Just a glimmer.

For a brief moment, listening to Alan Simpson talk about the work to come of the Debt Commission, I was seized by a moment of optimism. Perhaps there is a glimmer of hope that the cascading problem of debt and entitlements might be honestly and openly discussed, and then addressed, before the weight of our collective irresponsibility collapses around us.

As Simpson noted bluntly, there is not a person within the political establishment in the nation’s capital that does not know the depth of the problem. It is notable, then, how little s actually has been done to address the problems, particularly given the amount of hubris, hot air, and sound bites that focus on the problem.

In many respects, the challenges are simple. With respect to the operations of the Federal government, we spend more than we take in. Compulsively. Collectively.

In some respects, operating deficits as an ongoing problem was exacerbated by two political moments, one by each party. Ronald Reagan fundamentally changed the relationship between the political parties with his embrace of supply side economics, and the articulation of the notion that tax cuts are a politically and morally self-justifying imperative, without little regard to fiscal consequences.

While Reagan took office at a time of very high marginal tax rates, and the salutary a affect on economic output of reductions in rates was clear, Reaganomics came to represent the view simply that economic output is improved with lower taxes—a premise that surely remains true all the way down to a tax rate of zero. But the obligation of governance remains the balancing of revenues and expenditures, and the premise argued by David Stockman, Grover Norquist and others that lower revenues will lead to lower spending proved to be manifestly false when put to its test in the ensuing quarter century.

At the end of the day, the miracle of the Reagan Revolution was that it effectively ended the power of conservatism as a force for fiscal rectitude in American politics. In the succinct words of Pete Petersen, the Republic Party fell prey to the unholy alliance of tax-cutting Republicans and big-spending Republicans.

If Ronald Reagan ended the Republican Party’s stance as a force for fiscal responsibility in the 1980s, Bill Clinton matched his contribution a decade later. Just as the large share of Republicans who admire President Reagan in unblemished terms will take umbrage at this assessment of his contribution to our problems, so too will many Democrats point to President Clinton positive contributions, as the one who left George W. Bush with balanced budgets.

But Bill Clinton also brought to the Democrat Party a commitment to build a fundraising apparatus to match the Republican Party’s fundraising prowess within corporate America. After years of watching the tireless efforts of Peter Terpeluk and Wayne Berman and the other titans of the Republican Party fundraising community develop teams of Eagles and Pioneers, with assurances of access to the top and throughout the bureaucracy, Clinton built a Democrat commitment to a kinder and gentler relationship with the for-profit community.

Clinton’s greatest success in his transformation of the Democrat Party’s relationship with corporate America came in Wall Street. Formerly the heart of the Grand Old Party, the Clintons built a foundation of support for the Democrat Party in lower Manhattan. And by the end of Clinton’s presidency, his administration matched the zeal of the Republicans in promoting the deregulation of the banking industry, ending Glass Steagall restrictions, and fending off regulation of the growing derivatives markets, even in the face of serial financial crises that would have deterred a less determined leader.

The past decade has been a golden age for corporations seeking to access the power and the purse of the federal government in the pursuit of corporate interests and the generation of private wealth. In addition to the financial reforms at the end of the Clinton Presidency, the banking industry pursued and won comprehensive bankruptcy reform several years later, with broad and bipartisan support from willing and well-compensated Congressional supporters on both sides of the aisle.

In terms of accessing the purse of the federal government, the success of the pharmaceuticals industry in passing the Medicare Part D reforms provided a nearly uncapped access to the federal treasury, and again won willing support on both sides of the aisle, with only lip service paid to the massive fiscal consequences of such an open-ended money grab.

In terms of harnessing the power of the federal government in pursuit of corporate goals, bankruptcy reform is one example, while a more interesting example was the near-decade long support of FDA regulation of tobacco products by Philip Morris. While FDA regulation was a long-held goal of health advocates, Philip Morris understood that FDA regulation—and the strict limitations on advertising that would ensue—would effectively lock in Philip Morris’ dominant market share in that industry, reducing advertising costs, increasing profitability and elevating its share price.

