The Bailout and the Future
| Wed Nov. 18, 2009 9:22 AM PST
Paul Krugman writes about the knock-on effects of the government paying off all of AIG's obligations at 100 cents on the dollar:
Brad DeLong says that the loss of public trust due to the kid-gloves treatment of bankers has raised the probability of another Great Depression, because the public won’t support another round of bailouts even if it becomes desperately necessary. I agree — but I think the bigger cost is that we’ve greatly increased the chance of a Japanese-style lost decade, with I would now give roughly even odds of happening. Why? Because bank-friendly policies have squandered public trust in all government action: try talking to the general public about stimulus, and it’s all confounded in their minds with the deeply unpopular bailouts.
By itself, the AIG story would be damaging enough. But it’s part of a pattern — and that pattern has ended up undermining the economy’s prospects, big time.
It's surprisingly hard to disagree with this. The most optimistic take, I suppose, is that the economy will continue to recover slowly, there won't be another big shock that requires extraordinary government action, and we'll get out of this OK. And I suppose that's still the most likely scenario. But public anger over the bank bailout, which was blazing earlier in the year, hasn't really abated. Sure, the tea parties are mostly over, but anger over the bailout is still smoldering, and it's pretty likely to increase as we continue to see headline after headline about how happily Wall Street is recovering in the middle of a deep recession thanks to all those bailout dollars. Congress could tamp down some of this anger if it enacted some serious regulatory reforms over the next few months, but what are the odds of that? Call me a pessimist, but I don't think they're very good.
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Comments
It's Worse
Submitted by Dave Brown on Wed Nov. 18, 2009 9:34 AM PST.
The problem is we need another bailout, or two, or three. We haven't yet seen the worst of the collapse of commercial real estate, the FDIC will be broke by the third quarter of 2010, the Pension Benefit Guarantee Corp. is heading towards bankruptcy, and nearly all public pension programs are underwater. And yet there is no political will in Washington to step up and do the right thing (even if we could agree on what that is).
Looks like at the very least, Obama's plan of focusing on the deficit in 2010 is dead in the water.
"a policy of austerity at home to make the working class pay"
Submitted by tpx on Wed Nov. 18, 2009 10:18 AM PST.
The American state has unequivocally valued corporations over people. That is the pattern, which is sowing the decline in most Americans living standards. The only way another governmental economic stimulus might be popular is if it was a direct transfer of wealth from the finance industry, but even then many Americans would prefer the transfer of wealth come from hard working Chinese who earn $100 a month rather from the non-value adding American wealthy classes. But neither will happen. The plan is to pay for the financial crisis through a decline in median wages.
From the World Socialist Web Site's Jerry White:
"This increase in exploitation is central to the administration’s plans to restructure American capitalism on behalf of the most powerful sections of the financial elite. The ruling class is seeking to lift itself out of the ruins of its own economic crisis by transforming the US into a cheap labor platform to increase exports, and by carrying out a policy of austerity at home to make the working class pay for the bailout of Wall Street."
the right thing
Submitted by Anonymous (not verified) on Wed Nov. 18, 2009 10:24 AM PST.
I agree with you Kevin, and absolutely with Paul's opinion. Obama's handling of the bank bailouts, I predict, will be the equivalent politically of Clinton's attempt to lift the ban on the gays in the military. Remember how the latter, whether you agree with it or not, just immediately hobbled the Clinton administration? This was followed by the courageous and costly battle to raise taxes and get spending under control -- a battle that Clinton won, but just barely. It cost him the support of a chunk of Dems, and that combined with the "culture war" swing triggered by "gays in the military" I would argue cost him health care and contributed to the yielding congress to the Repugs.
Pass significant reforms of the financial markets? Puh-lease. It ain't going to happen. Obama had his chance on this 3/4 of a year ago back when reforms could have been imposed. People _wanted_ it, but Congress did not. Obama made the tactical choice to "work with Congress" because he wanted a stimulus bill and was already thinking about health care. Best not to piss off the deep pockets. Problem is, it cost his administration a LOT of goodwill. In fact, my predictions are that Obama will get health care passed and that will be it as far as really significant legislation. No cap and trade. No financial regulation...or only the weakest of changes. Sure, there will be important things done (closing of Gitmo, winding down Iraq), but aside from health care, I don't see any legislation getting done that changes the fundamentals of our economy or political dynamic.
