RANDALL WRAY: THE CRISIS IS NOT OVER
2 June 2011 by Cullen Roche
33 Comments
Excellent thoughts here from Randall Wray who describes how the banking crisis is far from over, why the bailouts solved nothing, why the US economy remains at great risk of another crisis and why no real economic change (and recovery) will likely occur until after another crisis occurs:
Source: The Real News
Randall seems to have a bit of a problem with his math.
$400Billion per year in state block grants.
Elimination of employer and employee FICA – about 500 Billion per year.
Leaf raking projects at $15 per hour with full benefits ($5 per hour) for 8 Million people – $332 Billion per year.
And he says this will cost the treasury $120 Billion per year.
Yeah, most excellent thoughts. Brilliant! Effing Brilliant!
His $120B estimate was only for the job guarantee at the minimum wage. He was quite clear about that. And “leaf raking projects” is really a horrible mischaracterization, if you’ve seen any of the literature or looked at how it’s been done in practice in the US and elsewhere.
Ha. Yeah, all you free market guys who were all for letting the banks regulate themselves are now bitching about a $150B job program for Main Street. So do this math for me smarty pants – your deregulation cost the American tax payer $20 trillion in bank bailouts and guarantees and you are now worried about $150B in spending?
Not that I disagree with the implied point of your post,
A) it wasnt $20 trillion
B) guarantees don’t count as an explicit cost
Also, I’m not sure why you assume he is a “free market” fundamentalist from his post concerning math.
Folks – most of our problems can be laid at the feet of abusive corporate influence on Congress and our regulators.
This is not to say that much regulation is not only irresponsible but damaging to the free market. But under Bush many regulations were not enforced. Example: I worked the offshore Gulf of Mexico in the 1990s and those small red MMS (Minerals Management Service) helicopters would drop out of the sky without notice and give surprise inspections of drilling operations frequently. Virtually any infraction resulted in suspension of operations. Bush’s folks suspended that and Obama continued Bush’s policies – until the BP Horizon disaster.
And worse happened in the financial area. There regulations were actually removed (Glass Stegal, etc.).
The point is this – as long as money and power control our government and not the voters, abuses will continue to proliferate. And responses to these messes – like Mr. Wray’s – are only addressing the symptoms – not the underlying problem.
LVG,
I bet you win all your arguments when you mis-characterize your opponent.
De-regulation absolutely works when failure is allowed to fail. De-regulation in bailout nation will never work, anyone with any experience in running a business and understands how to get greed to work for restraint instead of against restraint understands that and would never claim otherwise.
Want bailouts? Then high regulation. Want low regulation? Then absolutely no bailouts of any kind. Let me know when you find that anyplace in our government-plays-Santa Claus-economy………”free markets”, for your own sake I hope you were joking.
If you believe banker self regulation, exclusively, caused our mess you’re naive. krb
We’ve tried that sort of environment where no one gets regulated. It’s called the 1800′s and it was mired with 6 depressions. The point of regulation is to reduce business cycle volatility by reducing the extent to which bad actors can disrupt the system. Clearly, that worked under Glass Steagall as there were no major baning crises under it. Then, as soon as we remove it, BOOM. Banking crisis and massive recession.
Had we not intervened in 2008 the country would be an even bigger hole. It would be like the 1800′s all over again. Huge ups and huge downs. That’s a total mess. I’ll take 3% GDP with low volatility over 5% GDP with high volatility any day of the week….reduce the risk of depression and you’ve achieved the holy grail of economics. Banks MUST be highly regulated. Otherwise, we get this horrible economic environment that we’re living in today.
Cullen,
With one exception, I don’t disagree with anything you’ve said. The exception…..it is unprovable and unknowable that “Had we not intervened in 2008 the country would be an even bigger hole.” We do NOT know that, and that argument is the same old sky-is-falling claim made by all the politicians, their appointees, and their beneficiaries on wall street who are responsible for the mess we’re in. A convincing argument could be made that had we used the trillions we’ve made available to wall street to instead wall off main street from the fall out of the TBTFs being nationalized, cleaned up and re privatized……with only TBTF execs, employees, bond holders and shareholders of the TBTFs being wiped out, including claw back of exec wealth…….and the trillions given to the TBTFs used on main street centric work projects……a convincing argument can be made that we would NOT be worse off now. Much of the exposure was to each other among the TBTFs……who knows how hard or easy, expensive or inexpensive it might have been to resolve them….assuming our leaders in govt took their tax payer fiduciary responsibilities seriously…..what a laughable thought at this point. The powers that be made a choice, a choice to support wall street INSTEAD OF main street, and the….”well, we would have been worse off”…is the excuse they use. It’s an age old political ploy….claim the unprovable. Please don’t do their cheer leading for them…..there are enough in the main stream media to do that.
