The Self-Imposed Limits of Reaction to a Crisis

October 10th, 2011 at 10:04 am

[As I promised yesterday, I wanted to elaborate on some of the points Ezra Klein raised in his WaPo article…and like I said, a kids soccer tournament slowed me down…the thing is, these kids stepped up their game like I never expected and won the tournament in the last minute of the second overtime!  Go, UNITED!

Anyway, this is a loooong post…but that’s a tribute to Ez Klein for writing such a stimulating [sic] piece.]

Ezra Klein has penned a fascinating account of the process, politics, and policy reaction to the Great Recession.  It’s a critical piece—given the current economy, how could it be otherwise?  But the critique is crafted with insight into the factors that led the government to under-respond to the crisis, and in this regard, Klein makes what could and should be an invaluable contribution.

He’s written a cautionary tale.  We should read this piece not just to look backwards about what we got wrong, but to figure out how to fix the process going forwards.

I’d like to add two points.  First, though Klein tightly summarizes what it is, specifically, that makes a financial recession so difficult to get out of, I’d like to flesh that point out a bit more.  If we learn nothing else from the economic pain we’re still going through, we should at least recognize the damage done by bubbles, especially debt bubbles, and ever more especially, housing debt bubbles.

Second, I’d like to think, from a former insider’s perspective, about Klein’s message (or at least, my reading of it): there’s a design flaw that causes our government to underreact to crises like the Great Recession.  In fact, there are a number of such flaws, some of which, like basic checks of concentrated power, serve us well in normal times.  But the flaw on which I focus below—the deep misunderstanding and irrational fear of budget deficits—is something that we can and should change.

Ezra starts from the insight that Rogoff and Reinhart warned anyone listening that recessions born of financial crises are particularly intractable to the usual counter-cyclical attack.  Why is that?

Debt and Its Specific Discontents

It’s not just about the deleveraging cycle, where firms and households resist spending and fail to respond to low interest rates as they’re rebalancing their assets and liabilities.  This is important, especially for households—we still have a 70% consumption economy, and when the household sector is more interested in paying off old debt than in current spending, we’re by definition stuck in an slog.

But I’ve come to view the deleveraging point as only one part of the problem, and one that’s actually hard to parcel out from the lousy jobs market, which is the main constraint on consumers.  The Fed’s debt service ratio—the share of income households are spending to service their debt—is the lowest it’s been since the mid-90s (though the fact that it’s still falling suggest the deleveraging cycle isn’t over).

I think the bigger problem is in the banks, and it’s born of that extremely combustible combination: debt and psychology.  When an equity (as opposed to a debt) bubble pops, markets move quickly to mark down the asset inflation born of speculation.  A share of stock in some worthless fad that was worth $1,000 on Monday can be worth $1 by Friday.

Debt bubbles don’t work that way.  Debt-based assets don’t get “marked-to-market” in the same way as stocks.  De-nile ain’t just a river, and banks who hold such assets can engage in “extend and pretend” in a way they can’t when an equity bubble pops.  This is especially the case in a housing bubble.  Holders of non-performing mortgages that are deeply underwater—and more than half of the 11 million underwater mortgages are more than 25% below sea-level—convince themselves that these assets turned liabilities will resurface and sail again someday.

And in fact, some will.  But many won’t and to admit that and mark them down means the bank needs to find more capital to keep its balance sheet in shape.  Basically, a debt bubble injects human nature into the problem, and our nature is to cross our fingers and engage in magical thinking about zombie assets coming back life.

Is the Federal Government Capable of Reacting As Needed?

In the current context, the answer to the above question is clearly no, but this is not a situation diametrically opposed to where we were in 2009.  It’s just a very extreme version of it.

Here’s how Ezra puts it, re the great recession:

“These crises have a sort of immune system. It is never possible for the political system to do enough to stop them at the outset, as it is never quite clear how bad they are. Even if it were, the system is ill-equipped to take action at that scale. The actors comfort themselves with the thought that if they need to do more, they can do it later. And, for now, the fact that this is the largest rescue package anyone has ever seen has to be worth something.

Perversely, the very size of the package is part of its problem. With something extraordinary that is nevertheless not enough, the economy deteriorates, and the government sees its solutions discredited and its political standing weakened by the worsening economic storm. That keeps it from doing more.”

