Progressives and the Budget Deficit
The budget situation today looks hugely worse than it did two years ago. The reason for the deterioration is not that the country has suddenly embarked on a massive new round of social spending, undertaken another major military adventure or even emptied the coffers through tax breaks. The reason that the deficit situation looks hugely worse than it did two years ago is that the $8 trillion housing bubble that had been driving the economy finally collapsed and threw the country into the worst downturn since the Great Depression.
The tragedy in this story is that the collapse of the bubble and its devastating consequences were entirely predictable. Had policymakers recognized the housing bubble and its dangers, they could have easily taken measures to avert this disaster, preventing the surge in unemployment, the flood of foreclosures and the huge budget deficits that characterize this downturn.
Unfortunately, the sociology of the economics profession and economic policymaking is structured so that the voices of those who raised concerns about the housing bubble were largely excluded from public debate. Federal Reserve Board Chairman Alan Greenspan and other leading lights of the economics profession insisted that everything was fine. As a result, nearly all the properly credentialed "experts" marched in lockstep behind their leaders, also insisting that everything was fine.
Remarkably, even after this collapse, nothing has changed in the structure of debates over economic policy. Nearly every day of the week an organization in Washington sponsors a policy session on the budget deficit or other some other important economic topic and every last "expert" is among that distinguished group that somehow could not see an $8 trillion housing bubble.
This would be like hosting a session on the future of US military involvement in Iraq in which every participant had confidently predicted in 2003 that the United States would cakewalk to an easy victory. Even the Republicans wouldn't be foolish enough to host a panel like this. Yet, there seems to be a bipartisan consensus that completely missing the biggest economic calamity in almost 80 years doesn't call into question your competence as an economic analyst.
This should scare people. There is no reason to believe that people who were incapable if independent analysis before the bubble collapsed are now capable of thinking for themselves. In other words, the vast majority of the so-called experts who pontificate on economic policy are still people who are more accustomed to deferring to authority than doing their own analysis. This means that a great deal of silliness is likely to be perpetuated, just as was the case before the housing bubble collapsed.
The basic story on the budget deficit is very simple: We need badly need large budget deficits in the short term. They are the only force that can sustain demand in the economy after the collapse of housing construction and the loss of the consumption that had been supported by $8 trillion in illusory housing bubble wealth.
In the longer term, we will need to reduce our trade deficit to replace this demand, but this can only be brought about by a reduction in the value of the dollar against the currencies of our trading partners. If our budget experts had been capable of independent thinking before the crash, they would have pointed out the over-valued dollar as a main cause of imbalances in the US economy. Unfortunately, most of them are still incapable of recognizing the obvious.
The other big oversight that the budget experts commit is the failure to recognize the positive role that moderate rates of inflation can play in our economic recovery. Sustained inflation in the range of 3 to 4 percent will be the quickest way to rebuild the balance sheets of households who saw most or all of their wealth disappear with the bursting of the bubble.
Modest inflation will also help to erode the debt burden the government was forced to take on due to the housing crash. For those old enough to remember, inflation was also a major factor in reducing the burden of the huge debt that the country incurred as a result of World War II.
Of course in the long term, if we don't fix health care then the deficits will be unbearable, but this calls for discussions of health care, not budget deficits. If we don't fix health care, the economy will be wrecked regardless of what we do with the budget.
But, we won't get a more serious discussion of these issues until we have budget experts who actually form independent assessments of the economy. As it stands, the debate is dominated by a follow-the-leader crew who could not see an $8 trillion housing bubble.
Like any budget, you can’t spend more than you take in.
How long has it been since we had a surplus?
I agree we as a Nation have to spend money to get out of the mess we’re in.
Do we really need to spend money that we don’t have?
I say No!
Maybe a crisis like this one is a wake up call?
The Republicans are crying all the time, about Obama’s going to raise your taxes.
Maybe, Maybe Not.
THIS IS THE TIME, We as a Nation really cut the expenses.
Yes we have a crisis, now it’s time to focus on our priorities.
You want to find a way to finance Healthcare?