Obama got rolled, and he is
Submitted by Anonymous (not verified) on Wed Nov. 18, 2009 10:38 AM PST.
Obama got rolled, and he is paying for it. I doubt that he will ever overcome the perception that he is weak.
I've heard stories that the
Submitted by Anonymous (not verified) on Wed Nov. 18, 2009 10:56 AM PST.
I've heard stories that the Bay of Pigs was a planned time bomb laid by the Eisenhower era CIA for JFK. And I've wondered if TARP, et. al., were similar time bombs set ticking by Paulson.
The flaw in the logic was that it was Obama who chose so many Goldman Sachs douchebags and then so furiously bent over for them and shoved the country on it's hands and knees for Goldman Sachs.
Let's not forget that the
Submitted by neff (not verified) on Wed Nov. 18, 2009 11:01 AM PST.
Let's not forget that the electorate is made up of boneheaded maroons who think the bank bailout and the stimulus package are the same thing. (I remember some sign at the 9/12 rally that said something like "TARP: Are You Feeling Stimulated Yet?" -- mixing up the TARP bailout program with the stimulus.)
Most Likely Scenario
Submitted by Detroit Dan on Wed Nov. 18, 2009 11:12 AM PST.
It seems that there will need to be more government action, as unemployment has already reached critical levels and shows no signs of turning around in the foreseeable future. In fact, further jobs stimulus is the conventional wisdom, I believe. This will no doubt be controversial and allow the Republicans to stir up all the smoldering resentment.
I also feel that the most likely scenario with regard to the global economy is a double dip recession. Knowledgeable economists on China are talking about significant excess capacity and stockpiling of commodities. The financial underpinnings of global trade seem to be growing shakier as hedge funds and others borrow in one currency to make speculative investments in other currencies. More fundamental structural changes are needed to balance world trade and stabilize employment in developed countries.
The most likely scenario, then, is a double dip and political free-for-all. I hope the Obama Administration is ready for this and provides stronger leadership the next time around...
There's still time
Submitted by Anonymous (not verified) on Wed Nov. 18, 2009 11:57 AM PST.
The only real danger to a prolonged period of liberal ascendency is the kid glove treatment of the banks. I realize that Obama is a moderate and doesn't want to upset the apple cart, but he is also a politician. He had better get in front of the lynch mob forming around Wall Street, or the mob will devour him. It's good politics and good policy to take a whack at the investor class. More populism and pitchforks, please.
governance & populism
Submitted by MarkH on Wed Nov. 18, 2009 2:03 PM PST.
Sometimes the two do not go well together, sometimes they do. So far this year it seems to me the gov't has done well to ignore public sentiment to get the system back into a semblance of good order. However, as we saw yesterday in the press conference, Att. Gen. Holder may have some plans to prosecute and that will help people understand the gov't plans have not ignored their feelings or the need for justice. At least I hope that's what happens.
After that I think we'll see some financial regulations. whether they are seen as too soft or too harsh isn't as important as that they be good and not punitive or political. We'll have to live with the new regulations for some time and there's no room for politics or revenge or favoritism toward those who contributed to Obama's campaign.
Where the duty & effect of governance matches public sentiment it will be helpful for the moment. Where governance isn't understood or considered by the public it can go unnoticed, even if it will have a very powerful effect for many decades. That's just the way the cookie crumbles.
Usually politicians, especially House members, pay attention to the public sentiment. The system was designed for that. When they get carried away it can lead to problems. When they're unresponsive they get kicked out. It's a tough life I think. Senators and Presidents may have it easier, though not easy.
populism is not demagoguery
Submitted by tpx on Wed Nov. 18, 2009 3:24 PM PST.
Demagoguery is not populism. Populism is much closer to utilitarianism than to demagoguery, even if demagogues use the policies of populism to rally the masses. Populism so scares the corporate elites that they have waged a propaganda war against it similar to the one waged against socialism, making the word analogous to demagoguery in the American vernacular.
But this is simply one part
Submitted by MaynardHandley on Wed Nov. 18, 2009 12:00 PM PST.
But this is simply one part of the autistic idiocy of economics and economists, is it not?
