What I Was Saying Two Years Ago
Last week I went back and looked at all of my talks from the fall and winter of 2008. Back then I was ringing changes on three themes:
1. We are in substantial trouble: the collapse of the housing bubble triggered a mortgage finance crisis that snowballed into a general financial crisis and a flight to safety that would, if unchecked, produce the worst economic downturn since the Great Depression itself.
2. Normal stabilizing monetary policy tools cannot help us any more. The standard policy moves we use to stabilize demand and production and prevent or cushion downturns have already been used to the full and cannot help us any more.
3. Nevertheless, we are going to get out of this with only minor damage to the economy, for we do have (a) the technocratic knowledge, (b) the policy tools, and (c) the political will to escape from the trap.
And I was very confident about all three of those. I would have given 9-1 odds on all of them together.
DeLong's problem is deceptively easy to solve from a distance, particularly by economic laypeople such as myself: he was deeply ensconced in a reality-based discourse, and reality had absolutely nothing to do with it.
But there's another explanation that's the mathematical dual of that one: DeLong was deeply ensconsed in a fantasy of economic rationality, and the crude realtiy of capitalist unreason smashed his poor little fantasy to bits.
DeLong proceeds to give a reasonably lucid account of everything we've been through. For example, he explains that the initial housing-based financial crisis should not have been such a big deal:
We built five million houses extra houses--largely in the swamps of Florida and in the desert between Los Angeles and Albuquerque--that simply should not have been built. Their cost of construction was to a first approximation covered entirely by mortgage debt. And on an average one of those five million houses the purchaser took out $100,000 in mortgage debt that simply will never be repaid: the buyer cannot afford it and the house is not worth it. That means that, as of the end of 2007, there were $500 billion of financial losses to be allocated: somebody's bonds and derivatives were going to pay off $500 billion less than people had thought....
Now in a global economy with $80 trillion worth of financial wealth, a $500 billion loss due to irrational exuberance and malinvestment should not be problem. Double it or quadruple it and it still should not be a problem.
Of course, the reason it was a big deal is that it was all leveraged out the whazoo based on the absurd fiction that these mortgages could be transformed into AAA bonds.
Even then, however, with all this folly behind us, it need not have been catastrophic, DeLong explains:
Nationalization of as many banks as necessary in the spring, summer, and fall of 2008 would have prevented it. If the U.S. government had zeroedout shareholders and options-holders in the process of rescuing each bank from a run as it happened, it would probably have had to have nationalized Bear Stearns, Lehman, Fannie, Freddie, AIG, Citigroup, and a few others.
This is a no-no, of course. We're not supposed to talk about nationalization. But no one was talking about permanent nationalization, and this same sort of thing happens all the time to smaller banks. Still, that's just the point: These weren't smaller banks. And nationalization, like taxes, are for "little people".
In addition to being able to handle the problem quickly and efficiently, DeLong notes a crucial forward-looking, long-term side-benefit:
[W]ith the U.S. Treasury as the majority shareholder of every single large leveraged financial institution in the United States, they would have been unable to lobby against financial reform.
Which means, in effect, that most all the problems that got us into the mess could have been actually solved. I say "most all", because there are larger questions about the long-term instability of capitalism that I want to talk about elsewhere, which were dealt with in some of the other papers I read that weekend. But this was the worst crisis we had had since the Great Depression, and if we could at least fix things half as well as we'd fixed them then, it would be just really peachy. Especially compared to where we are now.
After a bit of backward looking at how Greenspan & Co. got us into the mess, DeLong ticks off seven different types of action that the government could have taken--either fiscally, or monetarily (via the Federal Reserve). After ticking them off and briefly explaning them, DeLong noted:
All seven of these tools are applications of Walter Bagehot's rule: the principal that the way to deal with a panic in which nobody is sure if contracts will be honored is for the government to make sure that contracts are honored by lending freely to anybody who asks. (But, Bagehot wrote, the lending should be "at a penalty rate"--financiers should never profit from the fact of government assistance to stem the panic. That is the second part of Bagehot's rule.)
This didn't come to pass, however. First, under Bush, Paulson wasn't about to punish anyone. (And Obama wasn't about to break ranks, either, though DeLong doesn't point this out.) Second, under Obama, there was a severe under-estimation of how bad things would get, and how much stimulus would be needed--a figure that was calculated and publicly announced between the election and New Years, but that was clearly inadequate by the time it came to governing:
However, it was clear by February 2009 that the situation was much worse than the plans made in November and December 2008 had reckoned. By February 2009 it was time for a Plan B. But the Obama administration put forward no Plan B. And then there was no Plan C. And there has been no Plan D: policies on a scale to restore the economy to normal levels of employment and capacity utilization in less than half a decade have simply not been put forward by the Obama administration.
The overall impression I get is of policy that was many days late and many dollars short. This is especially distressing since the Obama administration appeared to be aware of this danger: remember Lawrence Summers writing on December 28, 2008: "In this crisis, doing too little poses a greater threat than doing too much..."
Why?
DeLong goes on to note that yes, Senatorial obstruction (mostly, though not entirely from Republicans) was a big part of the problem. So he notes that there are two ways the Senate can operate--a national unity mode and a partisan obstructionist mode, and continues:
President-Elect Barack Obama should have sent Vice President-Elect Joe Biden to talk to the Republican senators in November 2008. Would they commit to putting partisan advantage below the public interest? Or did Biden need to get ready, the moment he took the chair and began to preside over the Senate, to cut back the procedural underbrush as rapidly as possible? Biden never had that conversation. The Obama administration's placing the blame on Senate procedures raises the question of why they never lifted a finger to try to change those procedures.