Lets have a show of Hands. You want Healthcare; or do you want to spend money to see if there is water on the moon?
You want Healthcare; or do you want to find out if cow or sheep manure contributes to green house gasses?
TIME TO GET REAL, TIME TO PRIORITIZE
September 28, 2009 2:12 PM | Reply | Permalink
Expanding human knowledge, like seeing if there is water on the moon, is a priority. If we want to just bury our head in the sand, not innovate, not look outward, not learn new things, then we can kiss any future our nation has goodbye. The space program is a minuscule part of the budget, yet many people continually deride it,not even thinking about how it also helps our nation and the world as a whole. It's inspiration, technology, knowledge.
If you want health care improvements, then you are supporting people caring for people--human dignity. In my opinion, learning and growing as a species and learning about our universe is also a way to improve our dignity. Educating ourselves and our children also is given the short shrift. Would money help? Better methods? Why do we seem to be coming up short? All kids are scientists until they are in school for too long and loose interest. What makes science uncool that our kids lose interest and therefore let other nations climb ahead? Sometimes it's discoveries, like water on the moon, that pique a child's interest just enough to think about science just a little more. How'd life get here? How's water involved with that? It's a mindset, see?
If you want to say that our military spends too much and is a complete waste. Great. To me it's like we are throwing away our potential every resource that we waste that could be helping people, not wasting money and lives and resources on. It's bizarre how much we spend compared to other nations. There are other things as well that our nation seems to prioritize too much.
But Jeez, again deriding a scientific discovery which was funded by a flea that fell from the St. Bernard that is our military, moneywise, is a scapegoat that suggests that you would prefer people to continue in ignorance.
I'm sorry for the rant, Resistance, but I think that science is a priority. Besides, water on the Moon is fucking cool.
September 29, 2009 2:21 AM | Reply | Permalink
WE HAVE NO MONEY!
What is it you want to do, print more counterfeit money, which no one will want?
Are you telling me, that it is your priority; to spend limited resources on looking for water on the moon? This will do what to help the people on our planet survive at this time of fiscal trouble?
Heck, we can’t even keep up with the problems at home here. Whoopee! There’s water on the moon, did that just solve a problem here at home? Maybe we can bottle it and bring it back?
You talk about how miniscule this program is, and I can tell you, a multitude of people have they're own pet projects and they’re not about to let you cut their programs in order for you to keep yours.
Like going to the movies, you have twenty dollars, you can buy the ticket, you may even buy the popcorn, and despite the fact you’d like to buy some candy, because it is so good, You have no more money left.
Remember you only have twenty dollars, not thirty, not forty. Now if you want to give up the popcorn then you may have found a solution. You might even forgo the movie to buy the candy. But you can’t have it all. You have to choose
The candy is all these miniscule projects. I for one, don’t care to sacrifice healthcare being paid for, because that’s the ticket that’s worth the price,because for some, they can’t live without it.
Do we really need the candy though?
Again where are you going to get the money? Oh yeah! You were going to cut someone else’s project, but leave the moon exploration alone.
When are the American people going to wake up? If all we as a people are going to do is spend, spend, spend, when we're already broke. That's a sure recipe for disaster.
I suppose we could steal it from our Kids and grandkids, but that would be unconscienable; besides fiscally irresponsible.
What I am suggesting is finance the Social fabric first, protect the citizens; citizens that become your future defenders, your future scientists, but it would be a moot point if your people are unhealthy.
The old adage: Without your health, you have nothing.
September 30, 2009 2:26 AM | Reply | Permalink
By your analogy, we can say that the military and the wars that we are waging is the $10 movie ticket. Why not rent a movie instead? There'd be a lot more money left over.
As you say, priorities.
September 30, 2009 11:50 AM | Reply | Permalink
I looked at your Bio and it’s understandable why you’d be supporting space exploration.
But coming back to the problems of this world.
I can find agreement in your premise that the defense budget is a large percentage of our spending.
Advocates for a strong defense are not about to cut our abilities to defend against every imagined threat.
You and I can debate this issue till doomsday.
