2012 Year in Review

I haven’t been updating this blog much recently. But in the tradition of year-end roundups, I’ve decided to collect a few personal favorites from the things I’ve written over the last year.

This last piece was a personal favorite, and I hope to build on these ideas in the coming year. I hope to get a few long form things written this next year too and to finish another law review piece, this time on federalism.

Thanks to everyone who read and responded.

Freedom, Revisited [Part 1]

[ I started this intending to write a short essay on the need for liberals and the left to develop new theories of liberty. My basic view is that both for legal advocacy and to “reclaim the politics of freedom” generally, progressives need a fuller theoretical response to the right’s conception of liberty as noninterference by the state. This is the first of several posts, in which I hope to consider negative liberty, positive liberty, and civic republicanism understandings of freedom that more fully embrace the United States' tradition of democratic governance and the need for broadly inclusive economic structures. ]

I want to start by agreeing with Corey Robin’s conclusion in Reclaiming the Politics of Freedom. Freedom needs to be contested and understood at the level of first principles if an alternative is to emerge to counter the anti-statist, pro-private power vision that dominates American discourse and helped dismantle public services and the regulatory structures that limit corporate power.

The need to reconceptualize liberty is particularly urgent given that the conservative members of the US Supreme Court have imported a negative liberty theory of freedom into their interpretation of the Constitution and the First Amendment specifically. This impoverished notion of liberty has become a barrier to a variety of democratically enacted regulations and, in the 2010 Citizens United case, served as the basis for eliminating reasonable campaign finance laws. The constitutionality of the Affordable Care Act’s insurance mandate, similarly, will turn on the Court’s willingness to read this theory of negative liberty into the text of the Commerce Clause.

The theory of freedom that informs the American right’s “small government,” “get the government out of x” rhetoric is, as Charles Taylor and others have noted, a mostly negative theory of liberty. The idea being that freedom means the absence of coercion or interference, or as Ayn Rand said, “to be free, a man must be free of his brothers.” It’s important to point out that historically negative liberty has inspired leftists and liberals as intensely as it currently moves the American right. The theory of negative liberty was first described (albeit unpraisingly) by the liberal theorist and socialist Thomas Hill Green, and in the Twentieth Century, the idea moved liberals like Isaiah Berlin. In his essay Two Concepts of Liberty, Berlin described negative liberty as “the area within which a man can act unobstructed by others.”

The recent revival of interest in Ayn Rand’s writings and libertarianism more generally speaks to the level to which this notion has informed the way millions of Americans continue to understand themselves politically. I think it would be a mistake not to take such commitments seriously. Rather than entirely abandon a theory that has proven enormously inspiring and deeply rooted (at least among Americans), I think it’s worth asking what other liberals have found inspiring here and looking at where conservatives have sold their own theory short.

There is one extremely important difference between the negative liberty described by Berlin and the liberty celebrated by libertarians and the contemporary American right. Berlin’s definition of negative freedom means the absence of coercion from all others, whereas the right’s definition means only the absence of coercion from the state. As Corey Robin noted, the way conservatives managed to recast negative freedom in this way was “to locate this notion of freedom in the market.” By focusing primarily on the tension between private industry and government regulation, conservatives have advanced a view of freedom that largely ignores both the mass incarceration state and the various ways private industry can impinge on individuals’ rights.

As Bernard Harcourt’s scholarship has helped highlight, there is something enormously paradoxical about a view of negative liberty that locates freedom entirely in the market but turns a blind eye to police enforcement and national security. The United States has been gradually sacrificing civil liberties to the exigencies of law enforcement and counter-terrorism over the past decade. We have become the most incarcerating nation in world history, with more than six million people imprisoned and many of them for nonviolent offenses. As Harourt recently wrote, “The rise of neoliberal thought since the 1970s has left us with a frightening union, one in which there is both free-market ideology (which militates against universal healthcare) and mass incarceration (with the attendant excesses like generalized strip-searches).” The unwillingness of American courts to see liberty outside the economic sphere is, to quote Harcourt again, “pushing the country, inch-by-inch, in the direction of a police state.”