So, Obama totally failed to prepare for war. (Where was he during the 1990s, one wonders? Kenya?)
But that was only the beginning of the folly:
The Recovery Act in particular and expansionary fiscal policy in general, however, are only one of the seven tools to promote macroeconomic expansion. The other six tools do not require congressional action. The President appoints the Federal Reserve Chair and the Treasury Secretary (albeit with the advice and consent of the Senate).
And Obama's people manifestly failed, "Big Time" as America's #2 war criminal would say.
A President Obama who valued policies to reduce unemployment rather than extending the hand of comity one more time to Republican senators would, I think, have gone about staffing the administration in a very different way.
Boy howdy!
Next, DeLong goes into how Obama's advisors split all over the map about what to do. Obama didn't ask them for a Plan B, C or D, and with all their disagreements, they couldn't pull together to provide one unasked:
Without a common platform and a common set of priorities, they were defeated in detail. None of them, as best as I can tell, was happy with the drift of policy. But their unhappiness did not lead to action on the part of the administration.
Barack Hoover Obama, indeed! Not with any malice? Perhaps. But without any forethought? Definitely!
Next, DeLong does a little routine where he explains about time constraints on presidential attention and decision-making, but still ends up baffled. He notes this stuff is important--and not just to millions of jobless Americans.
EvenThe correlation between economic growth and electoral success not just at the presidential level but at the congressional-midterm level is well known. The correlation is strong. The difference between a rapid recovery and a jobless one is worth 20 seats in the House of Representatives in midterm elections.
And that's an abstract average. In this concrete case, it was probaby much, much more.
And so DeLong is bewildered... or worse:
I simply cannot understand why the task of macroeconomic recovery was moved to the back burner in the Obama administration so very quickly.
This is the part of the talk where I go from simply needing therapy to actually asking for therapy. I am at a loss, All I can do is to throw out hypothesis. What pushed macro recovery to the bottom of the White House's agenda for so much of the past months since the passage of the Recovery Act?
I do, however, have five hypotheses. All of these are speculative. I have no confidence that any of them are correct.
As a further indication of how lost DeLong is, not all of his hypotheses even try to explain what was going on insider the Obama Adminstration. Indeed, his last, best hypotheses is not about the Obama Administration at all, but about its puppet nemisis, the Tea Partiers. It's quite insightful, actually--but utterly beside the point that DeLong is trying to pursue. His hypotheses in order are: (1) The collapse of the union movement means that Washington politicians, media and other opinion-makers "rarely see people representing the interests of or even knowing much about what is going on in the bottom 90% of the American income distribution."
(2) Somewhat parallel, Washington in general is disconnected from the country. "The Washingtonians are prospering: for them and for the financiers of New York 'recovery summer' is a reality."
(3) The failure to lend at a penalty rate broke confidence in the government's ability to do anything constructive at all, and greatly magnified the obstacles to further action." But DeLong himself notes this doesn't really connect with "the climate of opinion around Obama."
(4) "Obama and his political advisors do not have a great deal of confidence in what their own economic advisors recommend because they see that the economics profession is badly split over a lot of crucial issues about how to generate a recovery." They might be less confused if they didn't get their history from Amity Shlaes.
DeLong's last explanation is the most interesting, but it has nothing to do with Obama's circle:
Nietzschean Ressentiment
Let me mention one last hypothesis--one that may get my economist union card revoked and get me transferred to a department of rhetoric, or perhaps cultural studies.
Friedrich Nietzsche talked about the losers, or about those who thought they were the losers. He discussed their tendency in various ways to transvalue their values--to say that what was thought to be bad was in fact good precisely because it was thought to be bad.
Three weeks ago I was talking to some activists from the California Tea Party. I was trying to explain the Keynesian perspective: Shouldn't we keep public employment from falling," I said, "because right the government can borrow at such extraordinarily good terms, and if we keep our teachers at work then they educate our students and our students can earn more in the future--and if teachers have incomes they spend money and that employs more people in private sector?
And they said no.
They said: we have lost our jobs in the private sector. It is only fair for those who work in the government to run some risk of loosing their jobs as well. They are unionized. They have pensions. It is not fair that they should have jobs too. They need to lose their jobs as well. Thus unemployment becomes something to be valued. The fact that government austerity will increase unemployment becomes a transvalued virtue of the policy.
DeLong goes on to explain how this applies to mortgage losses as well. It's a beautiful explanation, and in fact progressive critics have written about the movement conservatism in terms of ressentiment since at least 1970s, if not before. The idea that the Democrats "abandoned" white working-class men to lavish all sorts of goodies on blacks, Latinos and women was an absurd fantasy, but a very good rationalization for keeping racial and gender animus alive, long after they were universally recognized as evil. But again, this has nothing to do with Obama and his circle.
So what are we to do? Originally, I was going to offer some critique of DeLong's blind spots. But--as mentioned at the beginnig--since DeLong published the article around Thanksgiving, another paper has been published which does a remarkable job of making sense of what ultimately befuddles DeLong. It's not centered on Obama's circle, but it encompasses that circle as it illuminates a much broader shift in the dynamics of economic hegemony. I'll discuss that paper, "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson, in a diary later today or tomorrow. |
