Today’s report on Wall Street remuneration practices from Kenneth Feinberg, the Treasury Department’s “special master” for executive pay, comes about a year too late. After being appointed in February, 2009, Feinberg took eighteen months to discover what we all already know: Wall Street is awash in egregious self-enrichment.

The headline in today’s report, which was trailed in the Times this morning, is that in late 2008 and early 2009, at the same time they were receiving hundreds of billions of dollars in taxpayer bailouts, seventeen of the big banks paid out about $2 billion in bonuses and other payments. In a press conference today, Feinberg said these payments were “ill-advised” and “against the public interest,” but admitted he had “no authority whatsoever” to recoup the money.

The bigger story is that virtually nothing has been done to change the pay practices that Feinberg belatedly highlights. Despite widespread anger on the part of the public, and a rare consensus among economists that faulty compensation structures were partly responsible for the financial crisis, the U.S. political system has failed to rise to the challenge. The financial-reform bill that President Obama signed earlier this week contains a measure that would allow stockholders to vote on the compensation packages of senior executives. But this so-called “say on pay” will have little if any impact on how Wall Street firms pay their traders, which is at the heart of the issue.

As I pointed out in my book “How Markets Fail: The Logic of Economic Calamities,” the problem is not only one of greed—although that certainly plays a role—but of faulty incentive structures. Even today, most Wall Street firms pay their senior employees a not-too-outlandish salary (several hundred thousand dollars), with the bulk of their compensation coming in the form of bonuses that are largely paid in cash or stock options. Such a system is meant to align the interests of employees with stockholders. In fact, it can easily have the opposite effect, giving traders and their managers a big incentive to generate short-term gains while ignoring longer-term risks.

Over the years, like many people, I’ve had my share of disagreements with Larry Summers, especially on the issue of financial regulation. But when it comes to fiscal policy and the impact of deficit-financed stimulus programs, I’m with him all the way, or most of it, anyways.

Writing in today’s Financial Times, Summers makes the key distinction between an economy operating at full capacity and one, such as today’s American economy, that has lots of unemployed workers and capital. At full employment, additional public spending tends to get “crowded out” by rising interest rates and falling private-sector spending. But when there is mass unemployment, an increase in government spending leads to increases in output and employment.

So far, so obvious—or so it should be to anybody who has taken Economics 101. But Summers makes a second point that sometimes gets lost in the debate. With interest rates at close to zero, banks reluctant to lend, and many businesses and households hoarding cash because they are too nervous to invest it, monetary policy—the other tool the government can use to stimulate the economy—loses much of its effectiveness. As Summers points out, the U.S. economy is now in, or close to being in, what Keynes referred to as a “liquidity trap,” where a Fed-inspired expansion of the money supply has little impact.

Now, liquidity traps, which economists used to consider historic relics, are not at all pleasant to experience. In many cases, they are associated with falling prices and extended periods of economic stagnation. (Ask the Japanese, who have been trapped in one for close to twenty years.) About the only good thing that can be said about liquidity traps is that they provide ideal conditions for stimulus programs. Why is this? Because in a liquidity trap, there is no such thing as “crowding out.” By definition, interest rates are stuck at zero per cent, or close to zero. Therefore, increases in government spending have their full “Keynesian multiplier” effect. A dollar increase in spending, because it brings unemployed resources into use, ends up producing perhaps $1.50 or $2.00 worth of extra output and income.

Why, then, doesn’t everybody favor another stimulus program? In my opinion, most of the opposition is politically motivated. (In conservative circles, more government spending is innately bad.) But one or two economists and academics have tried to erect an intellectual case against deficit spending. If you want to read more, look at this article from Niall Ferguson, the Harvard historian, which is also on the FT Web site. When it comes down to it, however, the best Ferguson can do is to cite vague “confidence” effects. According to this worldview, what is holding back private consumption and business investment is not a lack of demand, but concern about the deficit. Of course, this is precisely the argument that some opponents of F.D.R. made during the Great Depression. In this area, as in many others, it seems, we are still stuck in the thirties.

