James K. Galbraith is an economics professor at the University of Texas at Austin, where he holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations. He writes about economics for numerous publications. His latest book, “Inequality and Instability: A Study of the World Economy Just Before the Great Crisis” (Oxford University Press, 2012), is available here.
Like many Americans, I was doing everything I could to help elect Barack Obama. It wasn’t all that much—but as an economist in Texas, I had some authority on the thinking of former Senator Phil Gramm, John McCain’s chief economic adviser. I’d made the front page of the Washington Post describing Gramm as a “sorcerer’s apprentice of financial instability and disaster.” (Gramm, with a certain sense of humor, denied it.) For that, and for my experience drafting policy papers, I was in contact every few days with Obama’s economists.
To economists in my own circle, it had long been clear that the financial crisis then unfolding was an epic event. We had watched the subprime mortgage disaster build up. In August 2007 we knew the meltdown had begun. Bear Stearns had failed. But for reasons that have to do with the pace and rhythm of politics, these issues remained on the back burner, the campaign being dominated by health care and the Iraq war. For those of us on the outside, it was hard to know whether the insiders understood what was coming.
And so it seemed a good idea to raise an alarm. But here you confront the Cassandra paradox: if you predict disaster, no one believes you. Economics is rife with alarmists; if the wolf really is at the door, it’s better to have a whole chorus saying so.
For this I had the help of the Charles Leopold Mayer Foundation for Human Progress, which convened a meeting in Paris. When you invite twenty friends to spend a few days in Paris in June, it’s rarely hard to persuade them to come. Among the Americans in the group were the editors of two important journals, a former United Nations financial expert, and the former federal regulator who had blown the whistle on the savings and loan fraud. There were also senior specialists from France, Britain, India, China, and Brazil.
The meeting had no political connection, but one result was a long memorandum, which I sent in early July to the Obama team. I do not know whether, or by whom, my memo was read. Not the slightest word came back.
Yet the memo disproves the notion that nobody knew. To the group in Paris, three months before Lehman, what I wrote was obvious. It was our consensus view. What follows is an excerpt.
Bubbles are endemic to capitalism, but in most of history they are not the major story. In the nineteenth century, agricultural price deflation was a larger problem. In the twentieth, industrialization and technology set the direction. It was only in the information technology bubble of the late nineties that financial considerations including the rise of venture capital and the influx of capital to the United States following the Asian and Russian crises—came to dominate the direction of the economy as a whole. The result was capricious and unstable—vast investments in (for instance) dark broadband, followed by a financial collapse—but it was not without redeeming social merits. The economy prospered, achieving full employment without inflation. And much of the broadband survived for later use.
The same will not be said for the sequential bubbles of the Bush years, in housing and now commodities. The housing bubble—deliberately fostered by the authorities that should have been regulating it, including Alan Greenspan and Ben Bernanke—pushed the long-standing American model of support for homeownership beyond its breaking point. It involved a vast victimization of a vulnerable population. The unraveling will have social effects extending far beyond that population, to the large class of Americans with good credit and standard mortgages, whose home values are nevertheless being wiped out. Meanwhile, abandoned houses quickly become uninhabitable, so that, unlike broadband, the capital created in the bubble is actually destroyed, to a considerable degree, in the slump.
Securitization is a long-standing practice but the question is, at what point does it go too far? It should be clear by now that nonconforming home loans cannot be safely securitized, because the credit quality and therefore the value of the asset cannot be reliably assessed. Further, in the regulatory climate of recent years (where as William K. Black pointed out, political appointees brought chainsaws to press conferences), ordinary prudential lending practices broke down completely. The housing crisis was infected by appraisal fraud, a fact overlooked and therefore abetted by the ratings agencies. “No one looked at the loan package.” Now the integrity of every part of the system, from loan origination to underwriting to ratings, is under a cloud.
Fraud is deceit, a betrayal of trust. And it is trust that underlies valuation in a market full of specialized debt instruments, off-books financial entities and over-the-counter transactions. That trust has, as of now, collapsed. The result, as John Eatwell phrased it, is that financial crisis takes the form of market gridlock—a systematic unwillingness of institutions to accept the creditworthiness of their counterparties. This is, of course, especially grave where a counterparty has no direct resort to a lender of last resort—and so the crisis naturally erupts in parts of the system that are outside the direct purview of central banks. Deregulation is, in other words, a vector of financial crisis.
The message of all this for the Obama presidency is fairly clear. No one in the group expects the financial crisis to have disappeared, or even to be under stable control, by January of 2009. At that time there will no doubt be immediate priorities: more fiscal expansion, fast action against the wave of home losses to foreclosures, plus fast action against financial speculation in commodities would seem as of now to head the “to-do” list. But the financial problems will not go away. And that means that a seemingly benign credit expansion, such as got underway for Clinton in 1994 and carried him through his presidency, is not in the cards for Barack Obama.
Given the fact that vacated and unsold houses (unless destroyed outright) stay in inventory for a long time, there is little prospect of a housing recovery, or that a new expansion of loans to the broad population will be collateralized by home values any time soon. Recovery from this source should indeed not be expected within the policy horizon of the next presidential term. Something could happen, for reasons largely unforeseen, as it eventually did in the 1990s. But to bank on such a happy development would be an act of faith. More likely, there won’t be good news on the growth front in 2009, 2010, or 2011. Achieving economic growth in some other way will therefore be an overriding policy preoccupation.
The only other known way is fiscal policy, and this raises two questions: how much fiscal expansion will be needed, and over what time horizon?
Calls are now being heard for a “second stimulus package”; these reflect the fact that the first stimulus package [the Bush package of Spring 2008], while effective, was necessarily short-lived. But the same will be true of the second stimulus package. And once the election is over, will the coalition presently supporting short-term stimulus stay in place? If not, what then?
If the above analysis is correct, the political capital of the new presidency risks being exhausted, quite quickly, in a series of short-term stimulus efforts that will do little more than buoy the economy for a few months each. Since they will not lead to a revival of private credit, every one of those efforts will ultimately be seen as “too little, too late” and therefore as ending in failure. Meanwhile a policy of repetitive tax rebates can only undermine the larger reputation of the country; it is unlikely that the rest of the world will happily continue to finance a country whose economic policy consists solely of writing checks to consumers.
