President Obama has announced a new plan to limit the size of banks and place restrictions on the trading and holding of assets of uncertain value by banks. “The American taxpayer will never again be held hostage by a bank that is too big to fail”, he said.

Much of the media attention has focused on the apparent attempt to use this initiative to shift to a more populist form of politics. Up to now, he has appeared quite timid about the question of bank re-regulation. Many analysts believe that this is because he is listening to his economic advisers, other than Paul Volker, rather than his political advisers who have sensed a restive public unhappy that the banks are not being brought under tighter regulation. Exceptionally, Mr. Volker, a former Federal Reserve Bank Chair, has advocated that Obama move on bank regulation, but the other orthodox economists have, amazingly, remain wedded to their belief in unregulated markets.

However Mr. Obama and Mr. Volker are right, as a matter of policy. If that coincides with the mood of the majority of voters, it is just another indication that the voters often get it right. The trouble with conventional experts on economics and social issues is they too often embrace orthodoxies and conventional wisdoms that mistake their belief systems for factual descriptions. Thank goodness for democracy, and its ability to force correctives in policy.

One fundamental problem with the conventional economists’ views on bank regulation is that it embeds a construction of an idealized world that among other things fails to distinguish risk from uncertainty. Risk can be measured and can be assigned probabilities. Uncertainty cannot. All that can be known about uncertain outcomes is that they can be very damaging if they occur. But the probabilities of different possible outcomes can’t be calculated. Thus it is not possible to insure against them, or to devise instruments that will act as natural counterbalances to them.

The complex derivative financial instruments that were used to finance the highly risky mortgages banks made were so opaque and confusing as to make it impossible to make risk calculations about them. This was the case with the so-called toxic asset backed paper that brought the banks down all across the world. Because they could not be assessed in terms of risk, they could not be insured against, and they could not be made subject to market discipline. The economists advising government were unable to see the implications of this because their education never let them think about market as institutions that can only work under certain situations, and their sluggish minds couldn’t grasp the significance of the difference between calculable risk and uncertainty. So they assured policy makers that risk is the only relevant or real idea, that any numbers are always better than no numbers (even if they are imaginary it seems) and that investors, who are by definition very smart, will always correctly assess risk and trade in instruments that will insure against massive bank failures that might otherwise arise from holdings of toxic assets.

The result that banks were left unregulated in terms of holding such assets. The economists pictured every bank as fully quipped with very smart risk assessors calculating to the millionth decimal point the risk and the appropriate risk protection strategies. It seems never to have occurred to them, and apparently still does not, that this couldn’t be done for the exploding class of derivative assets.

Some say that ii is not fair to criticize the economic advisers for not seeing the need to regulate the investment by banks in these kinds of assets because they were new innovations and their existence could not be understood. This is a faux criticism based on a narrow idea of what it means to understand something. From the 1930’s until the de-regulation of the 1980’s and 90’s, policy thinkers were a bit more broadly educated, and banks were prohibited from investing in any assets that carry these kinds of uncertainties and hard to calculate risk. And it worked. The problem was well known, even if the exact nature of the assets changes from time to time. It was the narrow minds of the policy makers and advisers, and the pressure from self interested financial community that caused governments to de-regulate, not the inability of intelligent humans to understand the problem.

Truth to tell, the conventional economist’s beliefs, and beliefs is all they were, suited their ideological conviction that regulation is a thing always to be avoided in favour of market based mechanisms. To rationalize this they had to construct the imaginary all knowing risk calculators as the actors who protected the whole system. But they were pure fiction, because the risks could not be calculated. The ordinary people, and now Obama, are fortunately a little more subtle and intelligent. They see the problem and they see a simple solution. If the risks associated with these assets can’t be calculated, its simple – don’t let the banks invest in them. It is simple to put in place regulations that block their ownership by banks. This Obama now intends to do, against the advice of his economists. He also intends to limit the size of the banks so that if some still make bad decisions with depositor’s money, they will be small enough when they fail so as not to threaten to bring the whole system down, forcing government to bail them out.