So when faced with such opposition, you fight the battles you can win.
Those who want a strong defense can find support in The Constitution of the United States.
Realistically knowing the defense budget, is not going to be cut dramatically, to achieve the balance in expenditures vs revenue. Then a pragmatic person has to look for other sources.
What’s the next big ticket item, Social Security and it’s ancillary programs? Now I am sure you are aware that’s another sacred cow.
So now it’s your turn, tell me, now that I’ve taken two of the most sacred cows off the chopping block, where do you suppose we can find the money necessary to fund everyone’s favorite project?
I think water and food safety would be a priority, along with Healthcare.
Now I don’t have the figures of how much these three programs are costing us.
Are we taking enough revenue to support these essential programs, the key being Essential?
Now tell me; if you don’t have any money and your credit sucks. What programs can really afford.
I suppose you could insist that someone else should pay for the things you want, and your neighbor he’d like a new BMW. So why don’t you pay his car payment, why don’t you pay his house payment too while your at it?
Eventually you’ll see why the States are having a budget crisis. States lived beyond their means, and no one has any money to pay the taxes, to support every pet project considered nice, but Non-essential.
Sure we all like Parks, but whose going to pay for the maintenance, when you can’t pay the taxes, because YOU can hardly provide for the necessities of life?
I’d prefer to live free, freedom from becoming a wage slave in order to pay taxes, to support everyone’s pet project.
Oh how nice, we get a park, but never get to use it because we’re all working to death to pay for it. Now how smart is that?
We found water on the moon, so lets all work extra hours, and send the money to the Government. Working longer hours, taking home less money because of taxation. Giving up time with the Kids, and in fact this working longer hours, for space exploration is so good, let’s tell the wife; “leave the kids with a babysitter and come go to work so we all can send money to find water on the moon” You call this living?
Which programs do you want to cut, except for those three sacred cows I mentioned?
Who do you want to tax for the BMW payment? Your Water on the moon exploration?
So I suppose if your going to get someone else to pay for every pet project how ever worthy, ask for the moon?
Unless of course; you want to raise taxes on some, and not others? If you want to pay more out of your paycheck, let’s here your idea? Is it essential or is it someones pipedream, “oh how nice it would be.”
So tell me, would you rather pay for everyone’s pet projects, or do you think we should live within our means?
When faced with the challenges we face today, we learn to balance between essential needs and wants.
THIS IS THE TIME,
That We The People prioritizes; between essential needs and wants.
This is how you take back your Government.
Lobbyists of Want satisfiers would now be rebuked. We the People in effect saying “Are you stupid, we can’t afford those things, at this time.”
We know the lobbyists exercise influence.
Who do you suppose pay’s these lobbyists?
Who pays the Companies, of want satisfiers?
So in effect YOU, pay the lobbyists to undermine your power, all because we pay for our wants, not only our needs.
We the People could say, “ We need healthcare, we need defense, we need Social Security.” Further saying, “Now if you can show me a way to have my wants and desires satisfied, how much is that going to cost ME.”
Me as in; the money coming out of your pocket book, not your neighbors. Besides your neighbor is also looking to get in to your pocket book as well, to satisfy his wants and desires.
Well guess what? I think we can find a middleman to accommodate both sides. We’ll call it the Department of Revenue, and we can even elect overseers taking a little of the profit, acting as middlemen.
Now that’s a stimulus plan. We made work. Paid Lobbyists, paid off politicians, pet projects. Good money when you can find it.
September 30, 2009 4:41 PM | Reply | Permalink
Thanks, Resistance for your thoughtful reply. You are right that I am not exactly impartial on this issue, so maybe I will leave it at that.
Here's a copy of the budget--your 'sacred cows' are listed on there as "mandatory expenses" and everything else as discretionary. Pg 10 has a good overview of the largest expenses (by far) and pg 28 has the discretionary costs. One thing of note is that they have the DOD actually receiving reduced funds in the future (but it is probably unrealistic to think that would actually happen).