What is the alternative? It is to embark, from the beginning, on a directed, long-term strategy, based initially on public investment, aimed at the reconstruction of the physical infrastructure of the United States, at reform in our patterns of energy use, and at developing new technologies to deal with climate change and other pressing issues. It is to support those displaced by the unavoidable shrinkage of Bush-era bubbles but to do so efficiently—with unemployment insurance, revenue sharing to support state and local government public services, job training, adjustment assistance, and jobs programs. It is to foster, over a time frame stretching from five years out through the next generation, a shift of private investment toward activities complementary to the major public purposes just stated. It is to persuade the rest of the world that this is an activity worthy of financial support.
As noted, this strategy will have to be developed in a hostile environment of unstable oil and food prices. However, it would be a grave mistake to interpret that unstable price environment as “inflationary,” as leading toward a sustained or inertial inflation. In particular, money wages have not changed or caught up; real wages are therefore falling—and quite sharply—in view of the commodity price jumps. As Ben Bernanke acknowledged in a recent speech, nothing in the present movement of price indices can be attributed to wages. In Bernanke’s choice phrase, “the empirical evidence for this linkage is less definitive than we would like.”
It is Democratic Party mantra that Presidents do not comment on the actions of the Federal Reserve. But in this situation, comment is needed. An appropriate comment on the larger role of monetary policy does not amount to interference in routine decision-making, e.g., of the Federal Open Market Committee. Rather, it should reflect the core reality: the Federal Reserve and other financial regulatory agencies failed in their responsibilities in the past decade and now they must take up those responsibilities again.
The entire point of a regulatory system is to regulate. It is to subordinate the activities of an intrinsically unstable and predatory sector to larger social purposes, and thus to prevent a situation in which financial interests dictate policy to governments. That is, however, exactly the situation we have allowed to develop. The job of the Federal Reserve and of the other competent agencies in the next administration must be, in part, to reestablish who is boss. Specifically, there needs to be a very thoroughgoing revamping of the financial rules of the road, to dampen financial instability, deflate the commodity bubble, reduce the enormous monopoly rents in the financial sector, set new terms for credit management, and generate productive capital investment where it is most required. This is in large part the Federal Reserve’s job, though it has strong inter-agency and international dimensions.
These measures cannot be viewed, or undertaken, in isolation from the international financial position of the United States. Obviously, a successful speculative attack on the dollar would severely disrupt the orderly implementation of this or any other strategy. Equally obviously, a unilateral defense of the dollar via a campaign of high interest rates would severely aggravate the problems of the real economy.
The way out of this dilemma—the only way out—lies in multilateral coordination and collaboration: a joint effort by the United States and its creditors. And this means that the next administration must return, rapidly and with a credible commitment, to the world of collective security and shared decision-making that the Bush administration has been at pains to abandon. An orderly disengagement from Iraq would send a major signal of the intent of the U.S. government to play, in the future, by a different set of rules.
Collective security, in short, is not merely a slogan. It is the lynchpin of our future financial and economic security—security that cannot be assured by any unilateral means. Only a collective effort will keep America’s creditors committed to the stability of the dollar-reserve system for long enough to effect the next round of economic transformation in the United States. Conversely, continued failure to appreciate the financial and economic dimensions of unilateral militarism is one certain route toward the failure of the next administration’s economic and financial strategies. The two largest issues we face—how to maintain American economic leadership in much of the world and how to manage American military power—cannot be separated from each other.
Collective security is, however, also more than simply a way of reducing risks and instabilities. It is the foundation stone for many physical transformations of the economy to come. It is obvious, in particular, that the military basis of international power on which the United States continues to rely is completely out of date, and has been for decades. As Iraq has demonstrated to everyone including the professional military, military power alone cannot deliver stability and security at all—let alone at an acceptable human and social cost. Yet parts of the military establishment continue to develop, and to harbor, the technological talent and capacity for problem solving which every aspect of our energy problem now needs. Shifting the basis of our security system away from one based on military equipment is a key step toward making those resources available.
And the same is true for other countries. China, for example, has long made energy choices favoring coal partly because the resulting power plants are diffuse and militarily expendable. In a secure world, that country would be far more willing to develop its vast hydroelectric potential, as the then-invulnerable United States did in the 1930s. Hydropower is carbon-clean, but militarily exposed. A stable reduction of military fears is a key step toward opening up markets that can potentially permit resolution of collective problems on the grand scale.
In short conclusion: from the beginning, the Obama presidency will face acute situations requiring immediate action, especially in oil and housing. It should aim for early victories in these areas as the foundation stone for intermediate- and long-term programs. For the medium term, institution building and the restoration of competent and effective regulatory power over the financial system—both national and international—will be key.
For the long term, the goal should be nothing less than the transformation of our energy base and the solution of our environmental challenges—the rebuilding of America. And that can be done only in an international financial climate made possible by a return to multilateral decision-making and a commitment to collective security. The American people are ready for this. President Obama should be prepared to explain that leadership in a world community—leadership of collective action on the grand scale—is America’s true destiny. It is not in futile warfare, but in great endeavors, that a great nation finds its future, its purpose, its place in history, and prosperity, as well as security, for its people.
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Do “Economists” actually create anything besides bad policy, but continue to pretend their good to save their own face?
Liberal Economists create more debt somehow defying logic/common sense they think digging the hole deeper will make it easier to get out. If I did this with my personal finances I would be bankrupt. America is in reality already bankrupt were it not for the almighty dollar being the world’s reserve currency we would have been forced to realize it already.
If I did this with my personal finances I would be bankrupt. LadyLiberty
Your mistake is in confusing a money issuer, the US Treasury/Fed combo, with a money user, yourself.
I have trouble understanding where this discontinuity arises. If LL earns a monetary income, she is also a “money issuer”. She can even “print” money by exchanging large bills for smaller ones, and small ones for pennies. Given that the system is so small, the effects of printing would become immediately apparent in that many more monetary units would now be needed to buy the same loaf of bread. In a larger system, it takes more time for the effects of excessive printing to become visible.
In fact, if we all produced undetectable counterfeit bills and fail to produce more real goods and services, we will still go ‘bankrupt’. In my view, the spirit of LL’s comment still stands: one cannot consume more than one produces, and trying to do so will prove ineffective.
