Well, the bailout bill passed, and we’ll have to see if it actually does anything. What’s gone missing in the discussion surrounding this bill (among other things) is any discussion of the assumptions underlying this legislation. Ian Welsh spells them out:
If you believe any of:
1) That the paper will not return high enough [profits] to recoup losses, since Treasury will be buying it at above market value;
2) That this is the beginning of more than a normal recession;
3) That Paulson in particular and Treasury in general will not make getting the money back a priority, but instead make their priority overpaying the banks to help them;
4) That because of information asymmetries, as Soros has explained, the Treasury is going to get stiffed with the worst crap;
then you don’t come to the same conclusion as Krugman does. Krugman, fundamentally, as he says himself in the article, believes that these people are operating in good faith and that they are not actually incompetent…..
Given the track record of the Bush administration, I would respectfully submit that extending them the benefit of the doubt is not wise. In fact it might be considered the opposite of wise. Remember also that we are talking about the Bush administration, the 700 billion can be all spent by the time Obama gets into power, and it probably will be.
Krugman praised Bernanke when he was appointed and extended him a ton of benefit of the doubt. He was wrong to do so. There are few economists I respect more than Krugman, but he is still an insider who believes that other people who are part of the club are to be granted the assumption that they are both competent and operating in good faith. Since Bernanke has turned out to be a disaster, and since Paulson’s track record is abysmal, I will submit that Krugman is wrong to think this.
As such, he is also very probably wrong to assume that the bailout bill will probably do no real harm and have no real cost.
In the short-term, what’s infuriating is that the Democrats didn’t hold out for anything substantial. The Alternative Minimum Tax? Obama would have altered it. And “encouraging” lenders to modify terms? They would have done so already if they had wanted to do so. And to top it off, since this isn’t a stimulus package, there’s no funding mechanism in place for it.
The long term problem is that there is no movement to deal with the fundamental problem: we are facing the end of several cumulative speculative bubbles. The music will stop, and the real question becomes, who gets a chair? Welsh:
The US has been run, for over 30 years, for the benefit of the rich. The financial sector, which once accounted for about 10% of the economy’s profits, burgeoned to about 40% based on loose money, deregulation and so-called “free” trade–which was no such thing. These profits, as Kevin Phillips among others has explained at length, were chimerical, illusionary, a sign of America’s weakness and not strength…..
The markets are now panicking, and we are being told the end of ages are coming. And there’s some truth to that: if Congress holds firm on this and then goes on to write and pass a bill which takes care of Main Street rather than Wall Street, then the end of an age is indeed happening; since the financial sector had become so large, so parasitical on the real economy, the end of that age is going to hurt a ton. The US has spent decades offshoring and outsourcing jobs, not rebuilding infrastructure properly, ignoring education, not dealing with fundamental problems like energy supplies, letting its universities work for for short term corporate cash instead of long term gains, and so on. The real economy, in other words, has been under invested even as the financial economy has sucked up all the room. Financial companies promised 15% returns, normal companies were forced to try and do the same, but the reality is almost no company can deliver that without fraud, extremely risky business practices, or both.
As it happens those 15% returns were lies, they were not real. They were a result of fraud, leverage, booking future profits today and various accounting tricks. They sounded too good to be true and as with most such things, that’s because they weren’t true. They were lies.
But because they sounded true, money went into companies that “delivered” such returns instead of into the real economy and the result has been that the real economy, which most of the population lives in (as opposed to the Wall Street “economy” which gives itself bonuses equal to the raises of 80 million people) has stagnated and fallen behind.
Getting off the financial path, off the junkies fix of fake profits and loose money is going to hurt. Let no one tell you otherwise.
Until we start investing in production, infrastructure (physical and human), and new technology–which in light of a national debt that has surpassed $10 trillion will have to come at the expense of the financial ‘industry’–we’re not getting out of this mess. To end on a truly depressing note, I leave you with an observation by Robert Farley:
Both the settlements problem and the bailout problem remind me of something I wrote a while ago in reference to the Roman Republic. Simply because something must happen does not mean that it will happen. The Roman Republic faced a series of internal crises that were evident to all and that desperately required political solution; moreover, the contours of such solution were evident to most of the relevant political players, and in the abstract were achievable. The Republic had been designed to manage the political affairs of a small city-state. The achievement of Empire made those institutions quaint; provincial governors would make war on their own authority, and return to Rome at the head of Legions bound by personal loyalty and with more money than the whole of the Roman state. The institutions of the Roman Republic, solid enough for five hundred years, were insufficient to actually achieving the necessary solutions. In the face of crises that demanded solution, the Roman Republic crumbled, because the institutional structure created vested interests and veto points that prevented the achievement of any solution. The Republic could not save itself because its very structure prevented it from doing the things that were necessary to reform. Almost no one wanted this outcome, but no one could stop it from happening. It’s not that people are stupid (although many are) or dishonest (although many are); its that the institutions make certain outcomes difficult to achieve….
The United States, I think, faces a crisis far less substantial than that of Israel or of the Roman Republic…. This also isn’t a call for bipartisan hand-holding; the Republican Party has essentially ceased to be an organization interested in policymaking of any sort, and can’t be regarded as a legitimate partner for the making of responsible legislation. Still, politics can fail even when almost everyone knows that they want to succeed.