

PoliPoint Press, 2010

He who feels punctured must once have been a bubble.

– Lao Tzu, Tao Te Ching, 6th century BCE

As the nation struggled to recover from the worst economic downturn since the Great Depression, the people who got us here are desperately working to rewrite history. The basic story of this economic collapse is very simple. The Federal Reserve Board, guided by its revered chairman, Alan Greenspan, allowed an $8 trillion housing bubble to grow unchecked.

– Dean Baker’s “False Profits”

The delicious double-entendre of Dean Baker’s most recent title is enhanced by the book’s cover photo of a trio of false prophets, Ben Bernanke, Alan Greenspan and Henry (Hank) Paulson, all of whom are thoroughly excoriated within the book’s pages for their responsibility in feeding, prolonging, misdiagnosing and incorrectly responding to the 2007-2009 financial meltdown and the associated economic collapse. However, the book also chronicles the loss of $8 trillion of housing “wealth,” $1.4 trillion in annual demand, whatever financial security the vast majority of baby-boomers ever had, “increases” in homeownership rates and any other widespread economic gains associated to the post-2000 period. Truthout has published Dean Baker’s columns about net job losses for 2000-2010, a decade that also saw a 26 percent drop in the stock market, the elimination of the $236 billion federal budget surplus President Bush inherited and its transformation into a record deficit and the overall deliquescence of any societal and most people’s personal economic “profits.”

While most of us find ourselves economically worse off after the last ten years, some have done extremely well and most of those who bear the burden of responsibility for the American economic catastrophe have suffered no consequences whatsoever: financial, social or professional. Writing about Bernanke specifically, Baker’s remarks are equally apposite to other titans of finance, central banking and the financial regulatory regimes:

It would difficult to imagine someone with a comparable record of disastrous failures being allowed to remain in most jobs. Would a nurse who routinely administers the wrong medicine and causes his patients to die be allowed to keep his job? Would a bank teller who leaves the cash drawer open remain in her position? How about the school bus driver who comes drunk to work?

In most lines of work, a certain level of competence is expected. Unfortunately, this is not the case for those who set US economic policy.

Baker places the burden of blame on regulators and the political establishment because they utterly perverted their mission:

Progressives do conservatives’ bidding when we denounce them as “market fundamentalists.” We should, instead, be exposing their use of government to set up structures that ensure the market works to benefit the wealthy. We could then bring our policies into focus as those designed to ensure that market outcomes will benefit the bulk of the population.

The market is just a tool, like a wheel or a hammer. It would be bad politics and bad policy for progressives to make a big scene attacking the wheel. It is similarly bad politics and bad policy to put these attacks on the market at the center of a political agenda.

Baker never attacks the wheel; instead he demonstrates how it was deliberately allowed to run wild. As Baker himself warned as early as summer 2002, all indicators pointed to the rise in housing prices as a classic bubble, divorced from any tether in reality, yet the regulators, media and most mainstream economists kept pumping hot air into that bubble. Further, Dean Baker exposes the pathetic excuses that the regulators did not have the necessary tools to put on the brakes for the self-serving and specious rationalizations they are. Ever debunking the myth that somehow it was the “free” market at work, he relentlessly exposes how regulation, regulatory bodies and the public officials charged with supervising the financial industry have used their power to favor a narrow swathe of private interests over the public good. And, as always, Baker highlights what alternatives were and are available to turn that equation around. Baker’s relentless exposé of what is actually subsidized and who profits from specific policies, how wealth is transferred and how all this activity is disguised fuels his narrative with “true prophet” power.

“False Profits” combines impeccable scholarship – assembling an array of relevant facts and data totally accessible to non-economists – with Baker’s acerbic, but unforced, wit and verve. His iconoclasm constantly renews its sources and consistently targets those “false prophets” in all sectors who contribute to misleading the American people. Baker is the journalists’ economist, the reality-based economist: whatever other case he may be making, he invariably demonstrates why correct and timely information and clear understanding are essential to economic problem-solving, as well as how “fudges” harm everyone.

The book’s structure begins by a backward look, an analysis of precisely how we reached the present situation and what our present situation actually is (in chapters, “Economic Collapse: It Is Their Fault,” “Surveying the Damage” and “The Terrible Tale of the TARP”), then pivots on an exposition of why correct diagnosis and analysis are so crucial (“Will They Ever Discover the Housing Bubble?”), develops the case he has presented with three chapters of prescription (“Stimulus: It Is Just Spending,” “Real Stimulus: Programs to Boost the Economy” and “Reforming the Financial System”) and concludes with a resounding final call for accountability (“Remember the Housing Bubble”).

Unfortunately, recent events – the absence of any effective policy to slow down foreclosures; the most probably ineffective and unquestionably inadequate stimulus measures in the just-presented budget; financial services regulatory proposals that do not address the causes for regulatory failure – suggest that the present administration is only slightly more willing to learn from Dean Baker’s acute analyses than was its predecessor. And Ben Bernanke’s reconfirmation as Fed chairman is just the most recent and flagrant sign that the administration has no intention of investigating, let alone punishing, the regulatory – and individual regulators’ – blunders that led to the present pass.

Economics is a science of human behavior. It rests on the observation that people respond to incentives. Consequently, Baker’s apparently political argument that there must be consequences for the failures of judgment and action that resulted in the economic meltdown is a quintessentially economic one. With no disincentives for failure and the ever-present incentives for complicity offered by the industry that has captured them, regulators will continue to fail the whipping boy who pays for their transgressions – us.

1. Dean Baker, “False Profits,” p.5.

2. OpCit. p.9.

3. Read the book for the argument, but the unequivocal conclusion is, “The regulators – first and foremost the Fed – had all the tools necessary to combat the bubble. They chose not to.” (p.153)

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Leslie Thatcher is Truthout’s French Language Editor and sometime book reviewer.