Who Can We Trust?
Some economic heavy-hitters have essentially announced the end to the Obama honeymoon. While the Administration is painting an optimistic beginning to the rollout of the vaunted stimulus package (now quite a bit smaller thanks to Congressional Dems), regular folks are still steamed over the AIG bonuses, and pundits from all corners are launching Jeremiads about the foolishness of spending more federal money in times of crippling deficits. There's kind of a maelstrom of economic opinion out there, and everyone is feverishly trying to appear commonsensical in the face of unprecedented circumstances. The pro-finance industry people on Obama's team are pushing the metaphor of a "clogged" or "frozen" credit system, that has to be "loosened up," or "primed," so that loans and investment can flow again. Republicans have essentially doubled-down on the audacious bet that people have forgotten that the past eight years happened. They're simply spouting forth the same tax-cutting, government-shrinking rhetoric that they have been spewing since Reagan, despite the fact that they themselves have shown no inclination towards fiscal restraint when in power. The mainstream media, with all of its millionaire analysts and superstars, is in no position whatsoever to perform any substantive analysis of the situation. These prima donnas have let their serious, investigative instincts atrophy over the years, leaving them ill-equipped to understand anything that doesn't involve a missing white girl, a politician's genitalia, or a celebrity's foreign adoption. So these "journalists" shout and lecture their way through the day's news, plucking the absolute lowest of low-hanging fruit, like the AIG bonuses or the question of Obama being too negative in his speeches.
Just to spice up this mix, we have the cavalcade of revisionist hucksters who, sensing the Great Depression parallels and fearing the possible subsequent Democratic stranglehold on power, have magically declared that historians are suddenly of the settled opinion that the New Deal did not work. Thus, we can't spend our way out of this current economic meltdown either -- because it will fail, just like the New Deal failed. Well, much like the junk science that undergirds the ridiculous claims of global warming skeptics, this arbitrary declaration that historians and economists have reversed their opinion on the New Deal is just flat-out wrong. Marshall Auerback has recently swatted away this New Deal revisionism, highlighting in detail the absolutely massive scale of Roosevelt's employment programs and regulatory frameworks, and their positive effects on the economy. We'll return to this a bit later.
So who do we trust in all of this? Who is telling us the truth, and how do we tell? The problem is that, in an unprecedented situation, everything we hear sounds both crazy and reasonable at the same time. Sure, it makes sense that when facing gargantuan federal deficits, the last thing we need is more spending (Frontline ran a terrifying episode on the deficit this week, called Ten Trillion and Counting). But the next day (maybe a bit sunnier day?), the Obama team's cool pursuasion on the doability of green stimulus and financial bailouts resonates. But then when more bad news hits, as it does with some regularity now, we're right back there with the angry talking head, demanding, "where's the stimulus for us hard-working people who haven't defaulted on our mortgages?"
As things get worse, which I believe they will, we cannot afford this head-yanking confusion over what the hell is actually happening. So, perspective becomes absolutely crucial, and we have to force ourselves to look at long stretches of time, long patterns. After all, the media only needs to pay attention to the next show, the next week's Nielsens, and the next season's pickup. Politicians, despite all of their projecting out for decades, are essentially only responsible until the next election cycle, which in today's world never seems to end. All of these elite "playas" are in the business of stage managing the impression that they are in it for the long haul, that they are here to stay. But the reality is, in the hyper-controlled, endlessly-triangulated, money-drenched political arena, everything is couched in short-term caution, so as to not upset the permanent ruling classes who pay for everything, and who own the media outlets on which the dramas play out.
In the long view, nothing about Obama's economic plan is audacious in the good way, meaning that it does not challenge existing power relations, and that it is far too small to do the heavy lifting required for real change. But it is all-too audacious in another sense, in that it cedes unprecedented power and trust to a cabal of financial insiders who have, at best, a profoundly faulty view of economic history, and at worst, are just evil shysters out to pad each others pockets. Some discourse-grenades were thrown into the economic discussion these past couple weeks, and they make clear that we could be in for some deep trouble if Geithner and company remain at the helm.
First, Paul Krugman has, in his last few columns, all but declared that he is off the Obama bandwagon. He has been pleading for people to understand that we may only get one bite at the stimulus apple, since popular will may evaporate if a package that is too small falls flat. He feels that almost every aspect of the Obama team's plan is either misguided or too small. The stimulus need to be much larger, in his opinion. He also supports nationalization of the large, troubled banks. But the high moment came when Geithner unveiled his Paulsonian "cash for trash" plan for the government to help buy up toxic assets, passing any losses on to the American taxpayer, while any profits are funneled to the private sector. As Krugman put it: "This is more than disappointing. In fact, it fills me with despair" (full column here). Of course, we all know that Krugman is a die-hard liberal, and he was an unabashed Obama supporter. So his quick turn to pessimism over the new Administration's plan should give us serious pause.
