“IT’S NOT A BANKING PROBLEM”
I found this commentary by Paul Krugman to be somewhat humorous. 2 years after the fact, prominent economists are finally pointing out that we have a household debt problem and not a banking problem:
“You can clearly see the oh-God-we’re-gonna-die period following Lehman’s fall; you can also see that it’s over, and stress is more or less back to normal.
So what’s holding back the recovery? Housing and household debt.
And so the priority in financial policies should be helping to clear up the housing mess and helping arrange debt relief. This is not the time to worry a lot about the banks — and especially not to worry about what bankers say.”
I am not sure why it has taken so many so long to diagnose this problem. The Fed, for instance, thought we had a credit crisis. The media was convinced that it was the banks that were the problem. But the real root cause of the issue was households. The reason I bring this up is because of my personal frustration with regards to the current economic plight. I have written letters to the Fed and prominent politicians outlining all of this in very easy to understand language. In 2008 I said:
“We have a major capital problem at the U.S. banking level. What Ben Bernanke and Hank Paulson are essentially proposing is an asset swap. The Fed will take on the toxic assets of the banks and they will receive reserves in exchange. This is important because it will alleviate the strains in the credit markets. That’s a good first step, however, it is not a solution to the problem at the household level and THAT is where the real economic weakness is. By introducing this asset swap idea Ben Bernanke is simply altering bank balance sheets. He is not fixing the economy.
So, the government has a partially correct solution. Not the BEST solution, but it gets to the core of the credit issues. They will essentially trade the bad paper for good paper and it will alleviate many of the pressures on the banks. As I have written here many times the banks are the lifeblood of the system. I like to think of the banks as the oil in the engine. If you run out oil the system begins to break down and eventually the engine stops running. You can’t have a healthy functioning economy if the banks aren’t lending. Unfortunately, because this won’t fix any problems at the household level it won’t induce any borrowing. So, it’s a clever way to resolve the banking crisis, however, it doesn’t fix the root of the problem which is at the household level.“
So here we sit quibbling over debt ceilings that don’t matter and Fed policies which are a complete and utter joke. Meanwhile, the household sector remains the root cause of the current malaise and deeply troubled. Why was it so hard to see that the mortgage crisis did not start with the banks? More importantly, why did so many people miss what should have been such an obvious fact? Or were they simply not interested in helping households because their banking lobbyists were too busy creating fixes for the banks? I don’t know, but it’s pathetic no matter which answer you come up with.
All of this has been quite obvious for some time. The golden consumer goose is cooked, the crankshaft has seized for lack of oil, the commons are depleted, etc. You can’t possibly think these criminals are well-meaning, but just a little slow.
You are not nearly cynical enough. It’s not that they can’t see this or don’t want to; they engineered it, for mammon’s sake. It’s called creative destruction, toward turning the US economy into a banana republican plantation. Greenspan, Bernanke, Paulson, and Geithner are not nearly as stupid as they appear to be. Read Naomi Kline’s “Shock Doctrine: the Rise of Disaster Capitalism”. The strategy and formula has been repeated over and over again with the collusion of uber-rapists at the IMF, and it is eerily the same as what is occuring now in the US. Bend over or grab your pitchforks.
If you realise they are all supply side wonks and can’t get their head round the demand side then it all falls into place.
They still think there is always suppressed demand just waiting to burst forth if they only open up the taps a little more. That’s their entire mindset – all of them.
It’s just like Polaroid who couldn’t get their head round the idea that digital technology made the instant camera obsolete. They were just too tide into the meme and refused to accept the inevitable.
The only approach to this blinkered thinking is to discredit them totally and move onto a new model with new people doing the thinking. The old guard are unfortunately beyond help.
Saying that the debt ceiling doesn’t matter is the real complete and utter joke.
Not only that, it’s terribly tedious.
Love.
I think policy makers only see what they are motivated to see. So it is the lobbists. And the Fed’s purpose is to ensure prosperity for the bankers, not the general economy.
