… and Denial as Well?

The “shakeout” has put Goldman Sacks and JPMorgan Chase at the top. Astonishing news, and, for some, a confirmation of Schumpeter’s view of the inexorable process of “creative destruction,” the way capitalism weeds out inefficient firms and rewards successful adaptation.

But the applause is muted, to say the least. As David Segal put it in Sunday’s New York Times, there is a “widespread sense that winners in this economy are produced by a game that’s rigged.” (see Windfalls for Bankers, Resentments for the Rest) Some economists have commented on the fact of this “recovery” shows that the “bailout worked.” But others facing foreclosure or joblessness can only feel resentment and rage at the continually widening gap between the rich and the poor. The silence of many political leaders suggests a form of embarrassment. No one wants to claim credit.

There will be a backlash. Taxing the rich to pay for Obama’s medical plan will be easier. Setting up a Consumer Protection Agency in the banking industry will be easier. But, apart from that, it is unlikely that increasing meaningful oversight of the financial industry will occur.

The danger is that we will simply return to business as usual: virulent competition among a handful of firms to make financial instruments more profitable – and a return to the denial of risk that was the underlying fault in our financial collapse. And where will the resentment go?

Possibly that resentment will attenuate as health care reform occurs and other defects in our social safety nets are repaired. The perception of the gap and its unfairness may fade – but it will not disappear. It will become part of what we don’t know we know about our economic system.