“If LL earns a monetary income, she is also a “money issuer””
Nope.
Not even vaugely sorta kinda with double scare quotes on top. A money issuer doesn’t need to make or trade anything of value to create money.
Of course the -value- of said money won’t be the same if the money issuer starts to print without the economy growing appropriately at the same time. But that is a totally different issue and one that also doesn’t have a good way to be scrunched down into a personal finance metaphor that will give you any understanding of what is actually going on in macro economics beyond wishy washy econ 101 “supply and demand” examples that everyone is already familiar with.
The whole “macro economics is like balancing my checkbook” is complete nonsense and is a meme spread by the pro FIRE crew to obfuscate real problems with our system.
Repeat after me, NO country with a sovereign currency can go broke, only through political gridlock and instability can it really go broke. If a country does not have a sovereign currency( think EU ), it can go broke very easily.
Technically, this is true. But Zimbabwe proves that it is quite a meaningless, though beloved, technicality.
Credit creation is another source of money into an economy and a far bigger one too.
If governments wished to maximize their ability to spend without price solution then abolishing credit creation is the solution.
The only way in which debts (in the currency they control) of a sovreign issuer of a currency are a bad thing is that it’s a huge, massive blowjob to the rentier scum. Nearly all of that sweet, sweet interest paid on the debt goes to the idle rich and is one of the major ways they loot us all of resources.
It’s called capitalism. Welcome to it.
Baloney! Free markets have nothing to do with corporate welfare.
Sovereign government borrowing is one of the linchpins of the counterf**ting cartel, the banking system, and is fascist, not free market.
“Baloney! Free markets have nothing to do with corporate welfare.”
No market is ever truly free, not even under Laissez Faire economic policy. His point however was that capitalism will trend towards our current version of crony capitalism over time since the profit motive is favored above all else, even law, ethics, and morals.
He he he, that’s a good one.
Check out the numbers and charts:
http://zfacts.com/p/318.html
Other than FDR spending a butt load of money to win WW II, it looks like the Republican Presidents like to really run up the tab. Maybe they have liberal economists working for them.
Remember what Cheney said – Reagan proved debts don’t matter…
it looks like the Republican Presidents like to really run up the tab. Glen
That makes sense. The National Debt is completely unnecessary but it does provide a risk-free return to the rich and to the banks. It’s a deliberate scam going back to Hamilton in the US. He should have been shot. Oh, wait! He was!
“In short conclusion: from the beginning, the Obama presidency will face acute situations requiring immediate action, especially in oil and housing. It should aim for early victories in these areas as the foundation stone for intermediate- and long-term programs.”
Oh lordy Lord! Did Obama ever get it wrong! Hamp was abysmal and the cause for many unwarranted foreclosures. Harp was no different. Tarp was a joke and whatever might be implemented during his potential 2nd term will be no better since he shows no indication of wanting to take away banks’ power.
Better hope that The 99 have some traction…
It’s going to be a long next ten years… Unless, of course, an earthquake hit Fukushima. Completely within the realm of possibilities, considering the 4 recent earthquakes in the vicinity.
Or SoCal.
Well, there’s your problem – you were doing everything you could to help elect Barack Obama. Now that it is even more obvious than before his election that he is a schmuck, how about doing something to elect someone, Jill Stein, whose program is more likely to produce good results, ala Green New Deal …
Exactly, my good friend, exactly.
If Romney, or Obama, (and I won’t mention Paul) were elected, we’re pretty much doomed.
No excuses this time around, it’s Dr. Jill Stein or expect to be royally screwed for the forseeable future.
I know, I know, those belonging to the class of the eternally ignorant, who still are clueless about all of Obama’s anti-worker, pro-bankster appointments, will moan:
If we vote for anyone but Obama, Romney will be elected.
Whether it’s Obamney or Romobama, is of no consequence, it had better be Jill Stein or else!
“Whether it’s Obamney or Romobama, is of no consequence, it had better be Jill Stein or else!”
Wrong. If you are anything other than a white male, or care about who is appointed to the supreme court there is a huge difference in Obama and Romney.
Since there’s no rule of law, why does the Supreme Court matter?
Oh, and nice smear with the racist card. I was wondering when the Obama Fans would start doing that again.
Lambert, what is your problem with expectations of racism in this society. Obama is the obverse lesson of racism, the capacity of the United States to overcome its cultural conditions and elect a bi-racial, prominently Black looking American. It says more about us as a whole, than about him. We elected him, he did not crown himself or reveal himself as the word made flesh or whatever bug it is up your ass about race and some fantastic political condescension of voting for Obama like his winning was some corn flake breakfast prize for simpletons and guilty white liberals.
If you can’t do better than blurt out race card and Obama fan, you are just reinforcing this site as the place to go to understand Wall Street and to be completely disregard as unfathomable mystification of all things politic.
Jill Stein will not win, the republicans are throwing the election, and capitalism was coming apart at the seams when Obama was in Law School. See the lucky circumstance and dark cable part of the above article. He is more the default future occupant than anything else. As if anyone else would want to occupy the White House during this end of the world as we know it period. It’s not a choice between 2 evils when the game is fixed, and serious opponents do not have the stomach to contend for power during this disaster.
Tonight, the French president Hollande spoke live from Brussels and via translation on French24 TV, it was clear that there is momentum now spreading against continued austerity, war, pension “reform” and this gives Obama an international political condition to move more with stimulus and populist policies, even if they are minute distinctions without a difference. Small differences produce monumentally different consequences. 96% of the human genome is shared by apes and monkeys. That 4% difference sure looks alot more than 4% to me. But, it doesn’t matter about appearances, they are deceiving. Romney may seem identical to you compared with Obama, but they are only very similar, not identical. It’s those small differences that may prove to be any reason for hope, not hope and faith him, but in the differences. See GM bailout.
I noticed many of the directives for alternative energy and a 2nd stimulus did come to pass, but not in the pixie dust politics that you seem think should happen. Jill Stein could get elected and still find insurmountable political opposition to her policies. You know, you needed 67 votes to overcome filibusters in the Senate up until the 1960’s, which is what Johnson got to pass the civil rights bills. They then lowered the threshold to 60. Soon that will disappear. There needs to be landmark legislation to keep our world from collapsing. Obama is not the man to do. It will probably happen because of the awful pressure to change can no longer be contained. It won’t be because there is love for Obama, guilt over his skin color or swooning over his flowery oratory. It will happen because the alternative is certain widespread destruction of the social order from which there is no place left to run and hide, not even Singapore. He will just happen to be the guy in office when alot will come to pass. Hopefully, a full dose of reform to recover from this calamity.