Well, I agree that there ist a houshold debt problem. But 2 or 3 years ago there were hundreds of billions of toxic assets, which are now kept in the Fed. There was sloppy banking, which helped creating the huge pile of household debt by creating toxic assets.
“Why was it so hard to see that the mortgage crisis did not start with the banks?”
Because if you figurew out that the root can be found in the indebtness of private househlds, it is something the current system cant fix and noone wants to touch this.
Thats why everybody is pointing on symptoms, claiming those were the roots.
People who sit on tons of claims on money (known as FIAT) for sure dont want devaluation of these/ that the indebtedness of private household at some point is getting credited (or default)…
They want an ongoing appreciation of liabilities and not a free money system.
And if you shift attention on a claimed bank crisis, thats how you achieve to kick the can down the road. THats the game, always distract from the real causes to maintain status quo.
By the way, Iran and Lybia both countries are working on a free money system, thats the main reason why they are being ettacked. People who gain power from current moneysystem do everyting to fight a new money system.
They treated an insolvency crisis as a crisis in liquidity and laughed all the way to the bank
First, agree 100% with Neil on the supply/side/demand side problem. To extend the car/oil analogy: In 2008, the engine and steering froze up and the car consequently lost control and plunged over a cliff. And yet nearly three years later we still have these would-be mechanics of supply-side monetarism furtively pumping lubricants into the broken, smashed-up carcass of the totaled car, expecting that if they get it sufficiently lubed, it will start up and run again. But just because a financial breakdown wrecked the economy doesn’t mean that the best way to un-wreck it is to fix finance.
Some of the motivations by the neo-monetarists and supply-siders of both the left and right are rooted in nothing but desperate wishful thinking. They are desperate to believe in the monetary magic of the central bank wizards, because that means they don’t have to brave the politically challenging and scary battleground of fiscal activism, where the libertarians and conservatives have set up a permanent defensive perimeter and are prepared to lob political bombs labelled “Socialist!”, “Communist!” if would-be fiscal activists try anything funny.
Here’s something else to understand about prominent academic economists. First of all, they:
(a) don’t work in the everyday business economy. They are in universities that are run in accordance with a quasi-medieval business model, and are personally insulated from their institution’s economic decisions by the operational wall that separates faculty governance and academics from business operations. They lack an intuitive, hands-on understanding of what is currently happening in the business world, and it never seems to occur to them just to ask people. To figure out what is happening, they pull some simple model out of a book, and then try to plug in the data that the model tells them they need to collect. It is a scholastic, theory-obsessed approach to knowledge.
… and also, they
(b) have tenure, along with income and job security. Thus they do not have an intuitive grasp of what it means to live in an insecure world of massive layoffs and insecurity, as both an employee and a householder, in which the sword of Damocles constantly hangs over one’s head. If their personal circumstances were different, they would have no trouble at all understanding why so many millions of ordinary consumers are not spending any money, and why so many businesses are disinclined to invest money in expanded production and hiring to make new products for non-existent customers.
Dan…excellent commentary. How do you apply this analysis to public officials and corporate executives?
Corporate executives aren’t obtuse. They are just greedy, and trying to cut themselves the biggest slice of the pie possible under the current rules. Politicians do understand job insecurity, but they don’t work for us. They work for the people with most of the money. Keeping their jobs means pleasing their bosses.
Yes, excellent comment. El Viejo too. But I no longer think this is a case of willful blindness or unenlightened self-interest, as Yves Smith puts it in her excellent book, ECONNED. Rrather it is a kind of wink-nod-nudge “conspiracy” of understanding, a shared delusion among the elite (Summers, Rubin, Greenspan, Bernanke, Paulson, Geithner, Obama, et al) that those clever enough to loot society’s booty for themselves are, by ‘virtue’ of superior predatory skills, entitled to rule the plantation.