Obama’s and the people’s understanding is absolutely correct. Perhaps they should all get Ph.D.’s, but really it is just practical common sense. And to be honest, there are quite a few economists who agree. But they have been cast in the past as pro-regulation, which is a bad thing to be, and thus have been silenced by the dominant view within the profession. Price based instruments, the dominant view argues, are always better. So they still constantly talk about the challenges of pricing risk as the policy problem, and then excuse the banks because it is so, so hard to do in these cases. Which it is. Indeed it is impossible in these kinds of cases. But they are just wrong in defining the problem, as the experience of the last couple of years has clearly established, and thus fail in reasoning through what to do. It is of no policy use to sympathize with the banks for how hard it is, and to puzzle over how they might better price such risks in order to make policy. It is time for a more practical, intelligent, fact based analysis if we are to have good policy. If it is too hard to price risks, and banks don’t know enough to avoid them, the simple solution is to block the banks from holding such assets. Which means tough regulations that prohibit them from doing so. QED.

Ukraine has just completed the first round of voting in a historic election for President. The old conservative Soviet era clique is back, after seeming to have been rejected by the people in the previous 2004 election. The people back then took to the streets in peaceful protest against a corrupt and authoritarian President – sadly the very one who has come out in front in this election – and forced a new election in which he was trounced.

What a difference a few years can make. Five years ago, Ukraine was alive with the promise of this Orange Revolution, which saw the democratic overthrow of the old, corrupt, Russian aligned Party of the Regions headed by the despotic Vicktor Yanukovych. Young people gained prominence as activists and democrats became the toast of the media. One of the highest profile supporters of his Orange Revolution was George Soros, who previously played a large role in the success of the pro-democracy movement in Poland with considerable success. He reached out to and provided support for the people who yearned for change.

After weeks of protests, Orange revolution leader Vicktor Yushchenko handily beat Yanukovych in the heavily monitored second election after the first was struck down by the courts because of widespread corrupt voting practices. The latter in his previous term as President was widely despised for his close ties with rich oligarchs who had become wealthy through the hand over of state assets to them and their cronies. Most of these oligarchs come from the eastern regions of the country in which people of Russian descent make up the majority. Their control over the Government of Ukraine was sustained through a system of intimidation, government favours and state power over institutions that owed much to the tactics of the Soviet system that prevailed prior to 1989.

While Yushchenko’s 2004 win was seen in the West as a victory by democratic forces. That view was not shared in Russia. There it was seen as part of a western effort to extend the zone of western influence into the previous zone of influence and over previous allies of Moscow.

Yushchenko failed to live up to the promise that people believed he offered five years ago. The majority of citizens of the Ukraine, particularly in the western parts of the country dominated by ethnic Ukranians, believed that he would break the old reliance on Russia, the tight association with the Russian speaking oligarchs, and the corruption of elections to thwart the expression of the people’s will. All of these were part of the promise of the historic 2004 elections. Instead, his presidency was marked by a worsening of economic conditions, continued corruption, stand offs with Russia over gas supplies and trade, and a failure to achieve unity with the European Community and NATO.

Sadly, the simple fact is that Yushchenko governed badly. He lost the support of the people. He fought with this key potential allies, including Yulia Tymoshenko.

This election, Yanukovych received over 35 per cent, current Prime Minister Yulia Tymoshenko 25 per cent, and Yushchenko a mere 5 per cent in Mondays’s election. The main factors were Yushchenko’s inability to sustain a coalition with Tymoshenko, the third dominate Ukraine personality of this decade and the charismatic leader of a faction that has managed to be agile enough to avoid entrapment by either of the other parties, his constant conflicts with Russia that appear to always leave Ukraine the loser, and his own abrasive personality.