Beyond the paradoxes of the mass incarceration state, the problem of private power exposes another important oversight in the right’s operative theory. If negative liberty is genuinely about protecting spaces of individual autonomy, it has to mean being free to act without coercion from from private parties as well as from government and law enforcement. That means that businesses that can turn phone records over to the police, websites that sell an individual’s search history, prospective employers who ask for facebook passwords, and employers who meddle in their employees private lives are just as capable of interfering with people’s negative liberties as state agents. Private individuals unconstrained by the state provided the foundations of both slavery and debt servitude, indisputably two of the most unfree systems in human history. The failure of the right to address the excesses of corporate power and the various risks created in the private sector is precisely what is least liberating about that view — it is a vision of freedom that is willing to accept coercion and domination as long as they are committed by private actors.

In contrast to that view, a more thorough acceptance of negative liberty would be far more radical (and complicated) than simply shrinking the state at every opportunity. It would also mean liberating the spheres where individuals may act and opening up spaces for people to act democratically or collectively to shape the conditions of their own lives. To protect their own liberty, people would have to be able to resist not just coercion from the state but also to resist coercion from extractive economic structures and private actors who do not share their interests. Indeed, one might even expect the champions of negative liberty in a democracy would be far more concerned with coercion from private powers than the government, because government, arguably, is already accountable to the people through elections.

Negative theories of liberty could once again carry some emancipatory potential if expanded to embrace individuals’ authority to free of both unwanted private encroachments as well as intrusions by law enforcement and other state actors. That is not to say that a more expansive concept of negative liberty would not be without shortcomings of its own. Some of these shortcomings should become clearer when contrasted to the positive and civil republican theories of liberty [I'll save that for another post]. Nonetheless, negative liberty has been an inspiring and enduring vision of freedom that has moved millions of people across history and continues to speak to Americans’ self-understanding. For the current moment, a vision of negative liberty that takes private power into consideration still offers a powerful critique to those who think keeping the government out of the market is a sufficient guarantee of individual freedom.

Reimagining the Corporate Form: Toward a More Democratic System of Corporate Governance

This entry was also posted at the HLPR Blog: Notice & Comment.

Occupy Wall Street has, in the words of John Paul Rollert, “come to embody a common sense that something is wrong with American capitalism.” The problem Rollert points to is not with capitalism itself, but with a particular American version that has ceased to work for broad cross-sections of its population. Given America’s Depression-level income inequality and near-record levels of private indebtedness, it is extremely tempting to focus on bad outcomes as the problem. But the real issue is that many of the economic and political structures that we take for granted repeatedly produce unequal, undesirable outcomes. If reformers seek to make American capitalism more inclusive, the focus needs to be on fixing these structures and getting the rules right.

It has been a steady mantra of Occupy Wall Street not to make demands of existing political leaders and institutions. But as Matt Langer explained, “the reasoning behind not making demands most certainly does not preclude making demands of our collective imagination.” Whether people prefer to work within existing structures or not, the next essential step is to understand how broken institutions and flawed incentives created this mess and to start imagining what structures can be built in their place. Where better to start than with corporations?

Current Governance Structures and Their Shortcomings

Consider the role that our system of corporate governance has played in producing some of our current imbalances. Excessive risk-taking, stagnating wages, and the spike in executive compensation can all be linked back to a system of corporate governance that privileges management’s interests at the expense of other actors.

It’s by no means an original observation to say that boards are under the sway of management. Indeed, the US is something of a global outlier in allowing a business’ president/CEO to appoint its board of directors, and in some cases the president/CEO actually serves dually as the chair of the board. Not only is the composition of the board not reflective of its owners, employees, or investors, boards are only subjected to a relatively relaxed legal standard. As a result, directors often find that their interests (i.e. staying on the board) are best served by taking a passive role and letting management make most of the choices. In light of this structural failure to limit conflicts-of-interest, it should be unsurprising then that the interests of employees, shareholders, and other stakeholders are, at best, secondary to those of executives. As Harvard Law Professor Mark Roe succinctly phrased it, “the US is managerialist, not capitalist.