And every advantage must now be pressed in concert to ensure that what’s left of the commonwealth is placed in the hands of these more capable authoritarian neo-liberal slaveholders. That this is ultimately for the betterment of humanity, of course, goes without saying. Hence the destitution of the great unwashed middleclass rubes, wars torture and slaughter of infidels, are righteous causes in the end.
Where common sense has seemingly eluded our elite ivory tower econmists, here’s FDR on adding more debt to solve the credit crisis, in his inaugural address:
“Primarily this is because rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence….The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.”
Alas, our money changers today have NOT admitted their failure, nor have they abdicated, fled from the temple or disembowelled themselves in disgrace, as they ought. In their God delusion, they remain arrogant, disdainful, and violent in spite of all evidence of their complete failure. They have instead rededicated themselves to destroying democratic society in America in the service of empire, their global empire.
Wait a minute. Households were in debt correct, but that is how new money is created and the economy grows right? Many economists today wish that more would borrow now, right?
The problem is politicians ‘tweaking’ the system to make their party look good. KEEP THOSE INTEREST RATES LOW BOYS SO THE SHEEP CAN BUY ANYTHING THEY WANT.
Trouble is, down the road, debt gets ahead of everything else and there is hell to pay. Might I also suggest that corporations took more than their fair share and people were enticed and coerced into debt. The banks independently did the same thing to farmers years ago. Remember Willie Nelson? Look at real wages. Also, look at the wages of the private sector verses the govt sector.
MMT says that the private sector is the goose and the golden egg and everything else is support for the goose. Well the goose has been manipulated and neglected and now everyone will pay.
Moreover I remember agressiv aadvertisment by spam E-Mails from financial institutions in the years 2004 to 2006: “You are approved for 200.000$” up to “You are approved for 1.045.283$.
The customers were not robbing the banks to pile up the debt
.
This is the exact kind of article that keeps me coming back. I agreed with everything you said and disagreed with only one bit. This question: “Why was it so hard to see that the mortgage crisis did not start with the banks?”
Hmmm. No offense, but yes, it did start with the banks. When they idiotically gutted their own underwriting practices to allow an enormous amount of people to have credit they never should have had. Without that mistake, none of this would be an issue right now.
Isn’t that what a CEO is supposedly getting the big bucks for?… So that people who shouldn’t have the bank’s money aren’t given it. They handed out free money and tons of incentives for people to buy houses that weren’t affordable to the buyer. Sure the people fell for it hook, line and sinker like a bunch of greedy fools, but they were the tools, not the beginning of this debacle. A plan was hatched to get them into bombing mortgages and bet against them. Surely you get that. Or maybe you are using a technical definition of banks that differs from the common implication?
There’s a chance you mean the mortgage crisis doesn’t end when the banks are out of trouble, but only when the mortgagors are out of trouble as well. Or something else. Again, bit confused. I was with you 100% until that question. I’m not sure what to think.
Do you really mean to say that the mortgage crisis did NOT begin with the banks? If not, whom am I to think is implied to have started it? Surely not mortgagors given permission to buy a home by a bank?
ie: – _crafting_ their policies and hiring lots of robots to quickly multiply the fraud to create paper they could bet against – a class of officers telling buyers not to worry about the rate hike after the promotional period “you can always refi -ok? sign here sucker” Obama could have given every American $100k to pay off debts and spend on durables and it would have been cheaper than TARP!
Professor [Raghu] Rajan is not your average Chicago academic. He argues that [income] inequality lies at the heart of the crisis, forcing average Americans to borrow money to finance their spending – “Let them eat credit” is his killer phrase – and he warned of the risks of leverage in the financial system well before the crisis broke.
http://schott.blogs.nytimes.com/2010/07/06/let-them-eat-credit/
The fastest way out of the woods is the plan former Labor Secretary Robert Reich has suggested: Payroll tax holiday, universal Medicare, dramatically expanded Earned Income Tax Credit. Naturally, the incumbent politicians of both parties are running the opposite way, I won’t be sad when they’re eaten by bears.