Robert Shiller Advocates and Engages in NewSpeak and Dubious Analysis in NYT Piece

As an article in today’s New York Times makes clear, Robert Shiller has joined a group of behavioral economists that are advocating the use of propaganda and the subtler forms of manipulation of the public that Walter Lippmann famously called “the manufacture of consent.” In one sense, this ugly development is coming full circle. Lippmann and the so-called father of the public relations industry, Eddie Bernays, were both members of the Creel Commission, which in a remarkably short period of time, turned a pacifist US into a nation eager to attack bloodthirsty, baby-bayoneting Germans in the Great War. When the public became aware of the scale of the Creel Commission effort and realized how they had been played, Lippmann and Bernays wound up writing books defending this sort of effort.

Lippmann’s book Public Opinion argued, in keeping with T. S. Eliot, that human beings cannot bear very much reality, although Lippmann based his case on the complexity of the modern world versus the limits of human cognition. Lippman contended any portrayal of events was subjective and growing mass communication media were vehicles for manipulation. He claimed that this “manufacture of consent” was necessary for social cohesion; that the world needed to be simplified by the “well informed” so ordinary people could make decisions.

Bernays’ book Propaganda came later in the 1920s, and presented a far more benign picture, that the role of experts in helping the public navigate the public was well-intentioned and necessary, and presented numerous instances of how he had gotten various decision-makers to take up his clients’ interests by presenting persuasive information and what we would now call product imaging. But despite Bernays’ “win-win” gloss, his most famous follower was Reich Minister of Propaganda Joseph Goebbels.

Bernays, the nephew of Sigmund Freud, made use of psychological techniques, and the advertising industry has followed the path he blazed (I strongly recommend the four part BBC series, The Century of the Self, which you can watch on Google Video). So it isn’t surprising that behavioral economics, which was spurred by the work of psychologists Amos Tversky and Daniel Kahneman, should now be seen as a tool for elite groups and powerful interests to further their aims.

The problem, of course, is that the people who are in the role of manufacturing consent have their own interests and agendas. Lippmann pointed out how they could and did seek to present a self-flattering image.

But even if you assume, contrary to human nature, that the behind-the-scenes experts are paragons of virtue, the logic of the idea that experts can really do all that much better is circular. If the world is so complex that we are all reduced to working with mental models, or as Lippmann called it, “the pictures inside our head,” experts are also ultimately plagued with the same problem of limited cognitive capabilities as ordinary folks. The poster child of this problem is the economics profession. Thanks to the privileged policy role that economists play, the world of the new millenium, with its light regulation, more open markets, and high level of international trade, represents a large shift from the world of the 1950s and 1960s, and this redesign was overseen by the elite economists. They remained blind to the growing danger of financial system risk-taking and instability and rationalized clear warning signs, like plummeting consumer savings rates. And in the wake of the crisis, many employ rationalizations like “structural unemployment” to divert attention from their failure to anticipate this mess and their inability to devise remedies.

It’s ironic and a bit sad that Shiller penned this appalling New York Times piece. He was one of the few economists to warn of the dangers of the housing bubble. Yet now he seems to be siding with some of the most questionable impulses of his discipline, namely, a clumsy effort at sleight of hand to defend a dubious orthodoxy. In other words, the article, which defends the manipulation of public opinion, also contains crude bits of propagandizing.

This is the second paragraph of Shiller’s article, “Bailouts, Reframed as ‘Orderly Resolutions’,“:

The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. The net losses of the $700 billion Troubled Asset Relief Program, for example, which ran from October 2008 to October 2010, amounted to only $30 billion by the latest estimate. Yet TARP may have prevented many trillions of dollars of losses in gross domestic product.

Let’s count the intellectually dishonest arguments here:

1. As we have discussed repeatedly, the idea that TARP = total bailout costs is Big Lie, pure and simple. There have been tons of other covert subsidies, from paying the AIG credit default swaps counterparties out at 100 cents on the dollar, to the alphabet soup of Fed facilitate during the crisis, to ZIRP, QE and QE2. Negative real interest rates represent a tax on savers and investors. But Shiller simply ignores all that.

2. “Latest loss estimate” cleverly implies that it is the most accurate by virtue of being the most recent. But it isn’t. The estimate Shiller cites comes from the Treasury, which has every reason to paint as pretty a picture as possible. And it has. SIGTARP’ss latest report roundly criticized Treasury for reducing its estimate of the cost of the AIG rescue by over $40 billion through a reclassification process.