In the current issue, Cassidy writes about Paul Volcker and the financial-reform bill. Join Cassidy on Wednesday, July 21st, for a live chat.

Some eight years ago, when I was writing a Profile of George Steinbrenner, he showed me around the practice facility near Legends Field, the Yankees’ spring training stadium in Tampa, Florida, which was later named after him. The clubhouse, which was mainly used by young players the Yankees had hired out of school or college, was festooned with aphorisms about the importance of winning, which Steinbrenner held as the supreme sporting virtue, and, perhaps, the supreme virtue, period. (“Second place is really the first loser.”) But on this occasion what he wanted to show me were the new showering facilities and massage tables that he had recently had installed. “It’s very important to get a rub down after working out,” he said, opening the door to the shower area, where a young would-be Yankee, butt naked, suddenly found himself face-to-face with his employer. “It helps the muscles heal faster.” The youngster, apparently already familiar with Steinbrenner’s tendency to roam unannounced as he saw fit, wrapped a towel around his midriff and said, politely, “Hello, Boss.” Steinbrenner asked the boy how the practice sessions were going, to which he replied well, and Steinbrenner carried on out the door. He had some new turf specimens he wanted to show me.

In many ways, of course, Steinbrenner was a tyrant. His historical heroes were Winston Churchill and George Patton. From the former, he gained a love of overblown rhetoric; from the latter, he learned how to use intimidation as a management style. (Lou Piniella: “George is a great guy, unless you have to work for him.”) But unlike many of the billionaires who today buy sporting franchises and use them as playthings, he was a fanatical and punctilious tyrant, whose entire identity was suffused with his beloved Yankees. And he had a softer side. At Legends Field, he knew everybody from the parking attendants to the ticket collectors, some of whom he had kept on the payroll when they should have been in a retirement home or intensive-care unit. Although he fired people on a whim, he often regretted it and asked them back, most famously in the case of Billy Martin, who held the post of Yankees manager on five different occasions. When Steinbrenner recalled Christmas Day, 1989, the day Martin died in a car crash, tears would well up in his eyes.

What drove him, he told me, was a desire to impress his father, an aloof Cleveland shipbuilder who himself had been a college track and field star. After he had helped build up the family business and acquired a basketball franchise (the Cleveland Pipers), Steinbrenner and a group of investors bought the Yankees for ten million dollars in 1973. By the time he hired Brooklyn-born Joe Torre, in 1996, he had run through twenty managers in twenty-three seasons. The run of World Series victories that the team enjoyed under Torre brought him a measure of contentment, but he resented the adulatory media coverage that Torre received, pointing out to me (and others) that before he joined the Yankees Torre had enjoyed little success as a manager.

In recent years, Steinbrenner’s declining health forced him to slow down and leave much of the running of the team to his sons, Hal and Hank. But during the first round of the 2007 playoffs, when the Yankees went two down to the Indians, the old Boss resurfaced, telling a reporter who reached him in his room at the Mayfair Regency that Torre would be fired if the Yankees failed to win the series. After the Indians triumphed 3-1, the Yankees asked Torre to take a pay cut, and he resigned.

Getting rid of Torre was Steinbrenner’s last hurrah. Today, the Yankees have a spiffy new stadium, a low-key skipper (Joe Girardi), a general partner who rarely talks to the press (Hal Steinbrenner), and a star-stocked lineup that has the best record in the majors. It’s all a bit boring. If Yankees fans were more well-balanced, they might hanker for the old days of the Bronx Zoo, when George was busy conspiring against his best player (Dave Winfield), reaming out his managers (too many to list), feuding with his fellow owners, and getting banned from baseball. But Yankees fans don’t think like that. To them, as to their late owner, winning is what counts. And Steinbrenner, despite all his demons and his mistakes, ended up a winner.