James K. Galbraith also weighed in with a magnificent column that calls into question the economic worldview of the architects of the Obama plan: "No Return to Normal." Galbraith warns that our perception of economic reality is largely determined by some useful myths. "The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return." Geithner, Larry Summers, Ben Bernanke -- all these guys have been trained to think that there is a "natural" rate of unemployment, a "normal" growth rate, and the like. Their only difference from more conservative economists is that they think government spending can goose us back to natural conditions more quickly than doing nothing or just cutting taxes. This also influences the size of the stimulus plan, which Galbraith thinks is too small. It also puts the bailouts in perspective. As we have noted in earlier posts, the favorite metaphor for the financial system is not that it is broken, or collapsed, or even utterly depraved. Nope, it's just clogged, or frozen. So sooner or later, money pumped into the banks (while bad assets are stripped out) will jolt the Frankensteinian system back to life, hopefully with less gruesome results.
But as Galbraith puts it so eloquently: "(T)he plumbing metaphor is misleading. Credit is not a flow. It is not something that can be forced downstream by cleaning a pipe. Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. And the borrower must meet two conditions. One is creditworthiness, meaning a secure income and, usually, a house with equity in it. Asset prices therefore matter. With a chronic oversupply of houses, prices fall, collateral disappears, and even if borrowers are willing they can't qualify for loans....The credit flow metaphor implies that people came flocking to the new-car showrooms last November and were turned away because there were no loans to be had. This is not true -- what happened was that people stopped coming in. And they stopped coming in because, suddenly, they felt poor."
We're really into the nature of the housing bubble here. The bursting of this bubble was not just some temporary fluke that we can sweep under the rug. It represented, in Jim Kunstler's famous phrase, "the greatest misallocation of resources in world history," a colossal bad investment in a way of life with no future (also Kunstler). We dumped all of our chips into the pot, betting that the easy-motoring suburban crapscape would roll on forever, churning out service sector jobs and low-priced DVDs. The whole thing was financed on the very hyper-leveraged financial "shenanigans" that have now collapsed, a system of hallucinated value that we embraced rather than do the unglamorous work of farming, manufacturing and other real-world pursuits. The housing bubble was simply the external manifestation of an underlying devil's bargain, a co-dependent relationship between grasping hyper-consumers and their enabling extenders of credit. We all wanted to use our houses as piggy banks, to stock our halls, boudoirs, and driveways with the effluvia of big box stores and strip plazas.
Galbraith reminds us: "For the first time since the 1930s, millions of American households are financially ruined." No "unclogging" of the credit market is going to bring back the free-spending conditions of the 90s and early Oughts. Thus, like Krugman, Galbraith feels that the stimulus must be much, much, larger. He notes that FDR literally hired about 60% of the unemployed directly, for work on federal projects. Galbraith criticizes the "shovel-ready" measures that are in the current stimulus package, since they mostly just temporarily stave off jobs that may need to go by the wayside in the long run. By nature, the shovel-ready tasks are concentrated in the very sector in which we don't need any more stuff: building out of the sprawling suburban landscape that is destined for the waste bin anyway. "What did not recover, under Roosevelt, was the private banking system. Borrowing and lending -- mortgages and home construction -- contributed far less to the growth of output in the 1930s and '40s than they had in the 1920s or would come to do after the war."
So Galbraith actually advises just letting the financial sector go under. Protect bank depositors, but let the shareholders take the hit. Nationalize the big banks, break them up, reinstate Glass-Steagall to segregate securities from deposit-based banking, and re-regulate the whole industry. The financial system cannot be saved in its present form, nor should we want it to be. What must be saved, according to Galbraith, is the household economic system. The government needs to put people to work, increase Social Security and Medicare payments, and institute a payroll tax holiday. Redundant jobs in home and sprawl-building need to be quickly transformed, via a massive jobs program, into careers in green energy and transportation.
This cannot be done on the cheap. Galbraith notes that "the deficit and the public debt of the US government can, should, must, and will increase in this crisis. They will increase whether the government acts or not. The choice is between an active program, running up debt while creating jobs and rebuilding America, or a passive program, running up debt because revenues collapse, because the population has to be maintained on the dole, and because the Treasury wishes, for no constructive reason, to rescue the big bankers and make them whole."
This is truly a great article. Every TV pundit, nervous Republican, and ambitious Obama aide should read it. This is the long view that a crisis demands. The Obama team is muddling through as if the financial system is just a little sluggish, and can be saved along with everything else in the household economy, not to mention the environment and our theaters of war in the Middle East. But the reality is that the financial system is cooked, and we need to give up on it, in its present form. The hucksters who looted the country for their Hamptons houses and annual trips to Aruba need to be hung out to dry, and their dysfunctional institutions need to be seized, carved up, and resold to local interests. And yes, this is like the Great Depression. And yes, the New Deal did work. So yes, we need to go much further into debt to construct some kind of bridge to the future, one that provides food, shelter, and jobs to people along the way. Not many are really thinking about what the far side of that bridge will look like, so we'll return to the issue of community living next time.
Posted by Jeremy Raymondjack at 3/27/2009 7:11 PM 
Categories: Politics and Economics
Tags: Economic Stimulus Timothy Geithner AIG Bailout Obama Economic Team
Categories: Politics and Economics
Tags: Economic Stimulus Timothy Geithner AIG Bailout Obama Economic Team
Comments