You, know, you can answer me and I will not attack you with fart jokes or something along those or other petty, vulgar lines. The issues at stake are too important not to clarify this issue. And let me save you some time, here is a manual on Obama’s disappointment tenure so far:
“HOPELESS: BARACK OBAMA AND THE POLITICS OF ILLUSION” E
DS. JEFFREY ST CLAIR AND JOSHUA FRANK A major league pounding, point by point on policy failures, a whole lot of failures and short comings. I know his weaknesses, I just want to know the whole race card thing. Where are you coming from about that?
Paul,
i have to give you credit – you seem to have at least given up the “there are big differences between Obama and Romney!” routine that is soooo obviously nonsensical and settled on “small differences are important”, but methinks your slip is showing:
OTOH – “Small differences produce monumentally different consequences.”
OTOH – ” … this gives Obama an international political condition to move more with stimulus and populist policies, even if they are minute distinctions without a difference.”
So small differences can produce different consequences, but all we can expect from Obama are distinctions – WITHOUT differences ..
And – “There needs to be landmark legislation to keep our world from collapsing. Obama is not the man to do.”
So why not switch him for a woman who would?
“It will probably happen because of the awful pressure to change can no longer be contained.”
And it will be up to us to supply that pressure – by unequivocally signaling to the political class that we have “had it” with them …
“Jill Stein will not win”
If that is true, it won’t be because she can’t, but because folks like you persist in voting for schmucks ….
“Jill Stein could get elected and still find insurmountable political opposition to her policies.”
Oh, so she could get elected? Of course she would have political opposition – not least, perhaps, from folks like yourself, but that election would be a tipping point – the duopoly would be shaken at its core – their illusion of hegemony broken, and she could use the bully pulpit of the Presidency in a way that it hasn’t been used since Roosevelt – fireside chats become internet chats. And she would have enormous power and influence as executive in her appointments and directives, to her AG for example, as well as her function as Commander and Chief ….
Within 2 years of her election – if it seems that without a better Congress, much of the program she was elected for could not be fleshed out, those Congress critters would be toast, because the TINA meme would have been shattered …
Paul – we are where we are because the only folks who decided to think big were the 1%. It is time for the 99% to start thinking big ….
You cannot achieve what you cannot conceive – i can conceive of a better politics – join that effort and we can make it happen. The only reason to resist, it would seem to me, is that you would prefer things as they are …
Speaking of white males — as you were, speaking of Black-Americans, women, and Black-American women & Obama:
From an online bud’s email from several days ago:
THE OBAMA RECORD
Overturned: About a year and a month ago, President Obama went on national television supporting the firing of Black-American teachers in Chicago.
Fortunately, a federal judge ruled their firing to be unlawful termination.
Overturned: Sometime back, Shirley Sherrod was unethically dismissed from the Agriculture Department, and her unlawful termination was settled out of court to her satisfaction.
Overturned: The other week, Dr. Cate Jenkins, who was unethically terminated from the EPA under the Obama administration (she was a heroic whistleblower during the Bush administration), was reinstated to her position, with back pay, by a federal court.
Overturned: A U.S. District Court in New York has blocked provisions in last year’s Defense authorization bill that allow for military detention for terror suspects, throwing a wrench in the debate that will take place on the House floor Thursday.
District Judge Katherine Forrest ruled against the U.S. government and in favor of a group of civilian activists and journalists who had sued over the detention provisions in the 2012 National Defense Authorization Act, according to Reuters. The plaintiffs had said they feared being detained indefinitely by the law.
http://www.guardian.co.uk/commentisfree/cifamerica/2012/may/17/ndaa-section-1021-coup-detat-foiled
After he signed three “free trade agreements” — and is pursuing the Trans-Pacific Partnership, and appointed the three top jobs offshoring people in America (Diana Farrell, author of the infamous McKinsey report — claiming the more jobs appear from the offshoring of jobs? ? ? ? — and editor of the pathetic tome, Offshoring, and Reagan administration guy, Jim Kolbe, and GE guy, Jeffrey Immelt), and the endless attacks on habeas corpus, due process, ignoring the attacks on collective bargaining rights throughout the country, etc., you actually believe that drivel you espouse?
abe,
yoo, hoo – that SC bit is soooo lame – which of the 5 conservative Justices do you expect to retire or kick the bucket in the next 4 years? Unless one of them does it will still be a conservative court and in any case you are counting on O to pick “liberal” justices???
As far as “other than white males”, let me assure you there are plenty of those who are more than ready to jump ship – shucks, one of them is even running for Pres.!
The resolution of collective problems on a grand scale that I want is the committed, focused effort of us and every other country to clean up the environment. Swords to plowshares; aircraft carriers to ocean dredges.
Indeed.
“And what profiteth a man, if he win all the world, and lose himself, and do impairing of himself.”
“The two largest issues we face—how to maintain American economic leadership in much of the world and how to manage American military power—cannot be separated from each other.”
What happens if American policies come to be formulated so intelligently that they cease to be American?
Mel,
Your rhetoric is certainly confusing. Is that a symptom of your being confused to boot, or merely the result of your restating other people’s confusion?
Er, no? And have you stopped beating your dead horse?
Meaning, that I think what Mel is arguing is that problems of planetary scope are unlikely to be solved from the perspective of a nation-state, especially an imperial one.
The 1%, being trans-national, have their own solutions of planetary scope (some would argue that die-off is prominent among them), but localists and and permaculturalists and alternative economy people also have solutions of planetary scope.
Thank you. My way was more fun, but I guess more people will understand it now you’ve restated.
Leaving aside commentary on the rest of the article, I would like to focus on one paragraph:
“The entire point of a regulatory system is to regulate. It is to subordinate the activities of an intrinsically unstable and predatory sector to larger social purposes, and thus to prevent a situation in which financial interests dictate policy to governments.”
The paragraph continues with:
“That is, however, exactly the situation we have allowed to develop. The job of the Federal Reserve and of the other competent agencies in the next administration must be, in part, to reestablish who is boss.”