Current governance arrangements have had an enormous impact on the larger economy and on the distributive features of American capitalism. To begin with, the existing corporate governance system (in conjunction with other regulatory failings) has proven inadequate to keep excessive managerial risk-taking under control. Despite the Enron disaster, the fall of Bear Sterns and Lehman Brothers, and the near-collapse of many of America’s overleveraged financial firms in 2008, we appear to have done nothing to address this issue. These risk-induced failures were repeated last week in the near-overnight fall of MF Global. As though nothing was learned, the star-studded MF Global board sat by and, in Steven Davidoff’s words, “gave executives []free rein to take tremendously risky bets that brought the house down.

In 2008, Martin Lipton and his colleagues at Wachtell prepared an excellent memoranda on boards’ responsibility over risk-management which was posted at the HLS Forum on Corporate Governance. In discussing the legal framework for risk-management, they advised corporate boards to go beyond the minimal requirements created by the leading state law case, In re Caremark. Nonetheless, this is how they summarized the state of the law: “These cases demonstrate that it is difficult to show a breach of fiduciary duty for failure to exercise oversight; these cases do not require the board to undertake extraordinary efforts to uncover non-compliance within the company.” Federal laws like the Sarbanes Oxley Act do require auditing and increased oversight from the board, but the overall implications remain: the decision-making center of gravity remains largely with executives, whose personal incentives to post short-term profits can fuel excessive risk-taking, and current law gives boards few incentives to keep that risk-taking in check.

The problem is not just that boards are passive and deferential, but that those who want risk limited cannot make themselves heard. These high-risk strategies often run counter to the interests of other stakeholders, including bondholders and shareholders, whose interests are not reflected in the board’s composition and thus are not sufficiently represented. The idea that the broader public or the employees whose jobs are on the line would have a say is, under current thinking, not even a remote possibility.

The resultant proximity between Boards and management has a lot to do with runaway executive pay. Board members usually have a stake in their position, and because they are appointed by management, it’s often not in a director’s interest to start ruffling the CEO’s feathers. As Lucian Bebchuk and Jesse Fried argue in their excellent book Pay Without Performance, “structural flaws in corporate governance have produced widespread distortions in executive pay.” Their argument, briefly, is that boards have too many incentives to go along with management and are therefore unable to contract with executives at arm’s length. This broken feedback loop is at the root of the ridiculous pay packages, bonuses, and golden parachutes we’ve seen over the past decade.

The wage stagnation that’s affected the remainder of the workforce shares a common origin: all stakeholders other than executives are systematically excluded from decisions that determine compensation. The fact that corporate profits remain at near record highs suggests that the problem is indeed structural and not attributable simply to changes in the labor market. The absence of a voice for employees either in management or on the board of directors, in conjunction with weakening collective bargaining rights, means that the record profits businesses have been posting get funneled mostly to executives and do not translate into gains for the average American worker. The rules that determine who gets to cut the pie, in other words, have a lot to do with the fact that CEOs went from making 24 times what the average worker did in 1965 to making 185 times as much in 2009.


Ratio of CEO compensation to of average worker’s compensation.
Source: Economic Policy Institute, 2011, via SCSPI.

More Inclusive Alternatives to Minority-Rule Governance

Corporations do not have to be organized in this way in order for the private sector to prosper or for the economy to grow. Recent events should make it clear that keeping down transaction costs is not the only concern here. A number of compelling alternatives exist. I start with the more moderate reform proposals and conclude by proposing that we look to the German corporate model or other structures that afford investors and employees a role in a company’s management.