For the past year and a half, I have been in the unusual (for me) position of being relatively optimistic about the U.S. and the global economy. While Nouriel Roubini and other pessimists banged on about a W- or L-shaped recession, I was reasonably confident that the extraordinary policy response to the financial crisis of 2008—bank bailouts, near-zero interest rates, and sizable stimulus programs—would be sufficient to turn things around. So it proved. The U.S. economy is about to end a fourth straight quarter of growth, and, according to the O.E.C.D., the global economy will expand by more than four and half per cent this year. Given the internal momentum that capitalist economies possess, the prospects should be for more growth next year and beyond. Now, though, I am not so sure.

Tomorrow, George Osborne, the new British Finance Minister, will reprise the role of Philip Snowden, one of his most notorious predecessors, embarking on a program of fiscal retrenchment during a global economic downturn. In 1931, with more than two million Britons out of work, and with the international financial system tottering, Snowden tried to cut unemployment benefits in order to bring down the budget deficit. In the ensuing row (several ministers refused to back the cuts), the Labour government collapsed, and the Prime Minister, Ramsay MacDonald, formed a national coalition that enacted Snowden’s measures, only to see the economy get worse—much worse.

Snowden was the political mouthpiece for the traditional “Treasury view” that deficit reduction trumps all, even in a recession. Following the 1936 publication of Keynes’s “The General Theory of Employment, Interest and Money,” which provided a theoretical justification for debt-financed stimulus programs, this doctrine was supposedly relegated to the history books, but, three-quarters of a century on, it is back. And Britain is far from alone in shifting from stimulus to deficit-reduction. In the past few weeks, Germany and Japan, two of the four biggest economies in the world, have set out in a similar direction. Here in the United States, the $786-billion Obama stimulus program is still in effect, but there appears to be little prospect of its being extended or enlarged.

The financial-reform bill that the Senate voted through last night is an improvement on House bill from last fall, and its passage means final legislation is virtually inevitable early this summer. Given the dysfunctional political situation in Washington, and the Obama Administration’s innate aversion to anything smacking of radicalism, the coming overhaul will be surprisingly broad-ranging, and it should be welcomed. However, it still fails to address some of the root causes of the crisis, some of which will, doubtless, reëmerge in the years to come.

First the good news. Both House and Senate bills establish a new agency to protect consumers from predatory financial companies; force the trading of most derivatives onto public exchanges; oblige Wall Street firms banks to “eat their own cooking” by retaining ownership of at least five per cent of the securitized bonds they issue; and create a new systemic-risk council, which will be responsible for spotting dangerous trends, such as the emergence of another housing bubble. The Senate bill bars banks from investing their depositors’ money in hedge funds, private equity, and other speculative deals; removes some of the loopholes that were in the House bill, particularly in the area of derivatives trading; and orders hedge funds to register with the Securities and Exchange Commission, thus dragging them out of the shadows.

All of these things are sensible, and credit is due to the four Republicans who voted for them: Olympia Snowe and Susan Collins, of Maine; Charles Grassley, of Iowa; and Scott Brown, the Massachusetts freshman. (If the Republican leadership in Congress had had its way, virtually nothing would have been done.) The White House is perfectly justified in calling the reform package the most comprehensive since the nineteen-thirties. But that, by itself, is hardly cause for celebration. We have just lived through the worst financial crisis and global recession in seventy years, and this week’s renewed turmoil in the markets suggests it isn’t over yet. The key question is whether the reformed financial system will be safe. Or will its risk-taking practices still present a deadly danger to the economy at large? I’m afraid they will.

Apparently, he is. At least, that’s the message from Ed Luce, the Financial Times’s Washington bureau chief, who has a long piece about Obama’s economics team in today’s edition of the Pink ’Un. “While this administration is very much driven by the inner circle of political advisers, Summers has clearly emerged as Obama’s Henry Kissinger,” David Rothkopf, a former Clinton administration official, tells Luce. Adds Bill Galston, of Brookings, another former Clintonite: “My question is not whether Larry Summers is a brilliant man but whether there is anyone who has the ability to challenge his point of view.”

Luce also has some insider quotes. Here are my two favorites.

“There are times when Larry and I have had brawls and we have shocked non-academic colleagues by accusing each other of making schlocky arguments, as we would in an economics seminar. But it’s a sign of respect when Larry argues with you. Far better than being ignored.” (Christina Romer, head of the Council of Economic Advisers.)