I cannot say which amuses me more: the idea that an administration (government) is more powerful than those that elected it, or that the elected administration would turn a deaf ear to the requests of the financial interests that funds its very election, year after year.
These two paragraphs expose two primary flaws in the thought here. The first is that governments and government structures are command/control centers that should command all aspects of an economy, through regulation or direct control.
The second flaw is that politics, power, and the election process should result in no post election reward or payoff for contributors, or at least none for the “wrong sort” of contributor.
Please note that the opposite of the first flaw is just as much a flaw. Zero government results in anarchy and abuse. In the second, it is just as wrong to expect patronage and favor payoffs after a successful election.
Where these flaws are significant is the underlying assumption by the author at the time period in question that Obama and related democrats and democratic organizations would develop the first flaw and the seocnd could not possibly apply to them, as if the “D” affiliation was a mystic totem for uncorruptability and virtue.
Given the events of the last 3 years, plus the HIGHLY amusing support by the financial industry for Obama, as he publicly denounces M&A firms publicly but then has a $38k a plate fundraiser with his pals from Blackrock, and one of his major bundlers this year is a senior VP with Bain, and was directly responsible for the shutdown of that plant in 1992…but I digress.
“D” or “R” appelations don’t mean jack in the discussion of virtue, corruptability, or patronage. To assume that a politician will not undertake any action except those that further their elections, fundraising, or further entrench the power that allows them to garner funds by bestowing competitive advantage through regulation is the only sane assumption left.
It is the power to regulate and bestow competitive advantage that is the source of power for corporations. They pay for elections, and they get results.
Last point:
Command economies were responsible for the death of about Two Hundred and Fifty Million (250,000,000) people in the last century.
Lesson still not learned, apparently.
Without disputing your 250,000,000 figure, I feel secure in accusing you of selective body counting. How many deaths in the same period were the result of policies and actions by governments and corporate actors in what you would consider free market systems?
Are you counting Nazi Germany, Mussolini’s Italy, Pinochet’s Chile as command economies. And how about Sweden or, for that matter Chile under Allende.
Some clarifications please?
“Without disputing your 250,000,000 figure, I feel secure in accusing you of selective body counting. How many deaths in the same period were the result of policies and actions by governments and corporate actors in what you would consider free market systems”
“Are you counting Nazi Germany, Mussolini’s Italy, Pinochet’s Chile as command economies. And how about Sweden or, for that matter Chile under Allende.”
Here’s the napkin list of command economies I’m referring to:
CCCP
Warsaw Pact Client states such as East Germany, Romania, etc.
China, both under Mao and now.
Germany under the Third Reich
Italy under Il Duce
Angola & similar African conflicts
Cambodia under Pol Pot
Vietnam, after revolution to present.
Burma, pre-liberalization
Cuba
Empire of Nippon during WW2
Frankly I was not considering the various South American events, but they do add to the body count. Thanks for mentioning them.
Please note that Fascism is just as much a command economy as Communism.
Also note that the body count includes those not only dead from internal programs, but war dead as well. This is very appropo to WW2 and African conflicts. To omit these would be a grave oversight, and akin to saying that Hitler was not responsible for the 20 million or so Soviet war dead during WW2, or the Nipponese were not responsible for Nanjing, etc.
You forgot France and Begium and Netherlands, and United Kindom, and United States. If you insist on including Cuba, then you need to include Canada too.
So, how about what you would consider “corporate actors” from reputedly “free market systems” that take direct command over the global weapon of mass destruction that is the US federal government?
Where are we now?
Aaaaand JTFaraday asks the million dollar question!!!
If I consider China a Fascist Command Economy, with all its supposed “free market” but no “Freedom”, what might I consider about a nation state that:
1. Has an increasingly less free market
2. Has competitive advantage bestowed by government
3. Has less “Freedom” every day
4. Has government entities that are slowly reaching TIA, as applied to its own citizens.
5. Is creating harsher and harsher penalties for resistance
Where are we, indeed!
In a democracy, each and every voter has one and only
one vote. Lobbying ought to amount to advice on policy,
advocacy of some policy, but never writing draft legislation. The distinction and separation between the governors and the governed seems to be in a quantum entangled state.
“Advice on Policy”, interpreted:
“Here’s $250k for your campaign. May we suggest that you implement policy X? Oh I haven’t given you the check yet? We really suggest you implement Policy X. Oh you will? Here’s the check, and there’s more where that came from for such an enlightened leader!”
Glass-Steagall Act=Soviet Gosplan
I knew there was a connection somewhere!
Regulation of business is just like a “command economy” which means that anyone who favors regulation of business really wants to kill 250-million people!
/Woody Woodpecker-type laugh…
Oh, good lord, bluntobj… do you feel better?
Honestly, you should install some windows in that tower.
How would you have written it? Do you think anything you said could be put in a memo to the president elect’s advisors?
Also, let me tell you something about a command economy, and what it can do. It can lift a billion Chinese people, and it can raise and army from nothing to being victorious fighting both theaters in the last world war.
It can get anything done if the will is there. The author was not suggesting that we turn pinko – it’s a case of extraordinary measures… that’s it.
Go back and look at what Roosevelt did when he was swept into office. He did exactly what you said can’t be done.
In fact, along with windows, get some books in your tower, too.
The equation “regulation = central planning” is one of the current propaganda smokescreens of the elite’s rightist loudspeakers. It’s simply asserted without explanation or assumed, and the author goes on to the sorry history that can be attributed to central planning, if you want to think that way, leaving the bullshit behind and keeping the controversy shallow. I remember a few orations in antebellum Congress, where the Southerner began his speech simply asserting that “slaves are property” and spent the next ten thousand words defending private property.
Regulation is law enforcement. It’s the same sort of regulation/law enforcement as traffic laws. And just like the roads, while the vast majority keep more or less to the rules, there’s always going to be assholes with attitudes who screw it up for the rest of us.
Indeed, it may be too optimistic about the moral fiber of the creeps who run business. The assumption is that the regulation, once published, will be followed as a matter of course. Voluntary self-regulation that doesn’t need step by step direction. The few who don’t make it are therefore easy pickings for audits and enforcement actions. But that’s old school, unsophisticated, and not the latest thinking. None of that Sunday School stuff for today’s globally aware executive. Loopholes are competitive advantages, according to all the business schools.
