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.

One province has finally got it right on green energy. Ontario Premier Dalton McGuinty has just announced a $7 billion deal that will have Samsung commit to a major transformation of the electricity generating system. Samsung will invest in a big way in wind and solar energy as part of a move away from dependence on fossil fuels. Samsung will also make a commitment to develop secondary industries associated with these new green energy sources. Incentives are included in the package to ensure the creation of over 150,000 new jobs. Transmission capacity will be reserved on the grid to ensure that the new green electricity will get to Ontario consumers when they need it.

Contrast this to the approach in British Columbia under Gordon Campbell. Campbell is trying to sell a hopefully gullible public on a plan to subsidize large numbers of private investors to develop hydro power at sites on sensitive rivers and in vulnerable watersheds across the province. These projects, such as the giant Plutonium power project in Bute Inlet, are destroying pristine rivers, salmon habitat, and forested valleys out of the sight of most British Columbians. Valuable licences and other incentives are being offered up by the BC government to the private companies – the venerable BC Hydro is not permitted to develop any of the projects. The biggest problem with the whole undertaking is that it can do little to displace fossil fuels as the source of electrical energy when river runs and lake levels low, but indeed increases the need for fossil fuels during such periods. Under the deals the government has put into place, BC Hydro is forced to pay exorbitantly high prices for energy produced when it isn’t needed (when lakes and rivers are high and Hydro can meet demand with its own large dams), which it must then resell at a large loss, and then it will have to go outside the province for mostly dirty coal fired electricity when the rivers are low, purchasing this power at exorbitantly high prices. These outside purchases are being forced on BC Hydro because the government has ordered the shut down of the relatively clean and efficient Burrard Thermal plant.

The sad fact is the the BC scheme is just a large scale scam to line the pockets of the friends of the government who are getting the permits and licenses for these new, dysfunctional private hydro projects. They get guaranteed high prices for electricity that is not produced when it is needed, and when it is produced must be resold by BC Hydro at a large loss because it all comes when it is not needed; a sweetheart arrangement if ever there was one. And most offensive of all, the whole plan is being “green washed” by the claim that it is a green energy plan. Sadly in this it has had the support of a couple of high profile BC environmentalists who one has to assume do not understand the admittedly complex scheme.

The Ontario plan is completely different. There will be no-payoffs to private interests who are friends of the government for unneeded power. The new wind and solar plants will to together produce power when it is needed in a planned, balanced, systematic way. Old dirty energy will be replaced by new clean energy. There are no complex transfers of money to friends of the government at the expense of provincial ratepayers. Spin-offs and new jobs will be assured. And there is no green washing, because the plan, unlike the BC one, really does, replace old dirty energy with clean energy.

Predictably the self serving private power producers who have lined up at the trough in BC are complaining about the Ontario plan. If nothing else, their criticisms confirm that the scheme they are pushing have nothing do do with green energy. If it did they would be demand that the BC governments adopt real green energy plans like the Ontario one. The fact is that the flawed BC plan is the fault of a patronage obsessed government and a corrupt arrangement that does nothing to advance green energy. It is time that energy specialists, the media, academics, and environmental groups debunk the nonsense of their claims. Until that happens all of these groups must share some of the blame for the collaboration in the green washing that has accompanied the BC plan (the worst offender is the Vancouver Sun, which has virtually become the public relations arm for the BC plan. So much for a critical, watchful media).

Ontario is to be congratulated for going green in a meaningful and in many ways radical shift in direction. What a refreshing change.

Finally, a government in Canada has done something significant and even radical.

Redemption is a very human process through which those who have erred renew their social value through acknowledgment. reflection and revealed learning. It is a process through which people of recognized value to society who have failed in their social responsibility regain their ability to contribute. It confirms that error does not discredit all that one knows and understands, provided error is seen and understood.

For at least twenty years, the economics profession enjoyed a kind of triumphalistic hegemony in policy that permitted no dissenters. While it was disturbing and frustrating to those with practical knowledge, it was hard to fight. The profession expressed such certainty and such superiority as to make disagreement intolerable. It was a time of a kind of intellectual hegemony.

We can now see that its knowledge claims were essentially ideological, based on beliefs that defined what was correct thinking and what was not. Markets were efficient, Keynesian economics wrong, monetary rules and inflation targets the only possible macro economic goals, regulation useless and unnecessary, welfare social madness, and government action sure to fail due to rational expectations. Dissenters from these views were not only wrong, but apostates. They must be and were systematically discredited and pushed to the margins.

I well remember moderate views like mine on these matters being subject to condescending disdain by the very economists who work in the institution I am now part of. While I never subscribed to the classical left views, this was not enough. Moderate views were taken as a failure of intellectual rigour. A commitment to markets, deregulation, and smaller government were not just truth but character tests.

Many have paid the price for the monopoly these views gained over policy. The recent economic disaster need not have occurred had the views of economists been more moderate, reasonable and balanced, and had they not abandoned a once vigorous commitment to observation and science. For many of us, the question is whether there is any real reflection about and review of these views by those in the profession.

So far there is little evidence of regret or even error on the part of the profession. The smartest and the brightest have begun to try to understand why government action was necessary and is now working, but most are largely defensive and in denial, stuck in their old ways of thinking. That is regrettable. While it is perhaps not surprising that the process of redemption and renewal is beyond the reach of most people who so over-reached themselves, it is surprising that few in this profession have even ventured to begin the process. It suggests that this once honourable profession is incapable of confronting its own failures. Without that, it is almost sure to never regain its once dominant position in public life. Redemption is beyond its reach. Which is not uncharacteristic of those who succumb to ideology. Sad but true.