Calls are frequently made to enhance the role of shareholders in decisions involving executive compensation and risk-management that happen at shareholders’ expense. Bebchuk and Fried have argued that it’s possible to improve transparency and accountability by giving shareholders a greater say on pay, by strengthening shareholders’ ability to unseat and replace directors, or by increasing the number of independent directors (i.e. directors not employed by or doing business with the company). Another proposal they describe would allow shareholders the ability to amend the corporation’s charter. Any long-term solution to these agency problems entails providing investors and owners with a permanent vote or some structural role in decisions that affect them.

An increased role for employees is also necessary to prevent some of imbalances that have arisen between management and the average member of the workforce. Randall Thomas and Kendell Martin, for example, have argued that labor unions and related entities should be allowed to make shareholder proposals. It would be possible to go even further by affording both investors and labor a role on the board and a larger say in major decisions that affect a company’s future. This is precisely what the German corporate governance system does. The German Codetermination (Mitbestimmung) system provides employees a role in the company’s management and has proven remarkably successful across a number of economic sectors. And although German income inequality has grown in recent years, “income inequality in Germany is a long way from reaching US proportions.

I point these out not to advocate any particular corporate form, but to observe that there are alternatives that can address failings of the existing system. It’s important also to observe that things were not always this way. The internet has fostered an explosion in new forms of social organization, and cooperative membership structures are another potential source of ideas. There’s no reason that running a successful business means accepting a one-size-fits-all corporate model, particularly when that model marginalizes a company’s most committed participants—its investors and its employees.

Capitalism isn’t a single thing or a system of natural laws. It is a system whose rules are shaped by political—and ideally democratic—choices. Nowhere is this more obvious than in the reified legal fiction of the modern corporation. The absence of democracy within corporations is a central reason that the US has seen such a proliferation of high-risk investment strategies, and an unprecedented divergence in incomes. The concerns of both investors and employees have been systematically subordinated to the interests of America’s managerial class. The failure to create an inclusive economy is fundamentally a failure to build inclusive institutions. And the first step to fixing this problem is remembering that the rules that govern institutional decisions can be different.


I read today almost two pages
In a book by a mystic poet
And laughed like one who has cried a lot.

Mystic poets are sick philosophers,
And philosophers are madmen.

Because mystic poets say that flowers feel
And say that stones have a soul
And that rivers have ecstasies in moonlight.

But flowers, if they felt at all, wouldn’t be flowers,
They’d be people;
And if stones had souls, they’d be living things, not stones;
And if rivers had ecstasies in moonlight,
They’d be sick men.

It would take not to know what flowers and stones and rivers are
To talk about their feelings.
To talk about the soul of flowers, stones, and rivers
Is to talk about oneself and one’s own false thoughts.

Thank god that stones are only stones,
And that rivers are nothing but rivers
And that flowers are just flowers.

As for myself, I write the prose of my verses
And I am satisfied.
Because I know that I understand Nature from the outside;
And I don’t understand it from the inside
Because Nature has no inside;
Otherwise it wouldn’t be Nature.

- Alberto Caeiro (Fernando Pessoa)
Poem XXVII from The Keeper of Sheep, translated by Patricia Ferrari

Now that the debt ceiling has been raised, can we get around to abolishing the debt ceiling?

Originally posted at The HLPR Blog: Notice & Comment.

On August 2 of this week, the United States successfully—if you can call it that—raised its debt ceiling for the 10th time since 2000. Regardless of the merits or un-merits of the deal that was eventually reached, the negotiation process was overwhelmingly bad for the country’s fledgling economic recovery. America’s reputation globally has suffered as a result. China’s state run paper called the negotiations “dangerously irresponsible,” and many commentators thought the US was coming perilously close to a constitutional crisis.

The country may be suffering from a bit of debt ceiling fatigue at the moment, but given the harm that the past few weeks have done, the United States needs to get around to abolishing the debt ceiling before this situation repeats. It would be a good signal to markets and remove political uncertainty that’s likely to keep US interests rates up, and it’s important for the continued stability and civility of our political system.