If it’s a dig at the credit functions of the Fed, that has nothing to do with regulation. Regulation is law enforcement. The magical thinking that is academic economics turned directly into political policy, and the credit level is a political policy, has nothing to do with preventing all the tricks of embezzlement, false promises, broken contracts, forgery, and frauds of all flavors, that are the normal attitude of people in finance. If they can’t be good people, they can be made to act like good people.
I know it’s expensive putting out memes that keep people away from collective actions, and we should all show skepticism when false equations show up. If nothing else, it gives work to writers in the PR firms.
“Regulation is law enforcement. It’s the same sort of regulation/law enforcement as traffic laws.”
No, it’s not. A law is passed by a legislative body in code or statue. A regulation is developed by an agency, ostensibly within a legislative mandate to control or monitor an activity. The development of a regulation, its enforcement, and how it grows/changes is not part of the original law establishing that agency or scope of control.
Your post is not logically consistent. Your comment that zero government results in anarchy and abuse suggests that you are attempting to occupy a middle ground – but by equating Galbraith’s call for regulation with support for a command economy, you are denying that any such middle ground exists.
Before you start trying to point out flaws in Galbraith’s logic, I suggest you attend to your own.
Interesting. Everyone appears to miss the point about command economies.
The article’s author, in every suggestion, has a solution based on more regulation/control.
Where are the suggestions about eliminating the underlying causes, such as phantom credit creation, corporations hiring former regulators, lobbying, the ability for government to create competitive advantage in the first place? Or how about actually opening criminal fraud investigations and trials? Was that mentioned?
Instead, what is the idea? More control, more regulation, more regulators, more of no criminal enforcement, more more more more. Let me put this in caps to emphasize the idea:
EVERY COMMAND ECONOMY STARTS SMALL AND GROWS.
So yes, more regulation does equal command economies in time. That’s the point about lessons not learned.
bluntobj– Your reasoning skips several steps, and is therefore incomprehensible, or worse, to me. Your argument is yet another version of “both sides are imperfect, therefore they are both equally corrupt and misguided”. This is totally unhelpful nonsense.
Galbraith and company were prescient. You seem to be good at proclaiming everyone else stupid, but totally cynical and worthless to read.
Please let me know when you have something constructive and less arrogant to say…
“Galbraith and company were prescient. You seem to be good at proclaiming everyone else stupid, but totally cynical and worthless to read.
Please let me know when you have something constructive and less arrogant to say…”
I had to cross post this comment from the ‘99% of enforcement actions” thread from yesterday. My consistent posting of a criminal enforcement, strict liability, and laws over regulations approach applies to your statement, and this type of solution remark has been posted in these comment sections by me fairly regularly over the past couple of months.
Oh, and thank you on the lesson of arrogance. I will think about your example.
Here’s one of my comments on 5/23:
“Criminal Laws, however, are much more interesting as a tool to moderate behavior.
““In other words, if the company has already admitted guilt in a criminal proceeding, where the evidence required is usually much heavier”” (Quote from article)
And if all the resources were put into criminal investigations, with appropriate revisions to the criminal code for what were formerly civil offenses and incorporation of strict liability, you might moderate behavior much more.
Want a dedicated regulator? The criminal court system would be much more effective at ensuring financial fraudsters get the perpwalk and jailtime.
The concept of civil actions are becoming more and more irrelevant in the age of corpo-fascism.”
While I absolutely agree with the point that perps should go to jail and have their ill-gotten gains (not their legitimate gains, I don’t hate rich people necessarily) taken from them.
By the same token, Glass-Stegal prevented this from happening for more than 50 years and it took less than 10 years from its repeal to have us looking into the yawning chasm of the end of Western Civilization as we know it.
Yes, I would classify Glass-Stegal as a law. It affirmatively said that the depository banking and investment banking shall be separate operations.
Strict, not open to interpretation. That’s why it worked, and that’s why they had it repealed. Financial and corporate systems were designed with the hard limitation.
Laws designed to control financialization would work much the same way, would not be open to interpretation, and would be full of “shall nots”, and enforcement would not be a matter of opinion, but of fact.
Much like the constitution, financial laws work best when there is no room for interpretation. It is what it is.
Neither a Republican nor Democrat be.
“Neither a Republican nor Democrat be.”
/Thread
I know precisely why no one on BHO’s team read this, and certainly not himself.
It’s too long, no clear message, no elevator speech. Economists need to understand that politicians and especially those who run campaigns are financial and economic illiterate. Galbraith should have sent up the distress flare. This was a weak attempt at making a case (and coal in China, wtf?)
On the nose, snowedin. Right on the nose. If academics could just speak english (or french or german or russian or chinese …) how much pain could we avoid?
Same problem with global warming, GMO and many other scientific issues that are killed by lobbyists that know how to use bullet points.
This writer challenges Galbraith and other economists who assert a lack of demand and inequality are at the root of the crisis. He instead sees these conditions as being symptoms of a deeper crisis.
http://thenextrecession.wordpress.com/2012/05/21/inequality-the-cause-of-crisis-and-depression/
An interesting, well-written article. Thanks.
Bubbles are not endemic to “capitalism”. Bubbles are endemic to societies in which the money issuing power has been appropiated – usurpated formally, as it happened in England through the coup d´etat of William of Orange and the creation of the Bank of England swindle- by a private monopoly group within that society. Hence, as early as the Manu Code, the heaviest penalty of all the law book was given to the agents of the city that created ledgers entries in their books for their own profit thus usurpating the city power they represent. The penalty: Have their arms and leggs cut with a saw.
RE:
“Bubbles are not endemic to “capitalism”. Bubbles are endemic to societies in which the money issuing power has been appropiated – usurpated (sic) formally, as it happened in England through the coup d´etat of William of Orange and the creation of the Bank of England swindle- by a private monopoly group within that society.”
————————————–
In what conceivable “system” that includes people as decision-makers is it possible to reliably and indefinitely avoid the eventual circumstance of “societies in which the money issuing power has been appropiated – usurped formally ?
Or, in other words,
Bubbles are endemic to ‘capitalisms’–if, for no other reason than that people are endemic to capitalisms.