What comprises this “immune system?”  Part of it is good, old-fashioned checks and balances, envisioned by the framers to avoid concentration of power (the Senate alone can stop any idea, good or bad, in its tracks).  In terms of getting ample stimulus into the system quickly, I vividly recall how this came down in China, as their central planners just turned the stimulus dials to wherever they wanted, without any oversight.

It’s true that the framers didn’t envision the filibuster abuse now mastered by the Senate, nor the deep aversion to fact-based analysis that pervades our current dysfuntionality.  But I don’t think this fundamental structure is the root of the problem.

The deeper problem was the difficulty of the system to react to the depth of the Great Recession.

Now, I’m operating with a sample of one here—I’ve only witnessed such moments from the inside once, but I’ve seen them from the outside enough to have an informed opinion.

First, the fact that we failed to recognize the depth of the recession was not at the heart of the problem.  Other trusted voices—Klein mentions Krugman and Stiglitz (I’d add Dean Baker and Larry Mishel)—were warning that things were going to be worse than our forecast, and we heard them.  I myself, as quoted in Ezra’s piece, told the NYT in December of 2008: “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”  (And see footnote 1 in Romer/Bernstein, e.g.)

We wanted to have the largest package we could get and that was arguably what we ended up with.  Moreover, the damn thing worked pretty much like we thought it would.   Our mistake was failing to follow up on the initial success.

As Carmen Reinhart herself says in the piece, the Recovery Act prevented recession from morphing into depression.  The engine was racing in reverse, and our actions and those of the Fed shifted it into neutral, where we’ve been stuck ever since, and stuck at an unacceptably high level of under-capacity.

What kept us from doing more?  In fact, we did do more, but again, not enough.  We extended unemployment benefits, the first time homebuyers credit, the Hire Act, the payroll tax holiday, a small business lending bill, and more.

Yet, we’re still stuck, and at this point even the tiniest policy lift is terribly heavy.

Obviously, there’s a lot of politics in there.  Some of the opposition doesn’t want to give the President anything that might help him, and they’re willing to throw the economy under the bus.  Others, however, look at 9% unemployment and conclude nothing worked.  To tell them we would be stuck at 11% and rising does not persuade.  And they’re unwilling to throw more good money after bad.

So part of our problem is that nobody does counterfactuals—what would have occurred absent the intervention.  That’s understandable, and we should have tried harder to communicate that issue to the public.  Still, I’m not sure if we could have made a difference.  I do know that talking about green shoots didn’t help (I remember some critic at the time suggesting that we must be smoking green shoots).

But I actually think the “green shoots” mistake is an important hint.  One reason to go there is because if you believe things are truly getting better—if you really think that soon the private sector can pick up the growth baton—then you can pivot away from spending toward deficit reduction.  And the internal desire to do that is always strong in the White House—at times like this, too strong.

This isn’t just an Obama issue.  FDR did the same thing.

One little wiggle up in Treasury rates or one bad T-bills auction, and the economic policy makers start worrying about the revenge of the bond vigilantes.  The political advisors were deeply attuned to the public’s preference for less government spending, especially after the midterms.  And unlike job creation, which is often indirect and dependent on a chain of events (you spend, not save, your tax cut, and you spend it on domestic goods, not imports), the government does hold the purse strings and can cut spending—just look at the (deeply misguided) austerity programs showing up across the globe.  (Note: embedded in that last sentence is the recognition that direct job creation measures are a lot more effective than indirect ones; that’s a different, though related, post.)

In other words, one of the reasons we historically under-react to economic downturns is an irrational fear of temporary deficit spending.  The main question we want to ask both back then and right now is not “is the deficit getting too large” but “is it large enough?”  As long as the economy is operating under capacity and the spending is temporary—think Recovery Act, not Bush tax cuts—to do too little in the name of deficits, bond vigilantes, and Treasury rates (which are now at historic lows), is to condemn millions to unnecessary unemployment, declining living standards, and even, in the case of the young, permanent scarring.

I’ll have a lot more to say about this in an article coming out soon in the journal Democracy, and it’s but one of many dynamics that contributes to the immunity that Klein discusses.  And, yes, for many in Congress it’s a tactic—they don’t care about the deficit other than its use a cudgel against doing something to help someone other than their funders.  But as long as we fail to understand the dynamics of deficits—their need to expand as much as necessary in bad times and contract in good ones—we will never be able to meet the market failures we face now or in the future.


