How this essay got past The New York Times’s censors is an intriguing question, because it’s so chock full of disconcerting wisdom as to leave the average Times reader gaping, gasping and grasping desperately for the reassurance of convention. I’m just going to highlight some gems and make a few comments.
According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble.
Fannie and Freddie have received almost quarterly government bailouts, with only minimal reporting. To my knowledge, no public-sector unions have organized disruptive and frightening protests at the personal residences of these corporations’ executives.
A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs.
Public-sector unions in some states have gone to court to block furloughs for government employees. Not lay-offs; mere furloughs.
As we saw first in Dubai and now in Greece, it appears that governments’ response to the failure of Lehman Brothers is to use any means necessary to avoid another Lehman-like event.
This is something folks with what I call liquidationist tendencies have to get through their heads. When Hank Paulson and Ben Bernanke told Lehman’s CEO Dick Fuld no government rescue would be forthcoming — when they gave him the pistol and indicated, “you know what to do” — they unknowingly triggered a panic that will ring down for decades as negative incentive for virtually every financier or policymaker in the world. “Not another Lehman” is the operating principle of finance capitalism now and for the foreseeable future. Contrary to what its promoters are saying, the financial reform bill recently passed by the Senate, and likely to be signed by President Obama within a few weeks, does not do away with Too Big to Fail; it consolidates it as hard and fast policy.
Subdued reported inflation [the author makes clear that he think reported inflation numbers are bogus] also enables the Fed to rationalize easy money. The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices. The Fed hopes that by denying savers an adequate return in risk-free assets like savings deposits, it will force them to speculate in stocks and other “risky assets.” This speculation drives stock prices higher, which creates a “wealth effect” when the lucky speculators spend some of their gains on goods and services. The purchases increase aggregate demand and lead to job creation.
A very smart friend told me well over a year ago that in his mind the only thing that could substantially raise equity prices is inflation. Now inflation, as every economics textbook will tell you, usually attacks savers directly; here our plutocracy has developed an ingenious method of doing it more indirectly. But that is not all:
Easy money also aids the banks, helping them earn back their still unacknowledged losses. This has the perverse effect of discouraging banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread, then they have little incentive to lend to small businesses or consumers.
Nor is that all:
Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization.
That’s brilliant. This feature had never quite crystallized for me. As another friend just put it to me, “One intriguingly incestuous aspect of a lender the size of USG is that when it charges less for interest it also has to pay less for interest.”
There is a group of people that blames the government for this mess; there is another group that blames Wall Street. Constructive understanding will come when they all, as the kids say, embrace the healing power of “and.”