So, there's a limited pie. I'm dismayed at the increase in debt projected and interest servicing (pg 10) over the next 3 years. And, as you say, there's only so much money to go around. I'm kind of troubled going through the whole thing at the lack of understanding of how debt servicing is becoming a huge slice of the pie when if we just reduced some expenditures here-and-there now, there would be far more money to go around in the future.
So, I'm going to end this by saying that you've made your point here. I think that we do need to look at our priorities rationally. I still believe that science is a net economy booster and that it is worth pursuing with gusto (especially considering the percentages involved). But there are some expenditures in that budget that just don't make sense to me and should be dealt with. It would be nice if we could have an independent body weigh the programs that we have, and judge how useful and appropriate what we spend on these projects. Also to see what programs/infrastructure/etc can be trimmed.
I still believe that using Moon water as a point of the United State's excesses is a bit misplaced. The information that this "cheap" satellite made can be used for something in the future and have enhanced our knowledge (regardless how much you want to weigh the importance of this discovery). It's a smaller version of, say, Hubble, which has completely rewritten how we view our universe today. If you want to make an example of "Government spending gone wild and stupid", something like the F22--which was created for imaginary future wars and isn't even useful in the conflicts that we are in right now--might be a better example. IMHO.
October 1, 2009 1:00 PM | Reply | Permalink
It takes longer to build than to tear down, so don't expect a new surplus for a while yet.
September 29, 2009 11:14 AM | Reply | Permalink
Maybe it was the case, like the fish which doesn't know it's in water until it's out of it, that the everything-is-fine-bunch were in the bubble and didn't know it until it burst?
C'mon. They knew: Were making a pile of pelf by way of the bubble: Got out before it burst - and would do it again if given half a chance, and if we let them.
September 28, 2009 2:56 PM | Reply | Permalink
Fallacies pervade this interesting but quite flawed analysis:
1. It does not take an advanced degree in economics to appreciate that providing mortgages for low-income borrowers to acquire expensive and over-priced houses at teaser interest rates and very low or no down payments was foolhardy. Most economists missed the bubble, but so did most other people who should have known better, including asleep-at-the-switch politicians.
2. Even amongst economists, is there any great correlation between deficit dovish-vs-hawkishness and prescience re the bubble? I doubt it but Mr. Baker's article assumes so, without proof.
3. Plenty of general warnings WERE issued, including Greenspan's "irrational exuberance," years before the big bubble burst. People missing the timing and severity of the crash is rather different from them being utterly clueless about the possibility of it.
4. Observers who DID call the crash of '08 shortly before it occurred are not therefore experts on the ideal longer term level of federal government debt, or the pros and cons of exceeding that ideal.
5. The US dollar is not overvalued on a purchasing power parity basis, but even if it were this is not necessarily something the US authorities can or should try to greatly influence. We are not in the Bretton Woods system of fixed exchange rates any more.
6. Inflation would of course reduce the real value of the government deficit, but it would also reward many other borrowers and punish savers. It is not at all clear that this would be a net benefit to America as a whole.
September 28, 2009 3:06 PM | Reply | Permalink
and i thought dean baker was delusional.
September 28, 2009 4:36 PM | Reply | Permalink
To be fair, that did happen, as part of providing low/no interest loans to everyone. "Hey, he's got a pulse! You're approved for the loan!"
September 29, 2009 11:17 AM | Reply | Permalink
(Harper's mag) According to a former loan officer at a Wells Fargo branch, "The commission and referral system at Wells was set up in a way that made it more profitable for a loan officer to refer a prime customer for a subprime loan than make the prime loan directly to the customer."
Even though many customers could qualify for a prime loan, it was in her financial interest to figure out "how to qualify referrals for subprime loans." (In fact, in order to keep her job she had to make a set number of subprime loans per month.)
All manner of schemes to disqualify an otherwise prime loan qualified customer were used even going so far as cutting and pasting credit reports from one applicant to another, not to mention actually cutting and pasting W-2 forms.
September 29, 2009 12:33 PM | Reply | Permalink
The Baker plan is then as follows?
