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Posted by on Mar 21, 2009 in At TMV | 3 comments

Why The Toxic Asset Program Is Such A Waste Of Money, And A Way Forward

Yves Smith at Naked Capitalism has details on the newest version of the “give banks taxpayer money with no strings attached” program. I’ll simply excerpt her conclusion: “Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.”

Other reaction is similarly critical.

This is just another version of the same bad idea that has been cycled over and over again. In fact, it was the original idea when all this mess started back in 2007, although that version was dedicated to a very small subset of assets. No matter what the details are, the end result is the same: giving a large chunk of the nation’s wealth to the people that got us in this mess, and expecting them to reinflate the bubble. Even if the bankers were honest and competent, there is no way they could get us back to that promised land, for the bubble was unsustainable. In the real world, they are neither honest nor competent…

I came across an article by the economist James Galbraith that does as superb of a job explaining how there is “No Return to Normal” and why propping up the banks won’t work. He then offers an alternative vision, providing historical context to justify his claims. With a few caveats, it is very similar to what I have long believed and have been trying to communicate.

I fully agree that we are at a critical stage in our nation’s (and global) history. Our health care and energy infrastructure is fundamentally broken, and our culture of consumerism has eclipsed. The future of our country depends on how well those trends are addressed: if we spend our resources merely trying to prop up and reclaim our old ways, then we will face an increasing risk of fundamental collapse, but if we start working on moving to new energy sources and a new economic mindset, we will most likely succeed. At least I believe so, because I am an optimist at heart.

However, we must realize that even in the best case, we are going to have between one and two decades of stagnation, as resources are spent to rebuild the base of our economy. Without reinflation, retirees will be in dire shape and there will be a very high rate of private unemployment. Galbraith makes the very important point that targeted benefits will not only be necessary to provide a dignified living, but that the money will be quickly spent and flow back into the economy in a constructive way. Moreover, government jobs for the unemployed have the potential to provide a surplus of income that will be used to repair household finances and give a framework for the eventual return of a private credit dominated economy.

While I agree with his plan in its ideal form, I am very skeptical about a few points. He correctly points out that the primary point of the government expenditures would be towards long term constructive uses, and that the positive wage effect is a consequence, not an ends. If the government can direct resources efficiently then the plan will work; if it wastes large amounts of money on nonproductive uses then the plan will fail miserably. Galbraith skims over that detail, and obviously believes the government will be largely competent, but this assertion isn’t necessarily correct. Our political process is as broken as our economy and if we tried to start all these programs now it would be disastrous. Not only would it be ineffective in its economic investments, but it would be unable to critically analyze the success/failures of the programs and cooperate with private industry. Political reformation must occur before economic restoration.

He admits so himself but brushes away the concern:

Second, so long as the economy is placed on a path to recovery, even a massive increase in public debt poses no risk that the U.S. government will find itself in the sort of situation known to Argentines and Indonesians. Why not? Because the rest of the world recognizes that the United States performs certain indispensable functions, including acting as the lynchpin of collective security and a principal source of new science and technology. So long as we meet those responsibilities, the rest of the world is likely to want to hold our debts.

I do not buy that the world will continue to recognize the United States performs “certain indispensable functions” unless we radically alter our ways. We have a lot of superpower hubris that makes us apt to believe we are critical for the proper functioning of the world, but fewer countries are agreeing with that mindset and many of them would like to take a shot at superpower status themselves. Even worse, many countries feel they were duped into slaving for our luxury, and may opt out of the system entirely. By issuing massive amounts of debt, we are testing the will of the world to continue their political support for our exploits, and I think that is a test we will fail at the moment.

In order to pass that test we must start implementing a cultural and political roadmap to become a net exporter of goods and technology. The most pressing issue in the next fifty years will be energy, especially as it appears that we are very close to peak oil production. Intrinsically linked with oil are food supplies, and a few decades of current policy will seem them reach critical levels. The best way forward for our country is to convince foreign nations that if they support us over the short term, they will have a much greater (and equitable) standard of living for the rest of the century. If we do not do that then they will withdraw support, become insular, and start fighting for resources, making our recovery nearly impossible. As such, we should appreciate that foreign policy and cooperation is vital to domestic success.