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20 comments in reply to "The Self-Imposed Limits of Reaction to a Crisis"

  1. hilzoy says:

    This is really good. One qualification, though: the “deep misunderstanding and irrational fear of budget deficits” applies, as far as I can tell, only when Democrats are in office. When Republicans are in office, they can cut taxes, start two wars, and enact a prescription drug benefit without anyone batting an eye.

  2. Sandwichman says:

    I’m reading “old” Keynes now — political speeches from 1929, before he wrote his General Theory but clearly expressing the range of his opinions on policy and unemployment. There’s a great passage where he mocks the “very odd opinions” of Sir Laming Worthington-Evans, explaining, “He half understands an ancient theory, the premises of which he has forgotten.”

    Today’s conservatives half understand the same ancient theory Sir Laming half understood — a theory that “starts off by assuming the non-existence of the very phenomenon [unemployment] which is under investigation.”

    I am afraid, though, that today’s liberal Keynesians also half understand Keynes but have forgotten (or disavowed?) his premises. Keynes was keenly aware of the fundamental differences between the large corporation economy of the 20th century and the competitive, small firm of the 19th. Those differences meant that the process of adjustment by small fluctuations of market prices was no longer tenable. For example, he argued that the government should

    “regard the regulation of the wages of great industrial groups as being not merely of private concern, and it must quite deliberately in its wages and hours policy treat the gradual betterment of the economic welfare of the workers as the first charge on the national wealth, and not leave it to the accident of private organizations and of private bargaining.”

    Modern mainstream Keynesians seem to think that somehow if you can just get aggregate demand at a high enough level through fiscal or monetary policy, the “details” of wages and hours can somehow work themselves out through the magic of the marketplace. In other words, there is a strange complacency that even though the macro economy has failed, the underlying microeconomics are somehow sound. That may be Keynsianism but it is not Keynes and it forgets Keynes’s premise. Instead of assuming the non-existence of unemployment, like the forgotten premise of the conservatives, the Keynesians forget that they are assuming the existence of something that doesn’t existe: an active government policy regulation of wages and hours, for the betterment of the economic welfare of the workers “in all kinds of spheres of action where the individual is absolutely powerless left to himself.”

    • Alex says:

      To be honest, Sandwichman, I would argue that the macroeconomics has worked and the micro hasn’t. Quite a few different macro approaches both predicted a crisis and gave a coherent aetiology, and also offered a policy prescription, which worked in so far as it was implemented.

  3. janinsanfran says:

    One of the things policy makers were grossly unattuned to was the public desire to see people who were profiting from the general misery restrained. There seems to be abundant evidence of actual fraud in the financial system. Why haven’t any of the fraudsters been prosecuted?

    Yes, building those cases is hard.

    But folks would have more confidence in government if we trusted that the masters of the universe would be called to account when they cross the line from smart to greedy and unethical.

  4. RPL says:

    The more I study this the more convinced I am that the “fear of deficits” (when not a cover for “starve the beast” anti-governmental attitude) comes from a fundamental misunderstanding of what it means to be the issuer of a non-convertible fiat currency. All models, including IS-LM, have components at their core that are grounded in a gold-standard world. And the US, at least operates in a world that is fundamentally different from that. Seen through that lens, it is easy to see that a balance sheet recession means that the population seeks money and not bonds or items of production, and the only entity capable of providing that is the currency issuing government. Confusing government spending and taxation with the “money creation” of the fed and the fractional banking system leads people to believe that their effects should be equivalent, but they are not. Government spending procures real goods and services produced by the real economy and government tax cuts put real spendable dollars in people’s pockets that lets them both buy goods and services and pay down debts. The problem we have now is deceptively simple and devilishly difficult to fix; we need to give the American public more cash with which to do both of the above and it is only “fiscal policy” that can do it. As we can now observe, you can flood the banking sector with excess reserves, but in our current situation the money just sits there, failing to generate any economic activity. I have concluded that Modern Monetary Theory is the intellectual child of Keynesian theory without the gold standard or some other form of convertibility. If the private sector wants to run a surplus (a good definition of a balance sheet recession in my view) then the public sector must run a deficit. So the national accounting identity segment of the old Keynesian viewpoint provides the insight of the MMT’ers. And, they both demonstrate the error that was the simple quantity theory of money. The policy to fix this requires a new paradigm, and breaking free of some of the blinders imposed by traditional neoclassical economics is critical to developing the proper response. I recommend looking at the works Randy Wray and Jamie Galbraith for some of the best analysis of what is really going on at the moment.