Tymoshenko took most of the votes of the supporters of the Orange Revolution. She has given the appearance of favouring many of the democratic instincts of Yushchenko while avoiding the appearance of opposition to Russian influence. Today, while having many policy and personal conflicts, Tymoshenko and Yanukovych share similar positions on relations with Russia. Both argue that Ukraine can’t get along without good relations with Russian and blame Yushchenko for undermining Ukraine’s prospects by constant conflicts with Russia. Yanukovych promises that Ukraine’s will not pursue a NATO bid and will make Russian a second official language alongside Ukrainian. With great fanfare and much popular support, Tymoshenko made a deal last year with Russia to accept the shipment of Russian gas through Ukraine for European markets, something Yushchenko was never able to do.

The big loser is the Ukraine people. Democracy has a lot of respect after the failures of the last five years, and the resistance to corruption and autocratic government is much weakened as a political force. The young, so motivated the last time, are disillusioned and feel disenfranchised. The west has also been rebuked.

Regardless of who of the leading candidates from this round win the next round, Ukraine will once again be a Russian satellite, heavily influenced by Russian approaches to policy and interests. None of that is good. Part of the blame lies with the West which failed to pay nearly enough attention to Ukraine after the 2004 election. The US in particular became obsessed with Iraq, with unfortunate results for Ukraine.

The promise of the Orange Revolution can never be restored. That is a shame. The question now is whether Ukraine will ever find the democratic, western, progressive politics of Poland and other former Soviet nations.

Over the past decade the political left has had a lot of trouble with the issue of terrorism. Bush’s seemingly unthinking and ideological response to Islamic fundamentalist antagonism confirmed for many on the left that the modern version of world terrorism is in fact nothing more than a reaction to the persistence of American imperialism. Imperialism in its modern form is integral to globalization and capitalist expansionism. The US and western focus on Islamic terrorism is thus credibly perceived as a continuing thread in the long history of conquest and colonialism in the Arab and South Asia regions. So the left easily falls into a set of beliefs that see colonialism, imperialism, capitalism and US hegemony as part and parcel of a quilt that explains the root causes of terrorism as we know it today. This makes terrorism in some sense excusable, but also questionnable as a real threat to peace and safety of working people.

These left views are typically informed by high level and ideological thinking. As is too often the case with ideology, the facts get short shrift in such thinking. This too often leads to a fatal flaw – the denial of facts which challenge the world view as set out by the ideology. Of course it is not just the left that is guilty of this kind of thinking. One only need to look at the economics profession and its inability to look at economic facts of late as a measure of how smart people an get captured by ideology.

However, this is not an excuse. The belief that anyone who seriously worries about the dangers of Islamic inspired terrorism is simply a tool of imperialism is a serious analytical flaw. It is fine to be skeptical of equally unbalanced ideological driven claims such as those made by Bush and his acolytes about Iraq, or those made by economists about the infallibility of markets and globalization. But to deny the reality of the al Qaeda network and its intentions is not excusable simply because others are guilty of the failures of ideology thinking. Left politics defined by a denial of the reality of terrorism is doomed.

The danger that the left cannot see and understand this is high-lighted by the apparent disappointment in Obama on this issue. Obama has always been sensitive to the fact that many of his supporters on the left hated Bush’s self declared war on terrorism. He has tried to be moderate and conciliatory. In many ways this has served him well. Relations with the Arab and Muslim world have improved. Suspicion of the US has moderated. These are good things and cannot help but to reduce tension and hostility between nations.

However, it is pretty clear that al Qaeda and its affiliates have not let up. Their belief in a war on the west has not moderated or subsided. Obama has had to make it clear that US resolve has not faltered. Over the last few days he sounds in many ways like Bush on this topic.

This is not because Obama has changed. It is because the facts tell a story of continuing al Qaeda threats. He has before him detailed and unimpeachable intelligence that tells an alarming story. Obama has no choice but to respond. To do otherwise would send the wrong message to al Qaeda, and would be a failure in carrying out his duties to safeguard American people. All pedestrian stuff to ideologues, but part of the reality of real world life and government. The left has no choice but to track and support Obama on this one. To deny the reality of al Qaeda is to deny reality. Obama must act. It will not often be pretty. More attacks will take place and more lives will be lost. Sobering but true.