No Wonder the Economy Isn’t Improving
Washington’s Blog
March 4, 2010
I’ve read countless news headlines
recently about how economists are “surprised” over an “unexpectedly bad”
economic indicator.
But it’s not surprising at all. It’s no
mystery.
The government hasn’t taken the
necessary actions, and has instead been doing all of the wrong things.
Let’s recap.
The leading monetary economist told the Wall Street Journal that this was not
a liquidity crisis, but an insolvency crisis. She said that Bernanke is
fighting the last war, and is taking the wrong approach. Nobel economist
Paul Krugman and leading economist James Galbraith agree. They say that the government’s attempts
to prop up the price of toxic assets no one wants is not helpful.
The Bank for International Settlements
– often described as a central bank for central banks (BIS) – slammed the easy credit policy of the Fed and
other central banks, the failure to regulate the shadow banking system, “the
use of gimmicks and palliatives”, and said that anything other than (1) letting
asset prices fall to their true market value, (2) increasing savings rates, and
(3) forcing companies to write off bad debts “will only make things worse”.
BIS also cautioned that bailouts could harm the economy
(as did the former head of the Fed’s open market operations).
And BIS warned that the Fed and other central banks
were simply transferring risk from private banks to governments, which could
lead to a sovereign debt crisis.
Virtually all leading independent
economists have said that the too big to fails must be broken up, or the economy
won’t be able to recover (and see this). Instead, they have been allowed to get even bigger (and see this and this).
While modern economic theory shows that
debts do matter (and see this), the U.S. is spending on guns and butter like debts are a good thing.
Nobel prize winning economist George
Akerlof predicted in 1993 that credit default swaps
would lead to a major crash, and that future crashes were guaranteed unless the
government stopped letting big financial players loot by placing bets they
could never pay off when things started to go wrong, and by continuing to bail
out the gamblers. (Not only has the government rewarded the gamblers, bailed them out and let
them engage in a new round of risky betting, but it hasn’t even reined in credit default swaps.)
And instead of trying to restore trust in our financial system –
which is a prerequisite for any sustainable economic recovery
– Summers, Geithner, Bernanke and the boys have tried to sweep the problems
under the rug and con the public into believing that everything is okay and
that no real reform is needed.
As I wrote in October:
William K. Black – professor of economics and law, and the
senior regulator during the S & L crisis – says that that the government’s entire strategy
now – as during the S&L crisis – is to cover up how bad things are (”the
entire strategy is to keep people from getting the facts”).
Indeed, as I have previously documented, 7 out of the 8 giant, money center
banks went bankrupt in the 1980’s during the “Latin American Crisis”, and the
government’s response was to cover up their insolvency.
Black also says:
There has been no honest examination of the crisis because
it would embarrass C.E.O.s and politicians . . .
Instead, the Treasury and the Fed are urging us not to
examine the crisis and to believe that all will soon be well.
PhD economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the
bubble, and pointing out that those who caused the disaster are trying to shift
the focus as fast as they can:
The current craze in DC policy circles is to create a
“systematic risk regulator” to make sure that the country never experiences
another economic crisis like the current one. This push is part of a cover-up
of what really went wrong and does absolutely nothing to address the
underlying problem that led to this financial and economic collapse.
Baker also says:
“Instead of striving to uncover the truth, [Congress] may
seek to conceal it” and tell banksters they’re free to steal again.
***
Time Magazine called Tim Geithner a “con man” and the stress
tests a “confidence game” because those tests were so inaccurate.
William Black said:
How do you think we did the stress tests? Like doing a
stress test on an airplane wing, but you don’t actually have airplane wing. And
don’t know what airplane wing is made out of. It’s a farce.
And see this.
And while stopping the rising tide of unemployment is key to
reversing the financial crisis, the government hasn’t done much at all to
staunch the loss of jobs.
For example, as I wrote last August:
The government has committed to give trillions to the
financial industry. President Obama’s stimulus bill was $787 billion, which is
less than a tenth of the money pledged to the banks and the financial system. [106]
Of the $787 billion, little more than perhaps 10% has been spent
as of this writing. [107]
The Government Accountability Office says that the $787 billion
stimulus package is not being used for stimulus. [108] Instead, the states are in such dire
financial straights that the stimulus money is instead being used to “cushion”
state budgets, prevent teacher layoffs, make more Medicaid payments and head
off other fiscal problems. So even the money which is actually earmarked to
help the states stimulate their economies is not being used for that purpose.
Indeed, much of the $787 billion was earmarked pork [109], not for anything which could actually
stimulate the economy. [110]
Mark Zandi – chief economist for Moody’s – has calculated which
stimulus programs give the most bang for the buck in terms of the economy:
But very little of the stimulus funds are actually going to
high-value stimulus projects.
Indeed, as the Los Angeles Times points out:
Critics say the [stimulus money reaching California] is
being used for projects that would have been built anyway, instead of on ways
to change how Californians live. Case in point: Army latrines, not high-speed
rail.