Alan Simpson’s challenge is to stare down his long-time Congressional colleagues, and demand that they finally accept that their overriding responsibility is to tend to the long-term health of our nation. It is not about their own reelection or the success of one political party on another. Not in this matter.

But each Senator—with the possible exception of Scott Brown, who may not have been there long enough—probably firmly believes that every vote they cast is made with conviction and integrity. They believe the spin that is wrapped artfully around each vote. Bankruptcy reform is about consumer protection and personal responsibility, not about bank power and profitability. Financial reform was about economic growth and efficiency, not about the accumulation of power and profitability on Wall Street. Medicare Part D was about improving the health and well-being of seniors—on whose comfort we can place no price—not about creating massive new markets for a dizzying array of new drugs for newly minted syndromes.

But whatever they might believe about how they vote, Alan Simpson understands what has increasingly become clear across the political spectrum—from tea partyers and CPAC members on the right to those on the left who watched their dreams of single payer healthcare swiftly subordinated to the interests of the range of corporate interests brought “inside the tent” in the early days of the Obama administration—that the main challenge facing his efforts is dealing with the very people whose votes he needs. The changes wrought by Presidents Reagan and Clinton left us with a national capital where votes can easily be bought and the core principles of fiscal prudence are little more than buzzwords and political applause lines.

But I must remain optimistic about Alan Simpson’s new challenge. If—as Simpson suggests—everyone inside the beltway understands the truth of what we face, than they must succeed, because everyone outside the beltway understands it as well.

Risk of contagion.

After weeks of turmoil in the capital markets, the European Union has provided assurances that Greece will not be allowed to default on its debt. Like AIG before it, Greece has proven to be the domino that must not be allowed to fall, lest traders next take a run at Portugal, Italy and Spain, and ultimately bring the notion of a united Europe to its knees.

But those assurances, which at root suggest that Germany has agreed—behind closed doors—to serve as the de facto guarantor of the debt of Greece, would come with strings attached. Greece would have to cut its massive budget deficit, reduce public sector salaries, reduce farm price supports and restructure pension commitments. In sum, to do those things that Greece had agreed to do as conditions of joining the E.U. to begin with.

And now Prime Minister George Papandreou of the Panhellenic Socialist Party has to pick up the pieces. And he is not happy.

In an odd show of gratitude for the E.U. pledge of support, Papandreou has responded by accusing the E.U. of failing to do its homework when his conservative predecessors fudged earlier deficit numbers. But the integrity of economic data is a long-standing problem for Greece, dating to audits that showed that Greece routinely dissembled in its published data and essentially lied on its E.U. application. But whatever the history, it is Papandreou who now has to carry the bad news to the electorate.

Or he can let Greece default.

Maybe it is time for someone to stand up and stare the markets down. Maybe it is time for someone to demand that in a world of open capital markets, it is investors who must evaluate risk and take risk, and if markets are to efficiently allocate capital over time, investors must be accountable for their investment decisions.

The fact is that losing money is part of the process. Markets are supposed to weigh and price risk, and in so doing allow for the efficient transfer of information. In the case of Greece, this information is supposed to be about the long-term affordability of farm price supports and public pensions and other spending, balanced against the ability to support economic growth and wealth creation over time to pay for those politically attractive expenditures.

But we are no longer in the world of markets, we are now in the world of politics. After all, when Goldman and others took AIG counterparty risk but were let off the hook and paid out billions of dollars, that was not the markets working, that was politics. And over the past year and a half, we have watched bailout after bailout for fear of markets doing what markets are supposed to do. But risk is an essential part of the process. Risk is what free markets are supposed to be about.

And it is time that a socialist stood up and said so.

