On Friday, the U.S. Treasury took some extraordinary, extraordinarily risky, and probably doomed to failure, steps to bailout the financial institutions and speculators that dominate the U.S. economy. As with the previous and ever more panicked bailouts, these were aimed at preserving liquidity at the largest financial firms at an incredible cost to the U.S. taxpayers.
When considering such complicated phenomenon, metaphors and analogies can help. I think of the situation as an ecosystem in collapse. In any ecosystem the peak organisms such as sharks and whales are dependent upon an entire food pyramid that extends ultimately down to the plants and plankton that fix energy (do work and create value). In the U.S., but also in the global economy, we are seeing the peak organisms in sectors such as the finance, insurance, and real estate in severe convulsions and even dying. Firms in whole sectors such as the investment banks are no longer viable. In response, the U.S. government is plying them with bailouts and other measures to keep them on life support. The U.S. Treasury is openly manipulating the economy’s fever chart, the stock market. In each and every case, this has provided temporary relief, but not addressed any of the crises. This is not surprising because the decisions are being made behind closed doors by a small group of insiders whose whole experience is in the peak organisms. They cannot accept that the model that made them wealthy and successful has ended up destroying the plankton. So their response in every one of these ever larger and more frequent bailouts has been to transfer from the plankton to the peak organisms.
A more creative way of thinking is to recognize that what must be recuperated is the plankton. This will have to be funded by dramatic increases in taxation of the wealthy and a carbon tax to reduce energy usage to be transferred to the poor and middle classes. It is not too early to begin thinking about programs such as a new environmentally oriented Civilian Conservation Corps that would install energy efficiency and solar energy devices on new homes. A Works Progress Administration would undertake similar programs for public buildings and transit - this could be combined with a public arts program. Given the shocking lack of educational attainment in the U.S., another program could be to educate America. These programs would be labor-intensive and funnel U.S. dollars into the U.S. rather than being spent on imports from abroad. Programs spent on assisting the plankton and, at least, partially paid for by those to which so much was given is a far more creative solution than one that only bailouts the banks.
I believe fashioning an affirmative and creative response to the current financial disorder requires understanding where the problems are located and fashioning responses that target those locations. So far, I have heard nothing from either of the two leading candidates that they have an inkling of profoundness of the situation.
I would be interested to hear what have you folks have been thinking about the current crisis?
Tags: financial crisis, taxpayers, U.S. Treasury
September 21st, 2008 at 11:25 am
Re: “This will have to be funded by dramatic increases in taxation of the wealthy and a carbon tax to reduce energy usage to be transferred to the poor and middle classes.”
I thought this blog was about creativity, not socialism. This idea certainly will doom us extended lethargy if not outright failure. There is no time in human history that politicians taking resources away from the most creative and successful people and giving them to some politically motivated constituency has ever resulted in a growing and vibrant economy.
The root of this crisis is the government’s insistence that mortgages be made to people who couldn’t afford them. The government controls the flow of money, and excess money in the system led to a massive housing bubble that is now painful to correct. We are in a crisis for sure, and the government has to act as the lender of last resort to prevent a meltdown. As soon as the crisis has passes we need to get the government back out of what should be a private sector responsibility as expediently as possible. The last thing we need to do is institutionalize the governments active involvement in the economy.
September 21st, 2008 at 12:10 pm
“This will have to be funded by dramatic increases in taxation of the wealthy and a carbon tax to reduce energy usage to be transferred to the poor and middle classes. ”
Sounds like legalized plunder to me. If I show up at your doorstep with a shotgun and demand that you “be neighborly” and give some more of your money (that you earned) to some of those less fortunate, you would say I’m breaking the law. Change that scenario around to say that now I’m a politician, and my weapon of choice is votes, how does that make it any more right? It’s not - period.
This is a very realistic snapshot of what the creative class is up against. As they continue to lead the country in productivity and INCOME, how are they going to like being the target of class warfare? Everyone wants to see people be financially independent, but at what point will the creative class/knowledge workers say enough is enough?