  5. bakho says:

    “The political advisors were deeply attuned to the public’s preference for less government spending, especially after the midterms. ”

    The policy advisors forgot to figure in the STRONG public preference for more jobs and less unemployment. JOBS (Its the economy stupid) trumps preference for less spending, period. If people have jobs, the debt issues does not get traction. The previous time when debt got traction in 1992 was also in a recession.

    The 2010 was lost more by who stayed home than who voted. The passionate anti-gov Tea Party was out in force. Those suffering most from high unemployment were not given a policy to support and they stayed at home.

    • markg8 says:

      To give you an idea of those numbers 69 million people voted for Obama in 2008 and 44 million voted for Republican house candidates in 2010. I do hope people realize the error of their ways and don’t stay home next year or were all screwed.

  6. Marc Robbins says:

    And this is one reason why WWII spending was able to pull us out of the Depression. When the nation mobilizes for war, its “irrational fear of temporary deficit spending” evaporates.

    Of course, this might lead one to speculate on how the drawing down in Iraq in Afghanistan has been and will be a drag on economic growth . . .

    • markg8 says:

      Another reason nothing else pulled us out of the depression before that is after the court packing debacle FDR never passed a domestic bill thru congress again.

  7. JJ says:

    The administration also blundered when they used households as an analogy for government spending (the belt tightening speech). People retire, nations do not. If people were immortal and worked their entire lives, they could continue to borrow indefinitely, so long as their debt to income ratio remains reasonable.

    If the administration wanted to use a household analogy it should have been one like the following. Our country has taken a deep pay cut, our house has termites, our car brakes are squeaking, and we are experiencing some back pain. We can worry about our short-term finances by ignoring those problems, but we do so at the risk of greater future costs; the termites eat the house, our brake pads eat the brake rotors, and our bad backs eat our mobility. Or, we put those items on the credit card now—at a time when it is cheap to do so—and we save on the much larger future costs of ignoring them and, importantly, we increase the chances of regaining our lost earnings in the future when it will be easier to pay off the debt. Some say it is irresponsible to put money on a credit card that our children will have to repay. It is even more irresponsible to hand them a collapsed house, a car with no brakes, and to burden them with the costs of our care when we retire. Spending in the short-term does not always lead to bad outcomes in the long-term. And in this case, short-term spending is necessary to avoid the abyss we are about to fall into.

  8. Anthony says:

    This seems right, if you add to it the extra complexity that a lot of the places in need of Keynesian spending are also in need of restructuring and regulatory overhaul. Unfortunately those two things can operate at cross purposes. Even if the US came to some kind of agreement about the need for present deficit spending..we’d still have to haggle over policy changes to avoid being back in this spot a few years later.

    Nationally, we’re not really having either of these conversations in a meaningful way.

  9. perplexed says:

    Thanks for another great post Jared. I only wish that I could share your enthusiasm about Ezra’s article. While I found it to be an interesting accounting of some of the important events, it seems to me to be more revealing in what it leaves out than what it says; ultimately it leaves me with more questions than answers.

    For example, Ezra goes into considerable detail about the “measurement errors” resulting in the underestimation of the severity of the crisis, but makes no mention of errors surrounding what is or is not counted as “stimulus” spending. If the actual level of the spending that was likely to be “stimulative” was closer to $500 billion as Paul Krugman suggests, how is that this “package” got sold to the public as an $800 billion stimulus package; where did the other $300 billion go? Who is responsible to see to it that what is called “stimulus spending” has some meaning to it and isn’t just tax refunds used to pay down debt owed to our oligarchs?