In case you need persuading that the debt ceiling should be abolished, I recommend this article by James Surowiecki at the New Yorker or Annie Lowrey’s piece in Slate from back in May, where she referred to the debt ceiling a “historic relic” with a “horrific downside and negligible upside.” And on August 1, Bruce Bartlett, a former policy advisor to Presidents George H.W. Bush and Ronald Reagan, laid out a persuasive argument for the debt ceiling’s abolition, explaining that:

“Even if the Treasury avoids default on government debt this week, we will inevitably have to go through the same political drama the next time the debt limit runs out and every time thereafter. And sooner or later the shoe will be on the other foot, as Democrats hold the debt limit hostage against a Republican president.”

“Unfortunately, the option of just letting the debt limit expire is not available. It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional.”

Given the fight that was just waged over raising the debt ceiling, I am rather skeptical that the Republican-controlled House is prepared to repeal the debt ceiling at the moment. Neither party, it seems to me, has the proper incentives to give up this political bludgeon willingly. As Michael Shear stated, “it may be impossible for Washington to put the debt ceiling genie back in the bottle.” Whether the debt ceiling statute is unconstitutional is another matter.

Bruce Bartlett has also written an excellent summary of the constitutional issue and has compiled some of the best arguments for and against the executive branch’s invoking the 14th Amendment to avoid hitting the ceiling. While most of these arguments focus on whether the President was empowered by the 14th Amendment to authorize the Treasury Secretary to continue issuing debt, the relevant question is whether the legislation establishing the debt ceiling is itself constitutional. Niel Buchanan at Dorf on Law has addressed exactly this issue and argued that the debt-limit statute is unconstitutional because it separates Congressional spending from the authorization to raise money to pay for those obligations.

Alternatively, it might be possible to argue that Congressional action that calls into question the United States’ debt might itself be unconstitutional. As Jack Balkin has written:

“Secretary Geithner does not believe that the President is allowed to violate the Constitution himself to stop congressional Republicans, but it does not follow that what the Republicans are doing is constitutional.

The press so far has been asking whether the debt ceiling is constitutional. The correct question they should ask is whether the Republican strategy of hostage taking violates the Constitution.” (emphasis in original).

As most legal commentators have recognized, standing and the political question doctrine pose hurdles to the Supreme Court ever ruling on the issue. Given the enormous damage this game of political chicken caused and how perilously close the nation came to an unprecedented constitutional conflict, however, these questions are worth exploring in more depth—and soon.

Short-termism is a kind of contagion

An emphasis on short-term performance does not always produce a long-term viable strategy. That looks obvious enough when typed out. But short-termism has become the prevailing logic of many American institutions, none more radically than those institutions that make up its financial sector. As Sheila Bair noted in an op-ed on her last day as chairman of the FDIC, our media, political institutions, and businesses fall victim to this tendency, and it has begun to undermine our long-term stability.

To persist in acting this way would require a kind of insane faith that what’s good for now is good for tomorrow. It’s the story of how every tragedy of the commons ends badly. These attitudes, however, persist less because of any rational deliberation than because institutions can easily devolve toward incentives that reward short-term results.

One principal reason for this is that short-term strategies have a tendency to spread. In a way, this might even be a more general feature of unrestrained competition. I want to make a slightly tenuous comparison to evolution before returning to the more general point.

Assume there is a small plot of land with two unrelated breeds of plant. If plant A can absorb soil nutrients faster and outbreed plant B, it will proliferate and might eventually displace plant A entirely. This is known as exploitation competition. The evolutionary pressures on A become: 1) either depend on fewer nutrients, 2) develop a some alternate replication strategy, or 3) simply beat B at its own game, by reproducing faster and extracting nutrients more quickly. The last of these is the one I want to emphasize: Short-termism is self-reinforcing and it is contagious. When B’s reproductive strategy is on short-term success, it redefines the game for A. Eventually it becomes the only game left. This is what kudzu did when introduced in the southeastern United States. Taken to an extreme, quite literally, this is the logic of cancer.