“Sometimes, the most courageous thing to do is not to take the largest and most sweeping course of action.” (Summers)

Addressing the argument put forward by Bob Kuttner, Jon Alter, and others that Summers and Tim Geithner have hijacked Obama’s domestic policy, Luce points out, correctly in my view, that the President himself is primarily responsible for the Administration’s centrist stance on issues such as bank nationalization and financial regulation. Summers, Romer, and Peter Orszag, the Administration’s budget chief and studmuffin, all describe Obama as “pro-market” and “pragmatic.” One of these days, the liberal wing of the Democratic Party is going to have to accept that Obama is no radical. Says Summers: “In the same spirit that the president did not want to take ownership of the banks, he has a healthy skepticism about schemes involving large government action and an awareness of the possibilities of unintended consequences.”

PS: Memo to those of you hoping that the Big L was thinking of quitting—as was recently suggested by Josh Green, of the Atlantic: don’t hold your breath. According to Luce: “Mr. Summers himself sounds as if he is digging in his heels.”

UPDATE, 3:45 P.M.: Gordon Brown has resigned, and David Cameron has become the new British prime minister.

The last twenty-four hours have been great fun. Since Gordon Brown detonated his I.E.D. yesterday afternoon, the Westminster village has been a hive of intrigue and backbiting. But as the Brits sit down to their tea, the odds have reverted to a Conservative-Liberal Democrat deal that would usher David Cameron into office as the leader of a Tory-Liberal coalition. According to unconfirmed reports, the movers are already entering the back door of Downing Street.

As a lifelong Labour supporter, I don’t like one bit the idea of the Tories returning to power, but, after mulling things over, I have reluctantly concluded that a Conservative-Liberal coalition would be preferable to the alternative: a grand “Progressive Coalition” of the sort that Brown proposed. Such an idea, although attractive on the surface, would immediately run into severe practical problems, and I don’t think it could be sustained for more than a few months. Most likely, it would lead to another election this fall, at which Labour (and the Lib Dems) could end up suffering huge losses.

Many people in the Labour Party recognize this danger, among them David Blunkett, a former home secretary who today came out against a Lib-Lab deal, writing in the Guardian: “This would result, almost inevitably, in a massive defeat for Labour at the hands of an electorate who would blame us for flouting the will of the substantial minority.” Andy Burnham, the schools minister and one of Labour’s rising stars, is another of the Labour rebels who helped scupper a Lib-Lab deal: “I think we have got to respect the results of the general election and we can’t get away from the fact that Labour didn’t win,” he said today.

Take that, Tory Boy.

Gordon Brown has just turned the British election upside down, announcing that a) he is preparing to step down as Labour’s leader, and b) he is opening formal talks with Nick Clegg on forming a progressive coalition, involving Labour, the Liberals, and the moderate parties in Scotland, Wales, and Northern Ireland. Together these parties have more than enough seats to form a majority government, leaving the Conservatives out in the cold. Brown would presumably stay on as prime minister for a few months, and then hand over to his successor as Labour leader, or possibly to Clegg.

Nothing is certain, but if you want to have some fun, I suggest you spend some time this afternoon browsing the Web sites of the Tory newspapers—the Times, the Telegraph, The Daily Mail, and The Sun—which have been screaming for Brown to go. The P.M. has heeded their advice, but not in the way they had hoped. Apoplexy is not the word.

I’ll be back a bit later with some more considered thoughts. In the meantime, give Brown his due: he may have just carried out the political equivalent of a successful suicide bombing.

UPDATE, 1:15 P.M.: The great bunfight has begun. See Adam Boulton, a presenter at Sky News, Rupert Murdoch’s U.K. satellite network, assailing Alastair Campbell, the veteran Labour spin doctor, who has been advising Gordon Brown.

Read Hendrik Hertzberg on the prospects for electoral reform.