    What’s behind the bias that says that its OK to undershoot on the stimulus spending ($2.5 trillion hole with a recommended “fix” of $1.2 trillion later reduced to what is effectively $500 billion; 20% of what’s needed) but not on the bank bailouts? Why would a “blank check” be OK for bankers but not for the “economy?” How does that $2.5 trillion hole look now that the output gap is looking to be in excess of $5 trillion and counting?

    Why was there no discussion of giving this “stimulus” money directly to those most negatively impacted by this crisis who we know would likely spend every dollar of it thereby maximizing the “stimulus” effect. How is it that in a democracy, an option like this is “beyond the level of what’s acceptable” to even discuss? Why was there never any discussion of the role of income & wealth concentration in causing this crisis? Why has there never been any discussion of wealth, income taxes, and estate taxes as a way to resolve it? Why was this administration so fearful of presenting “real” solutions to a congress that supposedly was representing the entire American population? The “majority” in this country has close to nothing or less than nothing; who’s representing them?

    Is this really an accurate description of Summer’s role with regard to Christina Romer?

    Where was the discussion about why the banks were not nationalized? Who’s interest was this in? Where would we be today if this would have been done as recommended by Simon Johnson among others? How much easier would regulatory reform have been if “American citizens” owned these TBTF banks? Who really benefited from this and by how much? Where is the accounting of how much exposure there still is “out there” to synthetic mortgages and who holds it?

    Where does the presumption come from that nationalizing the banks results in the mortgages being paid off? What would be the rationale for the government “taking the bad assets off their books … or simply paying off the debt directly…”? Why wasn’t it discussed that this mortgage crisis was in fact a massive fraud against all real estate equity holders and dealt with as the crime it was? Why are mortgages that are created through fraudulent concealment of the very material fact that underwriting standards were abolished to generate profits enforceable in any U.S. court of law? The buyers of these mortgages and MBS’s had every right to investigate the underwriting of these mortgages and chose to rely the ratings agencies instead of doing their own, more expensive, homework. If this crime had been exposed for what it was, maybe mortgage holders would have to show why homeowners should have to bear the entire cost of the damages created by a fraud that mortgage investors themselves helped to perpetuate and could easily have prevented with proper diligence. How is it these mortgages can even be considered to be enforceable when the investors themselves were major participants in a massive fraudulent scheme? How is it that mortgage brokers, banks, ratings agencies and mortgage investors aren’t all on the hook to homeowners for the damage their fraudulent acts created? Not just to the extent of the underwater portion of mortgages, but for the entire $8 trillion loss of mostly middle class life savings. Why isn’t this entire group responsible to those who are paying the price of the output gap created by their malfeasance?

    Klein states: “Which means that the ultimate question was how much housing debt the American taxpayer was willing to shoulder. Whether that debt came in the form of nationalizing the banks and taking the bad assets off their books — a policy the administration estimated could cost taxpayers a trillion dollars — or simply paying off the debt directly was more of a political question than an economic one. And it wasn’t a political question anyone really knew how to answer.”

    Why couldn’t they answer this? Is it because of who they’re really representing instead of who they’re supposed to be representing? Why is this the “ultimate question?” Who’s “ultimate question?” Sounds to me like the question of the oligarchs who have already decided they get to decide “ultimate questions” for the American taxpayers now that they’re firmly in control of the government.

    Why is every single option “open” to “our” political discussion subject to the limitation that the wealthy not lose anything? Where in the Constitution is this veto power established? And this occurs regardless of their role in creating this situation.

    Klein says: “In general, the policies that are vastly better than whatever you are doing are not politically achievable…”

    That’s supposedly why we have a democracy, so what’s best for the country is politically achievable. Its only when that “democratic power” gets sold out from under us that what’s best becomes “politically unachievable.” Klein never discusses why this is so. He avoids the whole argument, but why? Because the oligarch’s that employ him wouldn’t approve?

    This explanation may be suitable to the owners of the Washington Post, but it leaves those of us without shares in the mighty “news” empires severely wanting for better explanations of the more important decisions surrounding this “crisis.”

    We need to permanently close the public auction market for political power in this country. No amount of retelling of this story to make it sound more benign survives any serious scrutiny. Trying to make it through this crises with our oligarchy intact is likely the most serious mistake we have made since discovering what they embroiled us in. Trying to ignore what really happened here and present it as primarily the result of bad information combined with a lot of bad luck only adds to the outrage.