Now, of course, things will not go well for the Greeks, should Papandreou choose to take this path. The Greeks will have to pay a heavy price for the failures of their representative government. But they will make the Germans happy. Because the German people want no part of this.

But at the end of the day, Europe will work it out. After all, too much is at stake. The E.U. countries staked their futures on the idea that being part of one big country is better than being a small country. France wanted a bigger platform to steer a new foreign policy freed from the hegemony of America. Poland wanted to trade in the Zloty for the Euro, as protection against having to trade it in for the Ruble. And, coming off of a century of European wars, they both wanted institutional arrangements that would harness German might.

This appears to be the path the world has chosen. For fear of “contagion”—the notion that as Greece goes, so goes Spain, and Portugal, and perhaps Italy—the E.U. will construct an institutional “firewall” to show that Greece will not be allowed to collapse. The only firewall standing between the E.U. and its planned “firewall” may be the German people, who are scandalized that their tax dollars will be used to fix a problem of someone else’s making, and who may yet prove the last line of defense against the real contagion.

The real risk—the real contagion—as people from Main Street to the Bundestrasse understand intuitively, is the growing effort to take risk and accountability out of the financial system. It is the cascading issue of moral hazard. People—like derivatives traders—understand that risk does not go away, it just gets moved around. And they know that when the music stops, they end up paying the price.

In the U.S., the contagion is manifest in the refusal to take the steps necessary to break up the financial and political power of the largest financial institutions, to set limits on what is or is not allowable in the derivatives world, or to return risk to ownership of the financial industry. In Europe, it is the unwillingness to look at the institutional structure of the E.U. that severed currency control from national politics and fiscal policies, and made national fiscal crises all but inevitable.

For all the talk of financial reform in Washington, we are hamstrung by a system that allows affected industries with political clout to dictate policy, and in lieu of real reform we are marching down the path of more complex regulation, deluded in our fevered imagination that some team of smart regulators will ever be able to take on the political and financial power of our largest financial institutions, or match the cunning of well-incented and marginally shackled traders.

The irony is that while a socialist prime minister struggles to save his nation’s pension system and safety net, his efforts may ultimately be undermined by the E.U. efforts on his behalf. The problem that the moral hazard contagion presents to Greece—and to the rest of us— is that only a return to robust economic growth can provide the real growth in incomes and the investment returns that will be necessary for nations or states to fund their massive future pension obligations. And each new action that we take down the path that we are now on that undermines the effective pricing of risk in the capital markets, undermines our ability to return to a functioning and growing economy.

Daisy chain.

It doesn’t get any better than this.

You sit down to write about the mundane corruption of our democracy, and the ease with which banks can announce on the front page of the New York Times that they are going to pull their political contributions from Democrats—who apparently are not treating them nicely—and the equal ease with which Republicans announce that they will go after those contributions, and treat the contributors with greater deference. Then you realize that that is not the pressing issue of the moment.

So you decide instead to write about the looming default of Greece on its debt, and the profound anger in Germany at waking up one morning to find that it has emerged as the defacto guarantor of not just Greece, but all of the overleveraged, profligate and unruly southern European nations that Germany tried so hard to hold under its thumb in centuries past. Indeed, the unraveling of the European Union—that great political institution created to contain the German colossus after the failure of the Maginot Line—is leaving German’s wondering how their aging nation has found itself on the hook for Greek bureaucrats who just this week marched in the streets to protest layoffs in the wake of Greek efforts to impose fiscal austerity.

But of course, the images of the righteous protests of Greeks marching in the streets, as though someone else is to blame for the overspending on the Olympics and pensions and every other matter, just foreshadows the pain that is looming across major state governments, who are just now coming to grips with the fact that the full force of the fiscal crisis is only now just about to land in the U.S., as Federal Impact Aid has been fully expended, and Republican and Democrat Governors alike are resorting to fiscal gimmickry and pension funding holidays as they struggle to avoid admitting the obvious: That if the states—and the Federal Government for that matter—are ever to return to real fiscal balance, they have to come to grips with the simple fact that they must spend less and/or take in more. And politicians, retirees and workers in many states will need to face the harsh reality that long-term pension obligations will never be fully met, and the sooner that they all come to grips with that fact, the more equitable the resolution will be.