In other words, if B chooses to play a shorter-term game than A, that redefines the game A must play to survive. Market competition is also susceptible to this dynamic, and in many ways it may account for some of markets’ successes. The process can weed out under-performers and produce more efficient manufacturing processes. But it also weeds out other business models that under other conditions would be perfectly viable and sustaining.

This fact alone should also provide a compelling reason for market regulations—something I’ll write about another time—but this dynamic also means the following: If a business starts engaging in rent-seeking activities (i.e. attempting to influence government into creating a legislative or regulatory playing-field more favorable to its interests), then quickly other competitors, other businesses, and even entire sectors may be forced to follow suit.

To make the link now to the financial sector: Incentives in the financial community have become tied closer than ever to short-term performance. Such incentives have the potential to reward speculation, and the 2008 crisis revealed that these incentives have the potential to reinforce bubble-generation. Extreme short-termism redefined the terms of competition. It drove firms that emphasized longer-term performance and responsible practices to obscurity and irrelevance, and it drove many organizations into riskier positions to remain competitive (e.g. the decision at Fannie Mae to get into subprime mortgages in 2007). It should not be surprising that given the ways that incentives were linked to performance that the terms of competition became what they did.

Nor is it surprising, as Bair notes, that short-termism has come to characterize many of Wall Street’s interactions with Congress and other regulators. Rent-seeking through lobbying and other activities directed toward obtaining a favorable regulatory playing-field have now become part of the ways that businesses in America compete. To take one easy example, provisions of Dodd-Frank that were seen as restraints on business were cut, watered down, and those that were left in have been implemented half-heartedly. And that happened despite a general consensus that Dodd-Frank was not aggressive enough in providing the US the framework it would need to respond to another financial crisis.

[Legislators are now plagued by a similar dynamic of having to fund-raise to keep up with each other, with a short-term focus on reelection rather than on governance. This further exacerbates the influence Wall Street spending can have].

Given the various ways in which Wall Street successfully defeated attempts to impose new regulations after the 2008 crisis, we would expect that the financial sector would be well-positioned for the coming decade or to handle another crisis. But this hardly seems to be the case. The shadow banking system, probably the single largest accelerator of the crisis’ spread remains largely unregulated. Banks are fighting tooth and nail against hightened capital requirements. And the fact that large financial institutions pushing for austerity measures is so shorted-sighted as to ignore any possible interdependence between growth and a healthy middle class. Etc. etc.

Perhaps the most insane thing about all of this is that large financial institutions and proponents of deregulation are so short-sighted that they believe this kind of game is actually serving their interests. [Or maybe the game is just to be the last one standing?]

To quote a post at Digby’s blog about Murduch’s ability to rapidly corrupt the WSJ, one of the world’s “most important sources of financial news”:

I think this may be the best sign yet of just how crippled our institutions have become. If there is one group in the world who should demand unadulterated facts and data it is the financial community. Sure, they’ll play it to their advantage, and care not a whit about how it affects our democracy. That’s not their job (although it is their duty as citizens.) But they simply cannot function properly if their information is tainted.

The ‘invisible hand’ produces races to the bottom just as often as it produces self-regulating systems. We have failed utterly to keep the terms of this game from keeping this short-term contagion in check. When that happens, even the winners are at risk.

Photo credit: Galen Parks Smith.

Debt: The First 5000 Years

This is just a short follow up on my last post, to observe that there’s absolutely nothing new about the dynamic underlying the economic policy of the United States or the resistance to the austerity packages we’re seeing across Europe. I just ordered David Graeber’s excellent-sounding book, Debt: The First 5000 Years. If this summary is any guide, Graeber is suggesting that debtor-creditor relationships predate currency-based markets and are one of the fundamental organizing devices in human history:

Every economics textbook says the same thing: Money was invented to replace onerous and complicated barter system—to relieve ancient people from having to haul their goods to market. The problem with this version of history? There’s not a shred of evidence to support it.