At about 3 A.M. today (London time), David Dimbleby, the BBC’s urbane election presenter scratched his head. “This is a very confusing election,” he said. Twelve hours later, following carefully worded public statements by Nick Clegg, Gordon Brown, and David Cameron, things weren’t much clearer. For now but probably not for much longer, Brown remains in 10 Downing Street, and the Labour government is continuing to function. (Later on today, Alistair Darling, the chancellor of the exchequer, is due to take part in a conference call with other finance ministers about the Greek crisis.) Over the next few days, much haggling will take place to determine the shape of a new government.

Needing three hundred and twenty-six seats to obtain a majority in the House of Commons, the Conservatives ended up about twenty short. As of this writing, with three seats still to be called, the Conservatives have three hundred and four seats (up ninety-six on the 2005 election); Labour has two hundred and fifty-eight seats (down ninety); the Liberal Democrats have fifty-seven seats (down five); and other parties—principally nationalist parties in Scotland, Wales, and Northern Ireland—have twenty-eight. Following this indecisive result, the most likely outcome is a new Conservative administration that would govern for six months or a year without a guaranteed majority at Westminster, before calling another election. (This is what happened in 1974, when a minority Labour government under Harold Wilson took over from Ted Heath’s Conservatives in February, called another election in October, won a small majority, and then ruled until 1979, when Margaret Thatcher led the resurgent Tories to victory.)

Ironically, everything depends on Clegg, the Liberal Democratic leader, whose party did surprisingly poorly yesterday. After Clegg’s strong performance in the first television debate between the party leaders, opinion polls had indicated that the Lib Dems would get somewhere between thirty and thirty-five per cent of the vote, possibly capturing as many as a hundred seats in the Commons. Instead, they got just twenty-three per cent of the vote and ended up losing seats, a shockingly bad result. But the Lib Dems did retain enough seats to keep either Cameron or Brown in power, or to vote them out, if they so wish. (The other parties, which include the Ulster unionists and Scottish nationalists, will also play a role.)

As the U.K. goes to the polls, the front page of this morning’s Times regurgitates the conventional wisdom that the party that loses the election could turn out to be the real winner, and vice versa. The British economy is in such bad shape, the argument goes, and the coming budget cuts are going to be so large, that the governing party will face a deadly backlash. The Times cites a widely-reported claim by David Hale, an American economist, that the governor of the Bank of England, Mervyn King, said to him during a recent lunch: “Whoever wins will be out of power for a whole generation because of how tough the fiscal austerity will have to be.”

I beg to differ. In my opinion, Britain’s long-term economic difficulties have been overstated, and its political firmament has been misinterpreted. With an economic recovery already under way, I expect the fiscal arithmetic to steadily improve, and the scare stories about Britain turning into Greece to be discredited. From a political perspective, today’s victor, widely expected to be the Conservative Party, will enter office with the priceless asset of diminished expectations. With a budget deficit of more than ten per cent of G.D.P., most Britons accept the need fiscal retrenchment, which, in any case, can be blamed on Gordon Brown’s financial mismanagement. By 2015, when the next scheduled election is due, most of the harsh measures will have been taken, the economic outlook is likely to be much brighter, and the incumbent party will be well-placed for reëlection. (If there is a hung parliament, things get a bit more complicated, with another election likely later this year or early next. But I would still expect the party that emerges as the victor of that contest to be reëlected in 2015.)

The crux of my argument is that the recession of the past two years has exaggerated Britain’s underlying problems: the country hasn’t returned to its previous status as “the sick man of Europe.” To be sure, the fiscal arithmetic is ugly: since 2007, the overall budget deficit has gone from about two per cent of G.D.P. to close to twelve per cent, and the national debt has jumped from about thirty-five per cent of G.D.P. to more than fifty per cent. (The Institute of Fiscal Studies, an independent research body, has produced a detailed summary of the figures.) If you listen to right-wing commentators like Niall Ferguson, you will hear scurrilous talk of the U.K. debt skyrocketing to more than five hundred per cent of G.D.P. in the next thirty years. If these figures were credible, it would be only a matter of time before international investors balked at buying U.K. government bonds, precipitating another financial collapse.