Then, this depressing thought was sidelined by the first mention of the word quadrillion. And that seemed to trump thoughts of bank corruption, Greek bonds, German upset, state pension, and the rest of it.

Last night, I saw the $4 trillion Bailout ads on TV. And this morning, I received an email regarding the $25 trillion guarantee of financial derivatives by the Federal Reserve, sent to me not from some crackpot, but from a derivatives trader at Merrill Lynch. This email referenced a story—referring to names that will mean little to most people—about how the Depository Trust Company, the brokerage industry vehicle that handles all stock trades—$2 quadrillion annually—announced that “the Federal Reserve Board had approved its application to establish a DTCC subsidiary that is a member of the Federal Reserve System to operate the Warehouse for over the-counter credit derivatives.”

So what does this mean in English? Well, the piece argues that all credit default swaps, are now backstopped by the Fed. Because, as quoted from an Office of the Comptroller of the Currency letter, “Clearing is a form of extending credit, one of the main functions of banking institutions. A clearing agent substitutes its credit for that of its customers… and is liable to a clearinghouse for performance on all submitted contracts, and assumes, with respect to the exchange, clearinghouse, and counterparties, the risk of default.”

If there is a theme to all of this, it is that in the name of the security of the financial system, we are continuing to march down the path toward homogenization of all risk onto the books of the Federal Reserve and the U.S. Treasury. In our efforts to avoid cascading collapse in the early months of the fiscal crisis, the Fed and the Treasury merged failing investment, took over and posted collateral to avoid the failure of AIG, backed up all manner of bank obligations, swapped bad debt for cash on the books of the Fed, and took all manner of other arcane actions, all in the name of preserving the system from collapse.

But since things settled down, we have done nothing to ameliorate the massive problem of moral hazard, beyond very lame and totally unbelievable statements that banks “better not count on a bailout next time.” These statements are unbelievable exactly because every step taken so far has been to shore up and make stronger the abilities of the Fed to respond to future crises, and to have resources at its disposal to act with fewer constraints by Congress or the Executive.

Does the creation of a CDS clearinghouse within the Fed system constitute a federal guarantee of performance under those contracts? I don’t know, but every action taken so far constitutes a greater concentration of risk onto the books of the government, rather than actions that would lessen systemic risk and force risk-taking back onto the private market participants, where it belongs.

And there are no small number of viable suggestions that have been made over the past year for consideration.

· Reinstitute the separation of commercial banking and risk trading activities.

· Recognize that institution size and political influence exacerbate systemic risks.

· Reconsider the rationale, role and structure of deposit insurance.

· Reinstitute at-risk rules for trading and the partnership structure for investment banking and trading organizations.

· Eliminate collateralization provisions in derivatives contracts so that counterparties must consider and accept counterparty risk, and to prevent counterparty collateral claims from undermining senior debt holder rights.

· Regulate credit default swaps and other derivatives that undermine appropriate functioning of corporate finance and bankruptcy process.

Just to bring all of this full circle, the reason so many are rejected has to do with at least in part with the corruption of the political process referenced at the outset. Failure to chart a path that reinvigorates the private assumption of risk will surely lead us one of these days to be facing the question that many Germans are asking this morning, when the next, far bigger, crisis hits, and the U.S. Government no longer has the resources available to absorb everyone’s risks: How did we let this happen?

Losing the Kennedy seat.

The Scott Brown election in Massachusetts is far less momentous than has been depicted.