    • markg8 says:

      That’s quite a rant. I’ll try to answer for you. My guess is nationalizing just one bank like Citicorp with branches as far away as Pakistan would have been a nightmare we’d still be working thru while nothing else would have gotten done in congress. If you think the GOP is screaming “socialist” now imagine the stink they would have raised about that. Buying up the banks’ bad debt, the big shitpile as Duncan Black dubbed it was the initial Bush/Paulson plan for TARP wasn’t it? Everybody hated it and as soon as they got the money from congress they switched to Gordon Brown’s UK plan of investing directly in the banks to keep the financial sector from collapsing. Why should the US taxpayer get stuck with all the bad mortgages? The idea was to stabilize them but it was the banks’ responsibility to unwind their mess. As for mortgage investors taking it in the shorts well I suppose we could do that, if you’d like to see mortgage funding dry up for the forseeable future and lock in losses to pension funds, mutual funds, municipalities and any other institutional investors the banks with their willing accomplices the ratings agencies pawned this junk off on. Seems to me the banks and ratings agencies deserve the blame along with Greenspan’s FED who let them police themselves.

      • perplexed says:

        Thanks for the effort I guess but the “answers” fall a little short of the target.

        -“My guess is nationalizing just one bank like Citicorp with branches as far away as Pakistan would have been a nightmare we’d still be working thru…”

        Banks have been nationalized hundreds of times; it really isn’t “rocket science.” How is our current “nightmare” any better that the one you say we avoided? Better for who?

        -“If you think the GOP is screaming ‘socialist’ now imagine the stink they would have raised about that.”

        Why would we let our political solutions be restricted by GOP agitprop? Why is it so hard to see the connection between their response and the purchase of political power on the open market?

        -“Buying up the banks’ bad debt, the big shitpile as Duncan Black dubbed it was the initial Bush/Paulson plan for TARP wasn’t it? Everybody hated it…”

        I never suggested “buying up the banks’ bad debt,” I can’t really believe anyone but the oligarchs in power would seriously suggest such an alternative. Who in their right mind would be on the other side of such a transaction (unless of course you’re talking about a “market rate” transaction which could have been a very good deal for the buyer in such a situation)?

        -“…they switched to Gordon Brown’s UK plan of investing directly in the banks to keep the financial sector from collapsing.”

        Nationalizing the banks would have stabilized them. That’s why its done. My question was why wasn’t it done. Who benefits? It wasn’t middle & lower class Americans, so who was it and what “politics” resulted in their interests be put in front of the other groups in a “democratic republic.” That’s the clue: this kind of stuff doesn’t happen in a truly representative democracy.

        -“Why should the US taxpayer get stuck with all the bad mortgages?”

        They shouldn’t, who would suggest such a crazy idea? do you think it might have been an oligarch that didn’t have anyone else to sell his ill gotten gains to at such a high price. Now at least your “answer” is starting to ask the right questions.

        -“As for mortgage investors taking it in the shorts well I suppose we could do that, if you’d like to see mortgage funding dry up for the forseeable future…”

        There is no “savings” here; its zero sum game. The losses have already occurred and are continuing to mount. A decision to indemnify the investors, banks, mortgage brokers & ratings agencies is a decision to allocate all the damages from the crime to equity holders (mostly middle class homeowners’ life savings) without even attempting to “claw back” the ill gotten gains from the perps. Some of these equity holders didn’t even have mortgages. What’s your rationale for having them take 100% of the losses “in the shorts?” Why would mortgage funding “dry up…”? Will they only play if the game is rigged in their behalf? Losses from past crimes would have no effect on cash flows from future mortgages; in fact knowing that everyone is now going to avoid fraudulent transactions will reduce the risk of loss in the future and should make the rates quite attractive.

        Ezra says “the ultimate question was how much housing debt the American taxpayer was willing to shoulder.” That’s because the oligarchs are calling the shots and restricting our political options to what’s acceptable to them (in other words, the range of options must not cost them anything). The “ultimate” question in my mind is “how much more damage needs to occur before we realize that we must separate our politics from our oligarchs and their money in order to implement solutions and get this country back on track?” Teddy Roosevelt figured it out, FDR figured it out. Why is it taking us so long? Because we’re so “brilliant” now that we have our computers and iphones?