These people claim to be understand (and the be able to predict) human behavior, and then they are surprised when it turns out that real humans feel resentment; real humans engage in violence; real humans learn from the past. Has any one of them ever read a history book?
What can one do in the face of such overwhelming stupidity except to ensure, in all times and in all places, that they are mocked as much as they deserve? When an economist steps up to speak at a public gathering, he should be booed. When one is quoted in the media or by a politician, questions should be asked about which astrologers and palm readers were also consulted, to provide a contrasting opinion.
There's Still Time
Submitted by Detroit Dan on Wed Nov. 18, 2009 12:31 PM PST.
I agree with the statement above that there's still time. The Obama Administration will get another chance, whether they want to or not.
For my Chinese economic insights, I consult http://mpettis.com/. Today's installment includes the following:
I have the sinking feeling that over the next two or three years I am going to find myself spending an awful amount of time thinking or writing about trade disputes between China and the rest of the world...
China’s development model has left it dangerously vulnerable to changes in US demand...
As other Asian exporters have been integrated with China’s export engine through the regionalization of industrial production networks, the vulnerabilities of the Chinese economy have turned into weaknesses of the East Asian region as a whole...
this lopsided debate within China between the domestic constituencies (more stimulus) and the internationalists (more rebalancing) reminds me, as I have often said, of the debate over the passage of Smoot-Hawley, which most Americans with knowledge and experience in international economics and finance, including President Hoover, thought at the time a dreadful mistake. Hoover was unable to stop its passage however because domestic constituencies were so strongly in favor...
In a global demand contraction, surplus countries are always the most vulnerable, as the US discovered...
China’s continued vulnerability to US overconsumption is a great source of weakness...
Projections of improving imbalances are almost surely wrong...
foreign observers have a mistaken view of what is happening in China. There is too much acceptance at face value that China has managed to escape the crisis fairly well...
I have been warning many of my investor friends that if there is a slowdown in Chinese growth over the next three or four years, not only will commodity prices drop to reflect the normal reduction in demand, but they may drop sharply to reflect the reversal of what I think is very significant stockpiling that has occurred in the past year or two, and which has distorted China’s import numbers. China has been buying lots of stuff which it hasn’t yet used...
I'll stop quoting now, although Mr. Pettis makes additional points which reinforce my belief that the conventional wisdom that China is leading the global economy to recovery is wrong...
Mr. Pettis is on to
Submitted by MacGruber on Wed Nov. 18, 2009 1:47 PM PST.
Mr. Pettis is on to something, something that a lot of people understand. Even more people understand this in Beijing, which explains why China is furiously working to expand its trade with other parts of the world.
It will also help explain why China will probably not sanction Iran; Beijing has too much invested in trade with the Iranians and doesn't want to upset that, or the flow of energy from Iranian fields.
China - Iran
Submitted by MarkH on Wed Nov. 18, 2009 2:08 PM PST.
Until the world can produce more of other kinds of energy we'll be stuck with awkward relationships with oil-producing countries. We Americans have realized for some time we need more independence. Clearly, as China's economy grows they too will need their own sources of wind, solar and whatnot.
Let's get on with it.
No one has bled
Submitted by Anonymous (not verified) on Wed Nov. 18, 2009 2:41 PM PST.
Obama will continue to suffer from the botched bank bailouts until they realize one thing. The public needs blood. It needs perp walks from Wall Street offices with bankers in handcuffs. It needs inditements, and above all it needs to see vividly on every channel every day that the powerful who caused this crisis are paying with their blood.
The average guy making 60K a year is barely holding on to his middle class life. He sees the stock market going nuts yet his health care premiums are going to rise this year, there will be no merit raise, and wonders what the fuck is going on.
Until we see the elite on their merry way to jail, there will be no recovery in the minds of middle america.
The public needs blood. It can either come from the bankers or the democrats and eventually Obama.
I agree with Mark H
Submitted by Omega Cenrauri (not verified) on Wed Nov. 18, 2009 2:55 PM PST.
Obama and Geithener probably followed a near optimal strategy for avoiding the current meltdown. But the optics is absolutely horrible. And the collateral damage from that optics, which is primarily a massive increase in distrust of government could have very severe, and longterm consequences. It would have helped to have forcibly nationalized a couple of banks, just to make the optics populist enough. Now trying to regain trust will be extremely difficult.
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