Some people believe that government is always the problem and that a renewed sense of individualism is the proper prescription for our ills. While I don’t believe that a large government is ideal, I don’t see how a weak government could maintain stability over a country as large as ours, or cooperate effectively abroad; both of which are crucial during this economic transition. However I will agree that as bailout plans have shown, our current government mindset is ineffectual and is being exploited by people that have great political power. The largest problem I have with the Fed decision to print money is that it signals to the world that we are going to try to avoid paying our debts or drastically change “our” (collective) lifestyle, and it does so on the backs of the working class. The only way this will change is if there is the political will to do so; the only way there will be will is if the People speak in a unified voice, demanding a new course and supporting the leaders to take us there. I think that Galbraith’s vision is a good starting point to coalesce around, especially for moderates leaning left.

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  • DdW

    Thanks for a very constructive and thought-provoking post, Mikkel. It does in fact point to actual steps that can be (and some are being) taken to rebuild our economy.

    I (surprise!) do like James Galbraith’s ideas, with some caveats, and you have mentioned some.

    I particularly support (Surprise, again!) Galbraith’s idea (as quoted by you) that “targeted benefits will not only be necessary to provide a dignified living, but that the money will be quickly spent and flow back into the economy in a constructive way. Moreover, government jobs for the unemployed have the potential to provide a surplus of income that will be used to repair household finances and give a framework for the eventual return of a private credit dominated economy.”

    As to the continuing “I refuse to accept stimulus funds for the unemployed” saga by my Texas guv., I may have a few more words to say, if time and energy, this weekend.

    Thanks again.

    Dorian

  • pachigordo

    Nice Job again Mikkel – I also read the longer article by JK Gailbraith as well. I still think that our current financial/banking system is ethically and numerically bankrupt – we cannot save it by propping it up with more money. The American public lost all its trust in the major banks and financial institutions and they will never win back our trust with more outrageous salaries, bonuses, commissions, while the vast majority of Americans have to deal with the reality of a deep recession. Our future is going to be vastly different from the past and it will take some time to come up with a sustainable new world economy.

    I was starting another blog myself on this subject but now Mikkel has gotten me thinking about more things. This is the point of good blogging and I welcome more readers to particpate and take up the slack here. Even hoping for the best from this latest Geithner toxic asset plan, it will take time and money. I wrote a prior blog (guest column) saying we need to put together an alternative financial/banking system to pick up the slack for the rest of the economy while we tackle the mess the financial/banking sector made of itself. And if we have to alter policies, at least it will have limited impact on the ability of businesses and Americans to borrow necessary funds and conduct their financial affairs through a few new good banks free of any toxic assets and run by people with the best interests of the general public in mind.

    Remember, every trillion dollars we spend or borrow is about $3,300 per capita divided among all 300 million Americans. I also agree that both political parties are still acting as if it were 2005 instead of 2009. I look forward to many other comments and new blogs on this very important topic.

    Best wishes to all and Happy Springtime from Marc Pascal in Phoenix, AZ (where it has been well into the upper 80’s each day for the past 2 weeks).

  • Jim_Satterfield

    I also agree with much of what Galbraith is saying. Economists operate on assumptions. These assumptions have been shaped by their education and how that education colors their view of recent history. It has led to an easy dismissal of any possible lessons that should be learned from the Great Depression and even earlier crises. It also leads, IMO, to a complete inability to recognize how changes in modern communications and transportation should be affecting their views of current events and attempts to project the future. Political conservatives suffer from wearing the same blinders as well.

    In regards to your last paragraph, the problem with the views of those who think all we need is a strengthened sense of individualism is that in reality we already have too much of that. I don’t think there is any ideology that isn’t bad for you if taken to too great an extreme, including individualism, and if there is anything I hear our political conservatives harping on is how bad it is for us to use our only common representative organization, the government, to do anything for the country as a whole by helping individuals survive financially.

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