1. Deficit-spend in the near term, until some unspecified recovery milestones are met
2. Once we recover, devalue the dollar to stimulate our export industries (even though this penalizes the very people who financed our deficit spending spree)
3. As we continue to recover, continue to devalue our currency through inflation, to the further detriment of our creditors
Isn't this the exact scenario that our creditors expect from us? Isn't this why the world must move away from the dollar as a reserve currency inevitably?
What the US needs urgently is a new engine of economic value creation - we need to build things that other countries will buy. (Obviously we also need to fix health care, reform Wall Street etc.) I think Baker is right about inflation here but he misses the importance of the US actually making things that other people buy.
September 28, 2009 4:10 PM | Reply | Permalink
We badly need large budget deficits in the short term. Dean Baker
Currently, Americans are in the process of shifting their time preference from "high" to "low." They'd rather have money to spend in the future than goods and services to enjoy right now.
The government is the sole source of money; it increases the supply when it prints it -- decreases the supply when it taxes it away. Thus, deficit spending should increase the supply of money. But that increase won't lead to inflation -- Dean's preferred outcome.
Until that "New Normal" preference is satisfied (Americans' savings goals are satisfied), the government cannot generate inflation no matter what it does.
September 28, 2009 4:48 PM | Reply | Permalink
I should add the suggestion that the government can satisfy Americans' current propensity to save and can alter their time preference by ---
Sending all Americans government checks in the total amount of $2-3 trillion or granting them an income tax and a FICA holiday for a period generating an equivalent amount of savings, the former solution being my preference.
Once a high time preference is reestablished, deficit spending can act to inflate the "money supply" -- but again, not before.
Somehow, I don't think we're ready to adopt such a sensible, realistic, and sophisticated policy.
September 29, 2009 5:28 AM | Reply | Permalink
How much Americans are saving today is questionable, but saving is not an abstract preference, it is a reaction to real conditions that for a long time have been masked by the bubble.
Americans are saving more because
To address a), government can
to address b) government can
7 and 6 cost money. 5 and 4 doesn't, they only requires giving up the role of government as guarantor of corporate profits. The appropriate level on investment in 7/6 is a matter of technical debate, but it should be determined by the goal of full employment. Namely, the government should invest to absorb all the slack created by private firms. This list of actions will restore the power of monetary policy to manage inflation. but that would be a side effect. We are ultimately in crisis because we have an economy in which government's role is to guarantee profit. We must move to a an economy in which the role of the government is to guarantee the general welfare of people.
September 29, 2009 6:25 AM | Reply | Permalink
Tax employee turnover? Wow!
This is the first I have heard this suggestion. I love it!
September 29, 2009 8:02 AM | Reply | Permalink
How about the threat of deflation?
We have enormous excess capacity in the manufacturing sector. Banks are cutting back on their loans and consumers/businesses are borrowing less. Housing is likely to be in a funk for another couple years. We are deleveraging, which is causing the velocity of money to slow.
All of that is very deflationary. Will the Fed print enough money to reflate the economy? Let's hope so. But we are in for a long next 5 to 10 years as tax rates go way up and we have a double-dip recession.
September 29, 2009 2:38 PM | Reply | Permalink
Two -- no three -- questions:
1. What do you think the Fed should do with the money it prints (actually, computer keystroke entries), that is, to whom should it hand the money it has newly printed? What actions of your proposed recipient of the Fed's money will cause the economy to "reflate"?
2. Why do you think tax rates will go way up -- or up at all?
September 29, 2009 9:22 PM | Reply | Permalink
In response to your three questions:
1)What do you think the Fed should do with the money it prints (actually, computer keystroke entries), that is, to whom should it hand the money it has newly printed?
This one I'm not quite sure I understand what you're asking. The Federal Reserve would traditionally increase the money supply by increasing reserves at deposit institutions. If we fall deeper into a deflationary spiral I think this is what the Fed would do in a more aggressive manner than it has recently. However, recently we've seen the Fed doing untraditional things such as buying most of the Treasury auctions and Agency debt (Freddie/Fannie).