***
Critics say those aren’t the types of projects with lasting effects on the
economy.
“Whether it’s talking about building a new [military]
hospital or bachelor’s quarters, there isn’t that return on investment that
you’d find on something that increases efficiency like a road or transit
project,” said Ellis of Taxpayers for Common Sense.
Job creation is another question. A recent survey by the
Associated General Contractors of America found that slightly more than
one-third of the companies awarded stimulus projects planned to hire new
employees. But about one-third of the companies that weren’t awarded stimulus
projects also planned to hire new employees.
“While the construction portion of the stimulus is having
an impact, it is far from delivering its full promise and potential,” said
Stephen E. Sandherr, chief executive of the contractors group.
It’s unclear how many jobs will be created through the
Defense Department projects. Most of the construction jobs are awarded through
multiple award contracts, in which the department guarantees a minimum amount
of business to certain contractors, and lets only those contractors bid on
projects.
That means many of the contractors working on stimulus
projects already have been busy at work on government projects.even the
stimulus money which is being spent [112]
David Rosenberg writes:
Our advice to the Obama team would be to create and
nurture a fiscal backdrop that tackles this jobs crisis with some permanent
solutions rather than recurring populist short-term fiscal goodies that are
only inducing households to add to their burdensome debt loads with no
long-term multiplier impacts. The problem is not that we have an insufficient
number of vehicles on the road or homes on the market; the problem is that we
have insufficient labour demand.[113]
Donald W. Riegle Jr. – former chair of the Senate Banking
Committee from 1989 to 1994 – wrote (along with the former CEO of AT&T
Broadband and the international president of the United Steelworkers union):
It’s almost as if the administration is opting for a
rose-colored-glasses PR strategy rather than taking a hard-nose look at actual
consumer and employment figures and their trends, and modifying its economic
policies accordingly.[114]
As yesterday’s front-page story on ABC notes:
Even as many Americans still struggle to recover from the
country’s worst economic downturn since the Great Depression,
another crisis – one that will be even worse than the current one – is looming,
according to a new report from a group of leading economists, financiers, and
former federal regulators.
In the report, the panel, that includes Rob Johnson of the
United Nations Commission of Experts on Finance and bailout watchdog Elizabeth
Warren, warns that financial regulatory reform measures proposed by the Obama
administration and Congress must be beefed up to prevent banks from continuing
to engage in high risk investing that precipitated the near collapse of the
U.S. economy in 2008.
The report warns that the country is now immersed in a “doomsday
cycle” wherein banks use borrowed money to take massive risks in an attempt to
pay big dividends to shareholders and big bonuses to management – and when the
risks go wrong, the banks receive taxpayer bailouts from the government.
“Risk-taking at banks,” the report cautions, “will soon be
larger than ever.”
Without more stringent reforms, “another crisis – a bigger
crisis that weakens both our financial sector and our larger economy – is more
than predictable, it is inevitable,” Johnson says in the report, commissioned
by the nonpartisan Roosevelt Institute.
The institute’s chief economist, Nobel Prize-winner Joseph
Stiglitz, calls the report “an important point of departure for a debate on
where we are on the road to regulatory reform.”
The report blasts some of Washington’s key players. Johnson
writes, “Our government leaders have shown little capacity to fix the flaws in
our market system.” Two other panelists, Simon Johnson, a professor at MIT, and
Peter Boone of the Centre for Economic Performance, voiced similar criticisms.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim
Geithner “oversaw
policy as the bubble was inflating,” write Johnson and Boone, and “these same men
are now designing our ‘rescue.’”
The study says that “In 2008-09, we came remarkably close to
another Great Depression. Next time we may not be so ‘lucky.’ The threat of the
doomsday cycle remains strong and growing,” they say. “What will happen when the
next shock hits? We may be nearing the stage where the answer will be – just as
it was in the Great Depression – a calamitous global collapse.”
***
Frank Partnoy, a panelist from the University of San Diego,
claims that “the balance sheets of most Wall Street banks are fiction.” Another
panelist, Raj Date of the Cambridge Winter Center for Financial Institutions
Policy, argues that government-backed mortgage giants Fannie Mae and Freddie
Mac have become “needlessly complex and irretrievably flawed” and should be
eliminated. The report also calls for greater competition among credit rating
agencies and increased regulation of the derivatives market, including
requiring that credit-default swaps be traded on regulated exchanges.
With the Senate Banking Committee, led by Chris Dodd, D-Conn.,
poised to unveil its financial regulatory reform proposal sometime in the next
week, the report calls on Congress to enact reforms strong enough to prevent
another meltdown.
“Sen. Dick Durbin once said the banks ‘owned’ the Senate,” says
Johnson. “The next few weeks will determine whether or not that statement is
true.”
(Here is the Roosevelt Institute report.)
Heck of a job, guys.