You can count on more politicians looking to buy votes and power, by robbing Peter to pay Paul. Fortunately, most people see through an immoral power play by those preying on people’s jealousy or the guilt-ridden schemes of intellectuals who have never had to produce anything on their own, and from the comfort of their their university office try to make amends.
September 21st, 2008 at 4:59 pm
Are you seriously suggesting that we usher in new “creative” solutions by resurrecting the New Deal?? Are you kidding???
I could write for hours on this subject but it seems to much like a waste of energy given what’s been offered.
You’ve written the most ridiculous piece about the crisis to be found anywhere in the world. Please keep the socialistic views in the textbooks and classrooms and out of the real economy.
September 21st, 2008 at 7:08 pm
OK everybody, take a deep breath.
What Martin’s suggesting isn’t socialism, which is defined as the government owning the means of production and sources of capital. That’s what the secretary of the treasury is trying to sell to the Congress.
What he is suggesting is higher tax rates at the top (however that’s defined) to fund building infrastructure, in other words directing investment to increase productivity. The New Deal, like Eisenhower’s interstate highway program, created public assets that made the private sector more productive. I don’t see anything wrong with the government building alternative energy systems, conservation, transit and education.
September 21st, 2008 at 7:14 pm
I agree with Professor Kenney. The current crisis is _due to_ a free-market fundamentalism run amok. In fact, if any of the above 3 commenters have actually read Marx, which I doubt, they would know that he said that capitalism is always in crisis - it creates it. Talk about socialism, that’s exactly what this bailout amounts to. Deregulate, privatize, roll back. Then, when the crisis arrives, which it of course did, the tax payers get stuck with the bill. What Professor Kenney rightly points out is that if a society can muster the political will to shower $700 billion on rich people who don’t need it and won’t spend it in a way that fundamentally alters the dynamics that lead to the crisis in the first place, then seemingly we should be able to muster the will to allot money for services that actually make people’s lives better off. No doubt that there will be some free-market dead-enders like the above 3 commenters who will whine and moan. People talk about creativity, but its hard to be creative if you can’t pay the rent or mortgage. By the way, John Warner absurdly suggests that the mortgage is due to “government’s insistence that mortgages be made to people who couldn’t afford them.” Huh? If the government had anything to do with it, it was because of the Republican party’s obsession with deregulation. Place blame where it belongs, on the financial industry.
September 21st, 2008 at 9:11 pm
Brian
Re: if any of the above 3 commenters have actually read Marx, which I doubt.
You discredit yourself by making asinine comments for which you have no basis for asserting. You have no idea what we have or haven’t read.
I agree with you that this bailout stinks of socialism. That why they government should get out of what should be a private function as soon as possible.
Democrats in Congress like Barney Frank absolutely gamed the system to encourage loans to people that can’t afford them, and that is a precipitating cause of this bubble and the resulting crisis. This not a free market failure. Like the Great Depression, this is a failure of government interference with the market. If there had not been an implicit federal guarantee of Fannie Mae and Freddie Mac, we wouldn’t be in this mess today. Investors in a free market would have had more disclipline because they would have born the risk of loss, not taxpayers.
There is plenty blame to go around, but Congress has a disproportionate share of the blame for this crisis.
September 22nd, 2008 at 12:26 am
Hi all,
A couple of points:
1) Socialism is about the state owning and operating certain sectors of the economy. TAt the present moment, we are not on the way to socialism. This is simply crony capitalism from the Bush Administration and the investment bankers that are at this moment running the Treasury.
Taxes have nothing to do with socialism (they have existed in all systems at all times).
2) We need to think creatively about the current catastrophic market conditions. A debate needs to be opened and we need to think more comprehensively about what the solutions to this crisis are. I believe that the contemporary problems of financial meltdown, massive income inequality, and environment are interlinked and we had better start to see this.
3) The problems that we are facing in each of these arenas are massively complex and interrelated. Sorting these problems out will require the greatest amount of creativity we as the human race have ever summoned up.