2. What actions of your proposed recipient of the Fed's money will cause the economy to "reflate"?
Those banks whose reserves have increased will now be able to increase their lending. Trillions more of debt is supposed to create the demand needed to purhcase the assets that have fallen in value.
3. Why do you think tax rates will go way up -- or up at all?
With deficits projected to average $1 trillion per year for the next 10 years, I don't see that as sustainable without higher taxes. I also believe taxes will go up because we've already seen tax increases in motion such as the healthcare surtax even though Obama doesn't consider that a tax. Cap and trade I also view as a tax because consumers will see higher utility bills.
We know that the Bush tax cuts will expire soon, which I also view as an increase, even though some people like to say it's just getting us back to the Clinton rates. With unemployment at today's level, even a 10% increase in the top rate will be suicidal when you realize the number of small businesses that pay the top rate.
The problem is that debt-financed government demand can't be sustained indefinitely. The US balance sheet is not a bottomless pit although it is looking increasingly like a black hole. That doesn't mean the government should walk away from creating short-term demand but it needs to be extremely careful in how it does so. If you remember the double dip recession we had in the early '80s, I think we're going to see that again where unemployment spiked to 8%, then levelled out for a bit before spiking again to over 10%. It's going to be an interesting ride.
September 30, 2009 8:42 AM | Reply | Permalink
I lean toward the idea that the traditional theorists have it bass ackwards. They think bank reserves generate lending; they don't.
Bank lending comes first; only after making the loans do banks go out and get the reserves regulators require them to hold (additional deposits or bank borrowings). The Fed can push as much money into the banks as it wants to, but unless the banks wish to make loans and unless businesses and consumers wish to borrow, the money will just sit on the banks' books -- doing nothing. Forcing an increase in a bank's reserves will not force it to lend.
So ---
If giving money to the banks won't increase lending and won't increase the money supply (and thus, won't produce inflation), who should we give the Fed-created money to if we desire any or all of those results?
September 30, 2009 1:19 PM | Reply | Permalink
Well since the Fed doesn't have a branch, it's hard to give these Fed reserves to anyone but a branch.
I agree you can't force the banks to lend (well Congress might try but I can't).
I'm not saying that the Fed will be successful. We could be caught in a deflationary spiral where we have increased debt defaults and banks more unwilling to lend.
But you can't get banks to lend more than they're lending today unless you increase their reserve levels. Assuming that they have no excess reserves today, I don't see how a bank can lend first and then find the required reserves later.
September 30, 2009 1:57 PM | Reply | Permalink
Easy.
The bank borrows the necessary reserves in the overnight lending market (that's what the overnight lending market was designed for) or in the worst case (banks hate this; it makes them look like deadbeats whom no one else will lend to) from the Fed's discount window.
Banks are in the business of adjusting reserves, daily -- no big deal.
September 30, 2009 2:39 PM | Reply | Permalink
But you can't get banks to lend more than they're lending today unless you increase their reserve levels.
Prove it! :-)
September 30, 2009 2:44 PM | Reply | Permalink
Sure, but the overnight lending market is only as good as banks' willingness to lend out its excess reserves, assuming it has excesses.
What happens when banks have very little excess reserves or don't want to take the risk of lending them out? Continued real estate defaults, credit card defaults, corporate defaults is not going to do well for banks' reserves.
September 30, 2009 5:40 PM | Reply | Permalink
Then, banks go to the discount window.
Of course the banks are stuffed with reserves, currently -- proof, if we needed it, that reserves don't lead to lending, lending leads to reserves.
Note: If a bank lends money, that money winds up as a deposit either 1) in the lending bank (thus, no additional reserves required) or 2) in another bank (which now has excess reserves and would love to lend the excess overnight to the original lending bank and thereby, earn interest).
September 30, 2009 8:11 PM | Reply | Permalink
But in your "note" you say "if" a bank lends money. Well, it can't lend the money in the first place unless it has excess reserves. And it can't have excess reserves unless the Fed has increased the monetary base.