3. “TARP may have prevented many trillions of dollars of losses”. This is a two for one in the truthness camp. First, “may have prevented” gets Shiller off the hook for failing to make a definitive statement, yet plants a firm impression in the reader’s mind. In addition, it sets up a false dichotomy, TARP v. doing nothing, when the choice was TARP doing something more sensible, like shutting down sick banks, firing management, spinning off good assets and taking the bad ones and working them out.

Now the next, truly bizarre bit of positioning in the piece: Shiller takes the process outlined above, the one that was used in the US in the savings and loan crisis and in the Nordic countries during their early 1990s financial crises, and calls it “bailouts” as if that is where the risk of negative public reaction lies:

Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July. It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers. Now they will be called “orderly resolutions.”

Huh? It’s widely acknowledged that Dodd Frank is too weak. In the Treasury meeting with bloggers last August, Geithner didn’t argue the point much, but instead contended that big enough capital levels, which were on the way with Basel III, were the real remedy.

It’s also widely recognized that the special resolution process in Dodd Frank is a non-starter as far as the institutions that pose the greatest systemic risk are concerned, the really big international dealer banks. A wind-up of these firms is subject to the bankruptcy proceedings of all the foreign jurisdictions in which it operates; the US can’t wave a magic wand in Dodd Frank and make this elephant in the room vanish.

In addition, no one has found a way to resolve a major trading firm without creating major disruption. According to Andrew Ross Sorkin’s Too Big to Fail, Harvey Miller the top bankruptcy lawyer in the US, warned when Lehman was told to file for bankruptcy that even the closure of a medium-sized broker-dealer was a significant market event. Whenever you shut down a troubled trading business, the counterparties (ex derivatives coutnerparties, who get perversely favorable treatment as a result of the 2005 bankruptcy law changes) have their positions frozen until the wind-down process sorts out who gets how much. No trader wants to be stuck like that, so they will flee at the first sign of trouble, with the odds high that counterparties will bolt before the authorities have decided to proceed with resolution. The run on Bear took place over the course of a mere ten days.

Shiller’s insistence that the public is so dumb as to confuse a wind-down with a bailout reveals his lack of connection with popular perceptions. The reason the public is so angry with the baiouts is no one, particularly among the top brass, lost his job, and worse, the firms were singularly ungrateful, thumbing their noses as taxpayers and paying themselves record bonuses in 2009.

Shiller is somehow worried that people will confuse the short-term (say 2-5 year) funding of working capital while “bad bank” assets were resolved with the hated 2008 bailouts. That’s simply bizarre, Large segments of the public would probably cheer, provided no dismissed senior executives had a severance package honored (meaning they would be fired for cause, which in most contracts will nullify severance provisions). Similarly, while Congress was very unhappy to make a roughly $50 billion allocation to the Resolution Trust Corporation, it was not a flash point with the public.

The reason a resolution is not that it looks like a bailout, but that some depict it as nationalization, meaning men in beards, wearing fatigues and carrying machine guns are expropriating assets. How can Shiller forget the debate over nationalization in early 2009, when Obama came into office?

This bit is also misleading on several levels:

On a Friday in July 2008, for example, the F.D.I.C. kept IndyMac Bank alive when its survival was in doubt. The agency moved in swiftly to transform IndyMac into a bridge bank, called the IndyMac Federal Bank, and the changeover went so smoothly that many depositors might not have even noticed. The cash machines remained in operation over the weekend, and, on Monday, customers saw what seemed to be the same bank.

First, no big dealer bank is going to be resolved neatly over a weekend as Shiller suggests. Second, the “many depositors never noticed” is hugely misleading. IndyMac was notorious because unsecured depositors took huge losses. The big reason Citigroup is permanently too big to fail is that it runs a major international cash management business on which many large businesses depend. As a result, Citigroup has uninsured foreign deposits in the hundreds of billions.

Shiller goes on to discuss the merits of better “framing” in the political arena, as if the right wing haven’t been onto that since the 1970s. But his article is peculiarly reassuring. If most economists are as out of touch with public perceptions and the state of the dark art of propaganda as Shiller is, we the great unwashed public have little to fear from the economics profession jumping on the manufacture of consent bandwagon.

The one good bit of news.

Originally published at naked capitalism and reproduced here with the author’s permission.