4) You are absolutely correct that the Democrats were completely and abysmally missing in action on these issues. The current Democrats have and are now showing little creativity or even thought about the current crisis. They absolutely cannot be excused, but let guilt be handed out evenly! The crazy deregulationists in the Republican party deserve primary blame, the Democrats were only accomplices.
New thinking is absolutely needed to spark a debate. I would say let the debate bring in the libertarians like Ron Paul and the environmentalists like Ralph Nader. All sides should marshal evidence for their beliefs as to how to approach this serious meltdown.
There is little to be gained by name calling. We are at a turning point and need an open discussion. What is clear is that the neocon, neoliberal Chicago School of economics has collapsed. The old liberalism of Hubert Humphery collapsed a long time ago.
In contrast to you, I believe there is no leftist or socialist voice in the US and we are the worse for it.
The essence of creativity is to be able to take many perspectives and synthesize them to come to new understandings and solutions.
I have no fear of the libertarian perspectives, which I value. I am an admirer of Ron Paul because he has been truthful during this crisis, while few others in our Congress Democratic or Republican have been.
At a minimum, like during the New Deal we need serious hearings with serious questioning on what happened and who might be the responsible parties.
Martin
PS: I hope you are not including as “positively” creative those on Wall Street who created the Ponzi schemes that have now collapsed.
PSS: New Deal reforms such as a strict SEC regulation, Glass-Steagall were critical to what made the US financial markets the envy of the world. Destroying these institutions and eliminating these regulations were enormous mistakes.
September 22nd, 2008 at 3:21 am
Here in the UK the government has moved to ban short selling.
Great. So we just get overvalued stocks.
Hey wait a second - isn’t that what’s led to all this in the first place?
They should have read that chapter in The Wisdom of Crowds. It’s funny how history repeats itself.
September 22nd, 2008 at 10:39 am
Hi Daniel,
As a confirmed and active short seller I agree with you. The ban was probably needed but needs to be taken off quickly or a massive “air pocket” will appear. Probably more transparency is what is needed. I need to think through this.
For those who have called me a “socialist” not a term that really bothers me, but apparently they think is insulting, I cut this from a recent post by “Mish” Shedlock, who along with Roubini and Tanta of CR are some of the most prescient observers of the current scene (Oh yes, I composed the first of my last posts nine months ago but could get no one to even consider them. And the last post before Mish’s AND that is because this stuff is now becoming obvious. AND WILL BE TOTALLY PLAIN IN ABOUT THREE TO FOUR MONTHS:
“Jobs, Jobs, Jobs
I am a libertarian. I do not believe in makeshift government proposals. However, I would rather get something than nothing for $700 Billion. Paulson’s proposal scores a big fat zero in term of providing an jobs or any real economic stimulus.
It is no secret that infrastructure in the US is decaying and needs to be fixed. A collapsing bridge in Minnesota is one key example. And what out our aging energy grid? Instead of giving $700 billion to banks that deserve to go under, I would rather give half that for jobs programs.
To create as many jobs as possible at the least cost Congress needs to scrap the Davis-Bacon Act. It would be better to create 3 construction jobs at $12 an hour than 1 job at $36 an hour. The idea here is to get as most bang for the buck and create as many jobs as possible for the money spent.
Waste In Iraq
We need to admit the mistakes in Iraq. The public never supported this war and the public was correct. The war in Iraq easily cost $1 trillion dollars if you count future medical bills. That is $1 trillion dollars that could have been spent right here in the US.
I propose we declare the war won and get out, totally and completely. Offer returning veterans first crack at any infrastructure rebuilding jobs. It is the least we can do to those who are likely going to be emotionally if not physically scarred for the rest of their lives fighting a war that never should have been fought.”
Yes a libertarian recognizing that we need to get money to people — i.e., Works Progress Administration and Civilian Conservation Corps.
Are these the “end-all” solution? But something like this would show that people are actually talking about the crisis seriously.
Consider the silliness going on now. The Democrats want to pump up housing prices which are still too high. They both want to increase lending in a society that needs to SAVE! Please see my last posts about the New Frugality.
