All about ideas…

Economics Today

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In Search of A New Economic Model is the theme of this page. After the financial market crash of 2009 and the havoc that followed, I chose to post various economists and financial writers ideas that have affected my thinking during these trying times. It’s obvious that 19th and 20th Century economics models, with their deeply held beliefs in Wall St., no longer work. And new models need to be sought and discussed.

The 2008 -’09 Wall St crash that cost so many jobs and so many people’s their life savings, their homes, and, ultimately, their futures is but a side story in a false economics story that goes back more than thirty years to the era of President Reagan. – because that’s how far back the push to deregulate banking practices and the decline of manufacturing in the United States goes.

The United States has been in thrall to a Milton Friedman, Chicago School of Economics, style of economics for decades. Even more that Ryandian theories, Friedman apparently held to economic and banking ideas that elevated banks – and their ability to self-regulate – at levels never before seen in the American Republic.

To quote from 13 Bankers:

Friday, March 27, 2009, was a lovely day in Washington, D.C.—but not for the global economy. The U.S. stock market had fallen 40 percent in just seven months, while the U.S. economy had lost 4.1 million jobs. Total world output was shrinking for the first time since World War II.

Despite three government bailouts, Citigroup stock was trading below $3 per share, about 95 percent down from its peak; stock in Bank of America, which had received two bailouts, had lost 85 percent of its value. The public was furious at the recent news that American International Group, which had been rescued by commitments of up to $180 billion in taxpayer money, was paying $165 million in bonuses to executives and traders at the division that had nearly caused the company to collapse the previous September. The Obama administration’s proposals to stop the bleeding, initially panned in February, were still receiving a lukewarm response in the press and the markets. Prominent economists were calling for certain major banks to be taken over by the government and restructured. Wall Street’s way of life was under threat.

That Friday in March, thirteen bankers— the CEOs of thirteen of the country’s largest financial institutions— gathered at the White House to meet with President Barack Obama.* “Help me help you,” the president urged the group. Meeting with reporters later, they toed the party line. White House press secretary Robert Gibbs summarized the president’s message: “Everybody has to pitch in. We’re all in this together.” “I’m of the feeling that we’re all in this together,” echoed Vikram Pandit, CEO of Citigroup. Wells Fargo CEO John Stumpf repeated the mantra: “The basic message is, we’re all in this together.”

What did that mean, “we’re all in this together”? It was clear that the thirteen bankers needed the government. Only massive government intervention, in the form of direct investments of taxpayer money, government guarantees for multiple markets, practically unlimited emergency lending by the Federal Reserve, and historically low interest rates, had prevented their banks from following Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia into bankruptcy or acquisition in extremis. But why did the government need the bankers?

Any modern economy needs a financial system, not only to process payments, but also to transform savings in one part of the economy into productive investment in another part of the economy. However, the Obama administration had decided, like the George W. Bush and Bill Clinton administrations before it, that it needed this financial system— a system dominated by the thirteen bankers who came to the White House in March. Their banks used huge balance sheets to place bets in brand-new financial markets, stirring together complex derivatives with exotic mortgages in a toxic brew that ultimately poisoned the global economy. In the process, they grew so large that their potential failure threatened the stability of the entire system, giving them a unique degree of leverage over the government. Despite the central role of these banks in causing the financial crisis and the recession, Barack Obama and his advisers decided that these were the banks the country’s economic prosperity depended on. And so they dug in to defend Wall Street against the popular anger that was sweeping the country— the “pitchforks” that Obama referred to in the March 27 meeting.

To his credit, Obama was trying to take advantage of the Wall Street crisis to wring concessions from the bankers— notably, he wanted them to scale back the bonuses that enraged the public and to support his administration’s plan to overhaul regulation of the financial system. But as the spring and summer wore on, it became increasingly clear that he had failed to win their cooperation. As the megabanks, led by JPMorgan Chase and Goldman Sachs, reported record or near-record profits (and matching bonus pools), the industry rolled out its heavy artillery to fight the relatively moderate reforms proposed by the administration, taking particular aim at the measures intended to protect unwary consumers from being blown up by expensive and risky mortgages, credit cards, and bank accounts. In September, when Obama gave a major speech at Federal Hall in New York asking Wall Street to support significant reforms, not a single CEO of a major bank bothered to show up. If Wall Street was going to change, Obama would have to use (political) force.

Why did this happen? Why did even the near-collapse of the financial system, and its desperate rescue by two reluctant administrations, fail to give the government any real leverage over the major banks?

Therein lies the question of not just why did the near collapse occur, but why was the American economy a willing partner in an economic model that was doomed to failure. And how does the country pick up the pieces?

During the Reagan Administration, a noticeable decline in U.S. manufacturing had already begun to occur, sparking Reagan’s Administration to conceive of models and ideas to reinvigorate manufacturing in the United States. Unfortunately, after GHW Bush took office, he disbanded the groups working to reverse the decline in U.S. manufacturing.

The deeply held American belief in U.S. free market economics is strong…and wrong! Real free markets do not rely upon tax expenditures, subsidies, tax credits, and other legislation for an industry’s continued existence. The very title of “free market” implies that all players in a market place come without pre-eminent influence over other players. Your local stores and markets most closely resemble free markets than national players who use their influence and money to write legislation in their favor.

This political and economic influence, often called rent seeking, in not new, but a centuries old tradition, dating back to earliest human communities. Nevertheless, it has caused more harm than good to the general populace, otherwise known as the commonwealth – from Old English term of “commonweal” or, more generally, the economic health of the common people.

In the pages following will be excerpts and ideas from economists, financial writers, and others discussing their views on how to rebuild the United States economy.

Written by Valerie Curl

January 18, 2011 at 5:59 PM

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