“Bubble” tendencies are a feature of and a factor in any economic behavior which is ulitmately either directly or indirectly dependent on human agency.
By focusing on “capitalism,” as though this is some sort of “thing” that exists “out there”, apart from the people who are inextricably bound up in it (in all its varieties), you miss the essential part of human psychology in markets and bubble tendencies.
People are at the root of bubbles because human habits of thought are inevitably susceptible to the psychology of bubbles in markets–whatever their other characteristics.
and without central banks there can be no credit creation. Americans have fought against central banking throughout our history and every time we eliminated them (we are now on our third version), the economy withered. Credit creation without regulation will create bubbles, there is no doubt about that but without credit creation, small businesses cannot be born, grow and succeed. That is what we face now with the current credit contraction, a jobless recovery.
It is to subordinate the activities of an intrinsically unstable and predatory sector to larger social purposes, James K. Galbraith
Why not simply replace it with an intrinsically ethical and thus stable and non-predatory sector?
Are we too dumb and unimaginative to do so and even lacking in the faith (See Skippy) to think it is possible ?
The gold bugs are waiting in the wings. Unless we want to be crucified on a cross of gold again we’d best start thinking of an ethical alternative.
The anti gold theory is interesting to say the least. If I was concerned about inequality why would I want any entity, such as the government, to devalue people’s wealth?
Why would I rather have a currency that allows counterfeit, such as fiat?
I am confused as to whether the ask is to end inequality or to take from others?
Our goal should be restitution for theft and the abolition of the system (credit creation) that permits it.
snowedin says it exactly:
“I know precisely why no one on BHO’s team read this … too long, no clear message, no elevator speech.”
Points are well-intended, but needs CliffNotes editor. Easier to describe the (by then obvious) problem than to frame a strategy gets it fixes.
Please no more “reign in the banks” and “homeowners are hurting” or “more multilateralim”. Nothing wrong with the sentiment. But, what, specifically should be the our top 3 steps to cause change?
I agree. It’s journalistic smoodge. The kind of thing that got Ezra Klein’s once and former liberal feel-good career going.
I don’t know. Maybe somebody needs to go take a refresher course in their local public policy school. Or something.
To underline my disdain:
http://www.youtube.com/watch?v=1XHcPYorSJw
yeah I’d guess every president or candidate gets a few US Postal mail bags full of stuff like this from cranks all over the US. Some of it is probably illustrated with emotionally charged doodles and Cartesian graphs.
Probably most of it goes in the shredder.
Of course Dr. Galbraith isn’t your average do-it-yourself econ crank (like most of us ahhahahah ahah who nevertheless seem to know more than most e-conn o mists) — but still, it’s a bit of sleeping pill getting through it as it wanders around, and anyone who read the news in 2006 and 2007 and had blood circulating through their brain saw the crisis coming.
Even the ones who say that no body could have seen it coming — even they saw it coming. But they lied to themselves and blew so much smoke, peddling their own wallet-stuffing fee-generating nonsense, that they convinced themselves that 2 + 3 = whatever brought in the most money. And they even began to believe it with the part of their brain that fakes and tricks, while the part of their brain that knows and sees, it went into a coma.
QED
“What is the alternative? It is to embark, from the beginning, on a directed, long-term strategy, based initially on public investment, aimed at the reconstruction of the physical infrastructure of the United States, at reform in our patterns of energy use, and at developing new technologies to deal with climate change and other pressing issues. It is to support those displaced by the unavoidable shrinkage of Bush-era bubbles but to do so efficiently—with unemployment insurance, revenue sharing to support state and local government public services, job training, adjustment assistance, and jobs programs. It is to foster, over a time frame stretching from five years out through the next generation, a shift of private investment toward activities complementary to the major public purposes just stated. It is to persuade the rest of the world that this is an activity worthy of financial support.”
Yeah yeah yeah. the administration knows this. Republicans have and will fight this tooth and nail until the end of time. Democrats spend their time fighting amongst themselves. Occupy has no representation in government and supports no one. You can’t change a system from the outside unless there is all out bloody revolution. And who wants that? So we’re all fucked. Stop wasting time on conspiracy theories or cute inaccurate “simple” solutions. Stop worrying about obesity or how much your neighbor makes, if their skin is a shade lighter or darker or if they paint their house purple with polka dots. Until the 99 percent elects people that will stand together for the 99 percent at the local and congressional level everything else is a waste of time and breath.
Galbraith was indeed prescient about the crisis. Of course, there were a lot of us in 2008 who had the popcorn out, watching and wondering which financial event was going to topple the whole house of cards. It’s interesting the what would now be called deficit dove approach he takes toward addressing the crisis. Perhaps MMT had not really caught on by that point or Galbraith was tailoring his writing to his audience. Of course, the US sovereign in its currency can finance its deficits without debt and can pay down those debts it chose to acquire as they come due without incurring new debt.
Obama never was a progressive. That was common knowledge among progressives from the beginning. There was an initial perception that he was still someone progressives could influence and do business with. I know it was upon that basis and to put the Bush years behind us that I supported Obama for the first half of 2008. This was lesser evilism at work. By July 2008, the month following the report Galbraith extracts, with Obama reneging on his pledge to fight the FISA Amendments Act, an act which gave immunity to the telecoms for years of collusion in illegal, large scale Bush Administration wiretapping, I had had enough of lesser evilism and Obama, and broke with him. As the events of the four years since have amply demonstrated, it isn’t just that the lesser evil is still evil. It’s that the lesser evil really isn’t very different from the greater evil. I mean think about that. If good people will support the lesser evil, what incentive is there for the lesser evil to remain lesser?
In 2012, we have the same false choice we had in 2008 between the lesser of two evils. We have two pro-corporatist, pro-1%, anti-99% candidates. One seeks to hide his extreme anti-progressivism, the other, his extreme conservatism. The first thing to understand is that this is not a choice for the 99%. It is a suicide pact. We should stop acting as if this is the only choice we have. There are others, and we should start choosing them.
This year has a similar feeling to 2008.
I was looking back at 5 years of S&P performance: http://finance.yahoo.com/echarts?s=^GSPC+Interactive#symbol=^gspc;range=5y;compare=;indicator=sma%28150,200,275%29+volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; and it occurred to me that we could have another election season where the equities markets dive and where both parties are panicking the people and pushing some hard sale on them (like TARP last time). I forgot about the panic occuring right around the election.