Here anthropologist David Graeber presents a stunning reversal of conventional wisdom. He shows that for more than 5,000 years, since the beginning of the agrarian empires, humans have used elaborate credit systems. It is in this era, Graeber shows, that we also first encounter a society divided into debtors and creditors.

With the passage of time, however, virtual credit money was replaced by gold and silver coins–and the system as a whole began to decline. Interest rates spiked and the indebted became slaves. And the system perpetuated itself with tremendously violent consequences, with only the rare intervention of kings and churches keeping the system from spiraling out of control. Debt: The First 5,000 Years is a fascinating chronicle of this little known history—as well as how it has defined human history, and what it means for the credit crisis of the present day and the future of our economy.

UPDATE (11/7/11): I wrote a review that was published in Guernica a few weeks back.

The Debtor-Creditor Divide

Several weeks ago, Bob Kuttner published a short piece called “Debtor’s Prison” in the American Prospect. The distinction he offers now seems quite clearly to be one of the emerging battle grounds in global politics–between rentier creditors and debtors. This is a line that’s deeply obscured in our political discourse but one that underlies virtually every economic debate. Reading this article and Paul Krugman’s follow-up offered one of those rare, paradigm-shifting moments where a number of seemingly disparate and complicated elements all fell together into one coherent picture.

The basic idea is that decades of U.S. financial deregulation and the government’s response to the financial crisis have systematically favored the claims of creditors and transferred the losses and downside of their risk to taxpayers, homeowners, and less sophisticated borrowers. To quote Krugman, “everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff.” I also recommend Yves Smith’s post on the costs of rentier rule.

Geithner, Summers, and most of Obama’s financial team have done little to alter this development. Charles Fergesun, the director of Inside Jobhas drawn attention to regulators’ unwillingness to see creditors take even minor haircuts. This has proven true even in egregious cases such as AIG’s toxic credit default swaps in which creditors cashed in at 100 cents on the dollar during the bailout. As Shelia Bair, the Bush-appointee who recently stepped down as Chairman of the FDIC, noted in her wonderful farewell op-ed in the Washington Post, there were few prominent regulators advocating that banks write down losses for the bad mortgages and other bad borrowing. Quantitative easing and the Fed’s decision to keep interest rates near zero have likewise served as a second stimulus for large creditors but have not translated into economic growth or more jobs.

As Tim Harford argues in his book, Adapt: Why Success Always Starts With Failure, we need individuals and businesses to take risks because success is an iterative, evolutionary process of failing and building off of what works. But when we punish borrowing so harshly and reward rentiers uncritically, we destroy incentives to innovate and instead encourage speculation and bubble formation. Getting people above water in their homes and allowing businesses to take loans on favorable terms is precisely what we need to stimulate demand and begin an economic recovery. Even Goldman Sachs acknowledged that this job crisis is a problem caused by too little aggregate demand.

But instead the response has been more of the same. In order to stay in creditors’ good favor, Europe is facing what feels like an endless series of sovereign debt crises and austerity measures forced on its population, and the U.S. is quickly throwing itself down the same rabbit hole. By imposing austerity measures and penalizing borrowers, policy-makers risk creating an entire class or an entire generation that’s too indebted to innovate, move, or seek additional training — creditors need to wake up and realize they’re not getting paid this way either.

Perhaps the most frustrating aspect of this entire situation is that because our political system is so closely tied to its own creditor class, this conversation is completely absent from the current fiscal debates. As Peter Dorman rather tragically observed:

“There are lots of interesting, complex issues in political economy. None of that matters now: the world is in the hands of politicians governed by expediency calculations whose time horizon can be measured in weeks. As far as I can tell, the gross illogic of their policies is simply beside the point.”