The overnight loan is just that, it needs to get paid back in the short run. So the overnight market isn't really a long-term solution for a bank to acquire excess reserves so it can make new commercial or consumer loans.
Banks may or may not have enough reserves right now. Many people think the banks reserves aren't enough because defaults are going to get worse. If they are "stuffed" with TARP funds that they are desperate to pay back, that won't do much to lending.
Another important thing to note is that when the Fed (or any central bank) pays interest on reserves, the multiplier effect has a much shorter life span. And if the Fed pays interest on reserves at the same rate as its target rate, then there is no multiplier effect.
September 30, 2009 10:01 PM | Reply | Permalink
Lend first; locate the required reserves second.
If the bank's deposits haven't increased enough the day after the initial overnight loan, take another overnight loan. Can't do that? Go to the Fed's discount window.
Reserve requirements are always calculated after business -- after lending -- is over for the day. The president's on the golf course by 3 p.m. The compliance officer? On a bad day he'll be there till 8.
September 30, 2009 11:18 PM | Reply | Permalink
Throughout this thread hasn't your real interest (and your argument) been directed at the issue of how particular "capital ratios" affect banks' willingness to lend?
September 30, 2009 11:30 PM | Reply | Permalink
My real interest has been that I am worried about deflation. That was my original point. I said that I hope the Fed can reflate the system enough to fight off the deflation spiral. But that is a dangerous game because government induced demand isn't sustainable in the long run.
October 1, 2009 6:14 AM | Reply | Permalink
So --
We're back to the question of whether the Fed can inflate (reflate) the economy when businesses and consumers are reducing their borrowings and banks don't have customers to lend to (even if they wanted to).
My argument is that the answer to that question doesn't implicate bank reserves. The amount of reserves a bank has on any particular day doesn't constrain or encourage its lending goals -- even for that particular day.
The Fed can pour as much money (your "reserves") into the banks as it wishes; it won't mean a thing ("pushing on a string"). Obama, Summers and Geithner say they disagree. We shall see who's right over the next twelve months or so.
I've been saying it for a year: Show ME and not the banks the money!
October 1, 2009 11:56 AM | Reply | Permalink
I've been saying that too. Been arguing on TPM here for a one/two year suspension of the payroll tax. Would have put $ into people's pockets instantly and I think they would have viewed it as more permanent than just a one-time stimulus/rebate check.
October 1, 2009 1:06 PM | Reply | Permalink
"The tragedy in this story is that the collapse of the bubble and its devastating consequences were entirely predictable. Had policymakers recognized the housing bubble and its dangers, they could have easily taken measures to avert this disaster, preventing the surge in unemployment, the flood of foreclosures and the huge budget deficits that characterize this downturn."
Hogwash.
The housing bubble was what propelled economic growth during the middle of this decade. If there had not been a housing bubble, the economy would have grown more slowly all along. Perhaps some frictional benefits would have been obtained, but the government would also have foregone massive capital gains payments and income increases to tax revenue all along.
That means the deficit would have grown -more- quickly during the Bush years, and thus interest payments would have mounted up earlier, further increasing the debt burden and, poolicy being equal, the debt load.
Greenspan, who Dean Baker blames for the bubble was THE first policymaker and one of the first economists to discuss the dangers of the wealth effect on long term macroeconomic planning. Also, he was chairman of the Federal Reserve -before- everyone started assuming that the Fed was supposed to regulate the entire financial system.
If Greenspan had tried to deflate the "bubble", he would have A. Failed, B. Deflated the rest of the economy too, and C. Caused a recession to occur earlier.
Dean Baker is just a pale clone of Paul Krugman; a political hack masquerading as an economist. He wants government intervention, period; the economics is a rhetorical tool, not an analytical one.
September 28, 2009 7:45 PM | Reply | Permalink
The housing bubble was what propelled economic growth during the middle of this decade.
Growth in construction jobs and housing related finance and business services jobs masked the elimination of 32% of all manufacturing jobs [17.3M(2000)--13.9M(2007)--11.8M(8/2009)].
Conclusion: The housing bubble gave the neoliberal free traders cover as they went around destroying our manufacturing sector.