        Read Winner Take All Politics by Hacker & Pierson, you’ll get the picture; & maybe even be better equipped to provide “answers” to future “rants.”

        • markg8 says:

          When you nationalize a bank you take the good with the bad. Who is gonna take Citicorp’s bad mortgages off the FDIC’s hands? Or Bank of America’s garbage they bought via Countrywide? As I recall everybody on the left and right came to the conclusion that lending them TARP funds and letting them unwind their own junk was a better deal. When you nationalize a bank like Citicorp with branches all over the world operating under any number of different naitons’ laws and regs it seems to me it’s much more complicated than wiping a out a bank in Indiana with 3 branches or a big regional bank with branches across a number of states. I agree with most of what you say but thanks to rule 22 anything and everything has to pass a 60 vote thresh hold in the senate. It doesn’t appear that’s gonna change any time soon so our best bet is to elect more and better Democrats. Taking back the house and getting to more than 60 seats is problematic, especially in the senate because we have so many seats to defend. But the only way we’re going to do that is show just how stark the differences are between the parties. It’s not easy, the GOP is beholden to Wall St and most Democrats are scared to death of it.

          • perplexed says:

            -“But the only way we’re going to do that is show just how stark the differences are between the parties.”

            Read Winner Take All… in too many cases the differences aren’t stark enough. Lot’s of democrats are beholden to the oligarchs as well. Its time they chose between their oligarchs and who they should be representing and got fully behind public financing of campaigns. They can no longer have it both ways and maintain credibility.

            For an interesting “counter-factual” think about what would be happening now if it was voters that chose where the campaign finance dollars went and the cash market for political power was closed.

  10. readerOfTeaLeaves says:

    Some of the opposition doesn’t want to give the President anything that might help him, and they’re will to throw the economy under the bus. Others, however, look at 9% unemployment and conclude nothing worked. To tell them we would be stuck at 11% and rising does not persuade….

    So part of our problem is that nobody does counterfactuals—what would have occurred absent the intervention. That’s understandable, and we should have tried harder to communicate that issue to the public.

    As an earlier commenter noted, there was tremendous fraud in the system; this has still not been addressed an IMVHO destroys trust. Failure to address fraud delegitimizes the economic system and diminishes all policy options that fail to be forthright about its role in creating the mess, and fail to address its lingering effects.

    A further complication is that there are still people who believe that ‘private enterprise’ is the only source of wealth. This is nonsense, but people believe it. This mistaken belief creates a huge psychological obstacle against any kind of government stimulus.

    This erroneous belief that ‘all value’ originates in the private sector (and never in the public sector) feeds directly into deficit hysteria — and even worse, it weighs the tax and policy conversations heavily toward ‘capital’, on the grounds that anyone with ‘capital’ is a ‘job creator.’

    The false belief about ‘job creators’ reinforces the false belief about ‘private enterprise’ being the only creator of value; it’s a dreadful feedback loop. It’s like being stuck in a closed system, with no oxygen.

    When we live in a political culture that worships CEOs and ‘entrepreneurs’, and lauds private investment, private property, private initiative, private wealth — well, it would astonish me if there were enough clarity in the system to see a public problem (like the actual size of a Depression looming). American political culture obsesses on private wealth, and tends to denigrate public solutions. I believe that until this fundamental problem in erroneous thinking is addressed, there will be no end to the mischief it produces – like a Sorcerer’s Apprentice of the mind.

    Anything – like a stimulus – that falls within the sphere of public goods or public resources is automatically derided under the political culture that has dominated the past 30+ years. We go from bad to worse, compound our bad ideas, and completely negate any possibility of reasonable action because we operate in a haze of privatization assumptions.

    The failure of this set of assumptions to produce a vibrant economy may now allow for some intellectual honesty and OWS is a symptom this may be happening.

    But I read Ezra Klein’s piece as an indictment of our political culture as much as a sequence of tragic errors and misjudgments. IMVHO, until more Americans recognize that the public sector has a huge role in creating wealth, we will be vulnerable to many errors and misjudgments.

  11. Michael says:

    Everything that was bad then is worse now. The only member of the Obama Administration that has permanent tenure is Geithner. We just have to wait out the next five years and hope Obama doesn’t do so much damage that nobody can fix it.