Irregardless, I don’t think you contradict my post either. Tearing down the Glass Steagall wall was disastrous……banks wanted in on the non-bank income opportunities. Fine, but that made them no longer “banks”, and SHOULD have made them no longer eligible for bank bail outs. And for the shadow banking cabal to so easily gain re-classification as “banks”, with the aid of the fed and deer-in-headlights oversight of govt, to gain access to fed largesse is……I’m rarely speechless, but that gets me close.
If we plan to bail out “banks”, then yes, they should be highly regulated and remain conservative…..that doesn’t contradict my post. Thanks, krb
KRB,
I totally agree here. The crisis was multifaceted. It wasn’t just the banks that got greedy. It was also Main St. And that’s why we need to regulate the banks. A law like a 20% down law would have not only strapped the banks, but it would have kept a lot of people from taking on stupid loans that they never could have afforded in the first place. That’s an extreme example, but it gets the point across rather succinctly.
When we tore down the regulations we increased the risk that a crisis like this one could occur. Now, I totally agree with you that we’d be better off if we’d bailed out Main St (that’s what I wanted after all), but we shouldn’t have to bail out ANYONE when a recession occurs. I am a firm believer that the right amount of regulation can smooth the business cycle and keep these disastrous debt implosions from occurring. The history of Glass Steagall would seem to confirm that….
Enjoy your weekend. Mine starts in 5, 4, 3, 2, 1….
Mark You are right, but stubborn ideology is producing the ill-informed comments missing the influence of big finance on government..
Yeah, that’s what it is. My “stubborn ideology” causes me to try and understand how the monetary system actually works and come up with policy reforms. My “stubborn ideology” is what makes me think that wanting to get the money out of financial regulatory policy and trying to understand how the financial system works aren’t mutually exclusive. Sure wish I didn’t have this “stubborn ideology” clouding my thinking.
Please read my comment below.
Not actually disagreeing with Mr. Wray – we need action on these symptomatic problems.
But more importantly we need to address the underlying problem – that is Special Interest Money & Power controlling our nation instead of voters.
Mr. Wray does not address this issue.
Wray wouldn’t disagree (I know him well). But turn it around–suppose you do address those issues, then what? Wray has the answers to that. Further, even with corruption we could still stand to have better policy–it’s been done before, it’s been done elsewhere, even though there’s no system now or in the past that wasn’t corrupt to some degree. If the economics profession understood how the monetary system worked, even with all the corruption, we’d have better policy, imperfect as it would be still.
Let me add to that . . .
Comments like Mark’s appear to suggest that we can’t talk about appropriate policy without talking about fixing the corruption. That’s silly. The two aren’t mutually exclusive. It’s like saying we can’t research and discuss whether or not there is climate change because of all the corruption in the political system. These things still need to be studied and discussed regardless. People need to know how things work and how to fix them regardless; in its own small way, understanding these things gives people even more reason to use their voices against the corruption (not to mention the fact that the counter movements are always asked, “so what’s your solution?”)
Another add . .
Wray’s written quite a bit about the corruption in the financial system and its influence on policy, and even in this interview he mentioned GS’s influence on the Tsy. His colleague, Bill Black, is perhaps the best there is on that issue. Another person in the MMT camp, Jamie Galbraith, wrote “Predator State,” for heaven’s sake. But apparently we have to ONLY talk about those things, or at least talk about them EVERY SINGLE time we write or are interviewed about the monetary system before people like Mark will think we are saying anything useful.
$20 trillion bailout for wall.st !? cant wrap my head around it.
anyways, i like his idea about the job-guarantee…its not like we are letting unemployed people go hungry currently….they get foodstamps, unemployment-checks, handouts, and other wastes.
This job-guarantee is way better…atleast you get people to do something. Foodstamps and handouts? this is way better.