September 28, 2009 9:23 PM | Reply | Permalink
The housing bubble (and credit card industry) also offered the illusion of wealth for the working class while their actual wealth & wages stagnated or regressed and the top one percent increased their dominance in this economy. And don't even get me started on the move from company pensions to 401k's and the like.
(I bet the elites are still kicking themselves about failing in the effort to privatize Social Security.)
September 29, 2009 8:09 AM | Reply | Permalink
well, I think Obama's answer to that might be "yes, WE can."
September 29, 2009 12:18 PM | Reply | Permalink
Frightening that you think that this is reasonable. Alan Greenspan above anyone else is responsible for allowing the bubble to get out of hand. If you have to go around pale cloning anyone Paul Krugman is a good choice.
September 29, 2009 2:25 AM | Reply | Permalink
If there had not been a housing bubble, the economy would have grown more slowly all along.
You could analogize it like steroids in sports.
It's not like this wasn't known all along - it may have been largely un-recognized, but it was neither un-knowable or obscure.
September 29, 2009 1:43 PM | Reply | Permalink
Well, except it wasn't unrecognized. It was intentional. The housing bubble was promoted to finance tax reduction for the wealthy and two wars.
It was anything but unintentional. And it diverted trillions of dollars into the hands of a small group of crony capitalists.
I don't think the perpetrators thought it would wind up in the disaster we're currently experiencing. But if you go back and look at what was happening when it was happening, you'll find all the key players were cheerleading it all the way.
September 29, 2009 4:11 PM | Reply | Permalink
We can argue whether the housing bubble was intentional, but the fact is that almost none of the economists who go out pontificating about the deficit these days ever said a word about the housing bubble. So, if we want to believe that it was a grand conspiracy and they were all in on it, then how should we view what they say about the deficit now?
Personally, I think that most of them were clueless.
September 29, 2009 4:21 PM | Reply | Permalink
They were not clueless. Economists are the modern version of theologians.
The fundamental theological question is why, given that God is good and omnipotent, evil exists.
The fundamental economic question is why, given that markets are good and efficient, life sucks.
Beneath superficial difference, it is the same question. Economists provide justifications for deprivation. Why are you poor. why can't you have a secure job like your parents had, why you need to "tighten your belt" in bad times and why you are not invited to the party in good times.
They provide excuses (models) for political action that benefits the dominant classes. During the boom, they explained why it was sustainable. Because to do otherwise would have ended the party (to which we were not invited). Now after the bust, they explain why we can't do anything that might hurt the some people.
September 29, 2009 4:35 PM | Reply | Permalink
Looking back on it, calling it a bubble, I think I'd have to agree they were clueless, in their Randian way.
They probably didn't think of it as a bubble that might some day burst. But it's clear, to me anyway, that they promoted the inflation of housing values as a way to pump money into the economy, both to recover from the dotcom bust and to keep consumption going, while siphoning tax money to the wealthy.
The siphoning was done by reducing top-end tax rates and by increasing corporate welfare. And, oh, yes, there were wars to fund.
I don't want to drift off into conspiracy theories here. I don't think of it as a conspiracy. I think of it as a world view gone bonkers and married up to a healthy dose of arrogance and greed.
October 8, 2009 3:12 PM | Reply | Permalink
And yes, I agree with your main point. Whole-heartedly.
October 8, 2009 3:13 PM | Reply | Permalink
So what is the answer? Health care that will cause a tax increase. Jacked up energy prices? Slow down the Depresion as much as posible, because the next step is the mark of the beast. I dont know if you read the Bible or not but we should'nt be suprised at all. Dont we have to protect or oil intrest at all cost? That's what Iraq is all about.
September 28, 2009 10:14 PM | Reply | Permalink
Are we protecting our United States citizens interest, in the necessity of oil reserves?
Or are we protecting Big Oils interest? Whose interest is not necessarily in the best interest of the Country?
September 29, 2009 12:59 AM | Reply | Permalink
Can you say Opec
September 28, 2009 10:16 PM | Reply | Permalink