“Events, dear boy, events”.
If you click through to the chart (from Krugman, ok, ok) you’ll see that The Greatest Orator Of Our Time and that loon, John McCain were running neck and neck until Lehman, at which point The Lightbringer pulled ahead and didn’t look back — presumably because people thought that “The Democrats are better on the economy” (and what a surprise they got, eh?)
I’ve often wondered, with no real evidence to back it up, whether Lehman wasn’t really an October surprise to drag America’s First Black Fascist President over the finish line, instead of some kinda horrible accident. After all, it’s not like the powers that be couldn’t have bailed Lehman out, as they did both before and after Lehman.
That’s interesting–I had never read Ecclesiastes 9:11.
Good post from back then.
Krugman is corralling people into the chance tunnel. But that was a good chart.
I don’t remember Lehman being cited as the main cause in real time. I remember being told it was a systemic issue and that Obama and Bush and McCain et al. were going to save the day by saving the banks. In fact, reading the News Summary from the News Hour on September 15, 2008, there is obviously a focus on Lehman, but also Merril Lynch, as well as the system-wide concerns and a broad market selloff. http://www.pbs.org/newshour/news_summaries/2008/09/summary_15.html
But I suppose it does seem *someone* may have pushed Lehman into bankruptcy and that is what caused the dominos to fall . . . Like most of the official stories I’m dubious and haven’t seen much critical analysis of the how and why this incident occured when it did. And I wouldn’t be surprised if the official story bears no resemblence to the truth.
Lehman was where the financial crisis entered the political system (meaning the “electoral” political system with the horse race, Congress Critters, stories in the News section instead of the Business section, etc. I can be said to know, since I was in the political blogging world then, and followed all this daily for months (as best I could!). Lehman is how I found NC; I had no idea blogs like this existed.)
The result of Lehman was TARP, which is extremely handy as a means of distraction, since (a) it’s where the financial crisis first became the object of attention for ordinary voters (“the news”) and (b) TARP at $700 billion is trivial by comparison to the earlier trillions handed out by Treasury and the Fed. So, with “they paid it all back!” a useful veil is drawn over an episode that was a distraction to begin with. Adding — see here. I think you’ll like the image…
I view the whole episode more or less along the lines of an “emergent conspiracy” as a opposed to a theory. We have an elite opportunistically managing a portfolio of political alternatives in near real time, having the advantage of “interior lines of communication” as a well-networked and relatively small number of players. Also, too, lots of money, which never hurts. (We might view Obama, Booker, and Deval Patrick — also managed by Axelrod — as items in a portfolio, for example. Who cares which one “wins,” as long as one of them wins? And all of them are “made” anyhow, as Stoller points out.)
Give the GOOOT the boot! But perhaps the GOOOT one knows is better than the GOOOT one doesn’t know.
Well said Hugh.
I’ll second that …
The problem to me now is simple, the problem was that I was completely wrong in supporting Obama for President and I will surely not make that mistake again. We have a President who is no more than a continuing of Bush on domestic and foreign affairs only pretending to be a Democrat.
I’m not sure that “real Democrat” is a useful conceptual category, at this point (any more than “real Republican” for that matter).
this can’t be emphasized enough… in what decade were democrats not imperialist enablers, racist thugs, or capitalist running dogs(haha)? this isn’t a partisan issue, nor was it ever… we just inherited the shortsighted, comfortable prejudices of our parents… i know it’s tough… everyone in my family accuses me of ‘electing bush’ by voting third party… and now the same thing again with romney… hell, im disowning them pretty soon
Well, Obama wiped Summers ass with this memo…..
C’mon, let’s be realistic. Summers’ nether parts are far too tender to be wiped with a memo such as this.
“Like many Americans, I was doing everything I could to help elect Barack Obama.”
Do economists believe that time is scarce? If so, why did you waste it electing yet another warmongering corporatist?
Stimulus has never worked in recorded history. The idea that it could solve a credit bust is sheer madness.
The insufferable conceit of central planners is as predictable as Barry starting more land wars in Asia.
“Stimulus has never worked in recorded history.”
Linky poohs? Data? Backup?
Just guessing, but US debt equaling 120% of GDP after DubDubII probably propelled the country through most of the decade of the sixties.
Has Krugman mentioned “accounting control fraud” in one of his columns yet?
Just asking.
I agree with Snowedin and the others who say that this article is poorly written, particularly if it was really a sort of action memo for presidential advisors. It is long, rambling, and contains little in concrete recommendations, though I will note that in the case of one of the few policy recommendations, get of of Iraq, Obama actually did this!
But the analysis is pretty good. One of my hobbyhorses is that commentators have unduly ignored the role of high energy prices in forcing the economic crisis (though there is substantial research documenting a strong correlation between high energy prices and recesssions in the past). This article mentions the role of high energy prices, so its better than most.
The article doesn’t use the words “peak oil”, and doesn’t draw the logical conclusion that if we are dealing with a permanent rise in the price of reousrce extraction, the world is beocming a less wealthy place. I’m sceptical of programs to “solve” what is really a predicament, not a problem.
The other blindspot of most commentators, this site excepted, is the role of corruption and fraud in creating this amount of economic damage. Actually, I think the eliets are well aware of the extent to which environmental stresses, resource crunches, and overpopulation has made the late twentieth century economic expansion unsustainable, and have taken to plundering their own economies. This would be the worse possible response, since the loot is in currencies that the amount of fraudulent activity will render near worthless in any event, plus if this is a long term resource crunch you can ultimately only escape the effects by moving to another planet. But if there was a chance of mitigation, the response of the last five years has thrown that away.
I would have recommended something along the lines of expansion of the welfare state to sustain the large numbers of people without paying work, repeal of just about all the important economic legislation of the last twenty years, winding up companies that are effectively or actually bankrupt, cleaning up the accounting, and promotion of smaller family sizes. And be honest about what you are doing.
Galbraith nails it — IN ADVANCE. He’s the best economist around, and proves that economics can be done right…
Dear Professor Galbraith,
Can I please get on your mailing list? Even if the White House won’t read/pay any attention to your memoranda, I’d sure like to.
I’m sure most at Naked Capitalism concur.