I agree. Put those people to work. Make them earn a paycheck!
bankers still get bonuses for ripping clients off, using US balance sheet and get bailed out when the *** hit the fan…why should we put real people to work ?
This is crap. Before we ‘put these people to work’ in order to lower the unemployment number and alleviate our sorry asses from fixing the system…fix the system!
Dismantle WS and the banks and put the SOB’s now work to work earning $15.00 an hour. The’ve cost us much more…come to think of it, make them work for nothing for a few years. Those who have a PHD in Science are to be put to work as teachers or researchers. Those who chose to leave the country will pay back every cent that the government provided for their education.
I do agree with him.
his point has become increasingly obvious to me over the last 3 years.
anyone who can look at human history and can believe we can deftly control any situation(especialy credit-any kind of private or public paper) without base constraint, is seeing something i cannot.
the financialization of practically everything will bring out the worst in us.buy and hold is dead forever.
just my opinion.
I convert all economic theory to flow and money type. Using that technique and listening to Randall:
1)Block Grants to the States. This is base money that issues from the Treasury and vectors into wages, and then ultimately pays down loans. Bank loans are credit money that disappears off the ledger when the loan is paid off. In this way the block grant base money deleverages credit money and is non-inflationary. The base money issued ultimately disappears as an accounting entry on bank ledgers.
2)Payroll Tax relief with employer match. Taxes are a reserve drain to the treasury. Reserve drains are base money that returns to the treasury. In other words, by doing a payroll tax relief, it is keeping base money in the pockets of labor, where said labor can then pay down their credit money loans. See number 1.
3)Programs like what FDR did during the Great depression: This is base money directly spent into labor, where labor can then pay down their credit money loans. Importantly, the base money is spent directly into labor, and bypasses the banks.
4)Job Program, where labor has a wage floor. This is base money directly spent into labor, where labor can then pay down their credit money loans. Also, this idea puts base money into the economy, which helps displace expensive credit money.
5)Stop home foreclosures: The above 4 items pay down credit loans, thus limiting foreclosures. Also, foreclosures are harmful to labor, and vector wealth to those who have savings. An argument can be made that banks often don’t loose with foreclosures, only those whose labor was confiscated are losers.
Putting on my MMT hat and thinking in terms of where credit money and base money vectors leads to a common theme e.g. credit money balance sheets are paid down; no doubt that Randall is right in his proposals. He also mentions that we need more regulation to control our credit money bank system.
I’ve probably annoyed everybody here at this website in previous writings. 100% reserves solutions are 100% base money, and regulation is built into the money itself. There is no need for job guarantees as real money becomes an efficient arbiter between those who have money to loan and those who want to take on debt. In other words, our current credit money system vectors wealth away from labor, thus making it difficult to employ said labor. Randall is nibbling at the margins and his ideas would probably keep the system going for awhile longer. But, clever humans will figure out other ways to break regulations and game the system for rent seeking. Credit money is the problem and eliminating credit money is the ultimate solution
Nice interview. I wouldn’t mind a follow up debate, if kept civil and on the issues.
Great interview.
The “trick”, it would appear to me, would be finding the right wage level, and ensuring that these jobs were not “make work” positions. Too high a wage level would disincentivized looking for better work (and draw talent away from the public sector). Too low would not lead to being able to sustain oneself within our currently constructed society, with its built in costs (building codes, transportation costs, etc).
Of course, one must also take into account the jobs that would be lost from this type of program. Like prison guards, police officers, welfare workers, etc. In a cruel twist of irony, many would then need this jobs program themselves.
Harder, perhaps, than determining the proper wage level, though, would be ensuring these jobs were not “broken window fallacy” make work jobs. Wray talks about this somewhat. This would be tougher to optimize.
Valid points, though there’s already a lot of research on each. We’ve been doing this for 20 years.
I am sure, I am sure. Just thinking off the top of my head here. I must admit I see the logic of this jobs proposal, if, of course, run properly. The caveat to all such proposals, I suppose.