To understand it simply requires holding onto two attributes of the Massachusetts electorate that might seem contradictory, but are not. First, that Massachusetts Democrats have a large registration edge over Republicans. Second that Massachusetts has close to if not the largest proportion of independent voters among states. Gallup achieves its ranking of Massachusetts as the third leading Democrat state—with a 34% edge over Republicans—only by allocating independent voters to the side to which they “lean.”

For some, the election results were touted as a bombshell because of the notion that this was Teddy Kennedy’s Senate seat. But if that Senate seat were to be an hereditary peerage, a Kennedy would have to step up and seize it. The Massachusetts election results might have been startling if Joe Kennedy had run and lost. But he chose not to run.

Despite its reputation, Massachusetts is not the Democrat bastion of national imagination. Over the past half-century, we have seen Republicans ruling the Statehouse more than Democrats—though long-time Senate President Billy Bulger would certainly protest the notion that any Governor ruled the Statehouse during Bulger’s reign. The 28 years of John Volpe, Frank Sargent, Bill Weld and Mitt Romney outstripped the 20 combined years of Mike Dukakis, Endicott Peabody and Deval Patrick. By way of comparison, in both New Jersey and Virginia, the sites of the other recent Republican gains, these numbers are reversed, with 28 years of Democrat rule compared to 20 Republican years.

A defining characteristic of top of the ticket statewide races in Massachusetts—a state with a hard earned reputation for local politics, patronage and corruption—is that they have not been dominated by old time pols, and each of these Governors—Democrats and Republicans alike—ran and won as reform candidates campaigning as much against the entrenched party establishments as embraced by them. Statehouse operative John Sasso may have greased the wheels to assure Michael Dukakis won the nomination, but the liberal Democrat from Brookline never won the hearts of party regulars. (I will leave aside for the moment the question how a half century of reform governors could have resulted in so little reform.)

If one is to draw a lesson for national politics from Massachusetts, it is less about policy—the notion that the Massachusetts electorate was voicing its opposition to federal healthcare legislation—than about politics. And in this regard, the message from Massachusetts is not particularly different than from New Jersey or Virginia. It is that the Democrat candidates lost the good will among independent voters—the voting block that was essential to the Obama victory two years earlier—as those voters leaned the other way.

Ironically, losing in Massachusetts—and losing the 60th vote in the Senate—may have been the best thing that could happen for Barack Obama. The Massachusetts loss should mark the end of Obama’s ceding the floor to Harry Reid and Nancy Pelosi—whose leadership has been anathema to the change the independent voters thought they were getting in 2008—and force a realignment of the President’s strategy. While in the first few days following the Brown election, the White House appeared to be flailing about for a message—leading to real fears that the wheels were coming off the bus—its ultimate embrace of the nationally broadcast question time with Republicans may have marked a turning point.

For the first time in many years, the public was able to witness—and our elected officials were able to participate in—real discussion over real issues. This was an astonishingly simple antidote to dangerous levels of public cynicism, at a time when Washington has been reduced to rhetoric and spin, and talk show hosts wield dangerous influence over our politics.

Every hour of every day, we are pummeled by a media that makes its living stirring us up, and exacerbating the fears and resentments that are easy enough to feel without the encouragements of Sean and Rush and Michele and Ed and the rest. And time is on their side, because most of the challenges we face take time. The economy will take time. Deleveraging takes time. The real world takes time. The only think that does not take time is the Internet and cable TV. They get faster every day.

As a nation, and as a polity, having our leaders discuss matters directly is a refreshing change. After years of debating the best format for presidential debates, we have never really gotten past various versions of gotcha questions. Yet, last week, when they put the President and Congress into a room, gave them a microphone and told them to have at it, apparently they were able to do just that. And do so intelligently and with civility.

So perhaps the message from Massachusetts is just what it should be: That the electorate—led by a growing, independent center—will continue to vote for the other guy until they see something that looks like progress. And progress does not mean a filibuster-proof majority for one party, it means injecting some degree of integrity into political debate and moving away from a system simply defined by the pursuit of partisan advantage.

And that would be a good thing.