No worries. FYI . . I simulated the program in a large macro model several years ago and this was the conclusion:
“Admittedly, even if one agrees that an ELR policy would have a stabilizing effect on the economy, there are still significant difficulties to be overcome regarding logistical and administrative complexities. In particular, according to the simulations here, an ELR effective at offsetting business cycles and providing price stability does so via a buffer stock of ELR employees that rises and falls countercyclically, though fluctuations in the buffer stock need only comprise—in the U.S. case simulated here—a minority of existing ELR jobs. Also, the ability to employ ELR workers in useful activities that generate productive output further determines the extent of the stabilization effects of the program, at least according to the simulations here. Neither of these would be easy to implement or sustain on administrative, logistical, or political levels. On the other hand, these complexities and difficulties are related to one of the program’s potential strengths vis a vis the other policy rules: namely, if effectively implemented and sustained, the simulations here suggest an ELR program’s stabilization effects could be automatic in the sense that they would not be dependent upon any policymaker’s forecasts, targets, or conceptual understanding of the economy’s functioning—which can clearly have an ideological bent. On the other hand, the effectiveness of an interest rate rule, tax rate rule, or transfer rule would be (or in the case of interest rates, already is) dependent upon the abilities of policymakers to correctly estimate and forecast current versus “potential” or “target” variables, as well as upon their (potentially ideological) perspectives regarding the relationship of policy instruments to ultimate policy objectives. This is so even where a small, somewhat politically-independent decision-making committee can avoid the “decision lags” that plague a larger body such as the U. S. Congress, as already demonstrated by the FOMC.”
Yes, especially political levels (or perhaps more accurately, the biases of those whom they serve).
I see the vision … and the issues … (or at least I think I do) … Just enough income to employ, but not enough to substitute for normal private labor when the market comes back. Productive projects as to not induce either inefficiencies, “unfairness”, or inflationary effects.
Many could (would) argue that this sort of “guaranteed employment program” was just another ideological scheme itself. From a more detached, objective perspective, if implemented correctly, it would in fact be more of an efficiency maximizing system, beneficial for almost all, in the grander scheme of things.
An actual working version of this would also likely piss off both the left and the right; the right via “rewarding the lazy with hard-earned taxpayer money” misconceptions, the left due to the fact that income levels would have to be quite low for the program to a) not to crowd out normal private labor creation or b) induce inflation (though this would depend on the productivity of the labor, I suppose). This income level would likely be lower than what many on the left’s representative ideal of a “living wage” would be (there is, after all, a difference between an actual “no cable, no iPhone” living wage and an ideological “Michael Moore 1950′s middle America” living wage). But irritating both sides simultaneously usually means a plan has validity. Creatable politically is another issue.
Because I believe the greatest obstacle for implementation, unfortunately, would be ideological. Other issues could be worked through (not to perfection, but nothing ever is). Getting people to wrap their heads around the concept itself, however, would be tough. People (including many university professors) already can’t get their heads around sectoral balance accounting, let alone something like this. One would have to look at the human sphere with a desire towards maximizing its efficiency, and not as a collection of autonomous individualistic entities, as the optimal model. De-teaching Adam Smith? Assuaging social engineering fears? Whew … Good luck. Not condescendingly, just … knowing what I think I know about humanity … Good luck with that.
Maybe in Europe.
I agree with all of that. You’ve characterized quite well the criticisms we hear from both the left and the right.
Let’s do the New York math. Medicaid in New York covers virtually everything; major medical, hospitalization, dental, othodonture, eyeglasses, behavioral health, substance abuse etc. It is the most generous Medicaid program in the country. How much would it cost to buy such coverage in the private sector? If any insurance company actually wrote it, the policy would likely cost $25,000 a year or more in premiums. Add SNAP (food stamps), heating assistance, rent assistance, grants for children, etc. and a single mother of two has an effective in kind income of over $50,000 per year plus enough cash via SNAP for a few meager pleasures. A live in boyfriend can add to household income by off the books employment from a variety of sources. A large and supportive bureaucracy in New York also makes a living off of these programs by serving those collecting on them.
Why would any intelligent person with limited formal education and few prospects want to “work” in the sense that middle class persons have in mind when these programs are available? As more working class Americans whose employment income does not equal public assistance levels figure this out, labor force participation will continue to decline. Everyone responds to economic incentives sooner or later.
A “Rosetta Stone” for economic policy going forward for the next several yrs.
My 2 cents = regarding the Job guarantee = the minimum wage should be
temporarily LOWER.
My project on Transfinancial Economics may have relevance here. See p2pfoundation entry here