Yes, I can talk and learn from the libertarians and they can learn from us who are more on the democratic left. We need to learn from the past and create a new future (as my friend Andy Hargadon would say!)
September 22nd, 2008 at 10:56 pm
“Like the Great Depression, this is a failure of government interference with the market. If there had not been an implicit federal guarantee of Fannie Mae and Freddie Mac, we wouldn’t be in this mess today. Investors in a free market would have had more disclipline because they would have born the risk of loss, not taxpayers.”
In a perfect Ayn Rand dreamworld, investors in a totally free market would act rationally with discipline. However throughout recorded history the rich and powerful have manipulated government, although less when there were regulations and controls on them. And since the dawn of capitalism there have been irrational investors acting without discipline, whether in the Dutch tulip bubble or last year’s financial derivatives.
September 23rd, 2008 at 10:37 am
Forgetting the blame, Pualson’s plan makes sense and is completely necessary. Of all people, Bill Clinton provided the best commentary on this last night on Dave Letterman. After the tech bust, an unregulated Wall Street looked for the next target market and, not seeing one, elected real estate. The business and political crowds went along for the ride and no we’ve arrived at a station we never thought we would ever see. The markets propped up real estate when they should have been investing in the new energy economy (and that ultimately will be the solution). Wall Street took the lazy approach of dumping money into real estate instead of looking for more creative ways to find new deals and prop-up new markets.
We need an independent non-partisan quasi-governmental body regulating the financial markets (much like State Bars do for the legal profession), a stronger fed and national bank and, generally speaking, a return to the kind of federalism originally proposed by Hamilton. The government is a cash cow and it can make lots of money lending it, thereby reducing the necessity for taxes. The government is the ideal lending body because of the amount of cash it hoards and can claim a right to tomorrow. If its loans go bad, at least the economy was stimulated in the process. Think of those bad loans as the equivalent of spending. Government should be deeply involved in the economic development game, not the taxing and spending game.
What the author proposes has been lost in this discussion. He proposes a classic liberal tax and spend policy. That’s a bad idea generally and certainly no solution to the present crisis.
September 23rd, 2008 at 12:42 pm
“Of all people, Bill Clinton provided the best commentary on this last night on Dave Letterman.”
In Maestro, Bob Woodward quotes Alan Greenspan as saying Clinton was the only President who understood what Greenspan was talking about. (He also served under Reagan & Bush 1, I think we can assume he would have included Bush 2). Clinton might be the only one who could actually take on the whole mess on and fix it, but it would be political poison for anyone to suggest it at this point.
September 23rd, 2008 at 7:00 pm
“In a perfect Ayn Rand dreamworld, investors in a totally free market would act rationally with discipline.”
Fannie Mae and Freddie Mac committed accounting fraud a few years ago, and Alan Greenspan pointed out that they don’t lover mortgage rates so what are they good for. To placate Congress, Fannie Mae and Freddie Mac aggressively start promoting “affordable housing” as their mission by buying massive quantities of sub-prime mortgages, creating huge demand to generate those mortgages. The only reason Fannie Mae and Freddie Mac can run this gambit is because they have an almost unlimited supply of capital because there is an implicit, and now explicit, Federal government guarantee of their debt. The demand they created led to a bubble in housing prices, that is the cause of the current crisis.
This is NOT a free market driven failure. This is a politically driven failure, and politicians like Barney Frank need to be held accountable. We don’t need to reform the markets, we need to reform the government to keep politicians from manipulating the markets for their favored constituents.
September 23rd, 2008 at 7:39 pm
John, I’m not arguing. Yes it was a politically driven failure. But political manipulation of the markets is always going to happen, and always has. Barney Frank, George Bush, Alan Greenspan, Ted Stevens, Bill Clinton, name your villain. (Reagan, FDR, Lincoln, Alexander Hamilton, Henry VIII, Nero…..)
It was also a “free market” driven failure because unregulated markets aren’t free, they’re just left wide open to abuse. The reason for regulation is to allow the markets to operate more freely with less political and backroom interference. I’d suggest that excessive deregulation is political interference in the market.
September 23rd, 2008 at 9:08 pm
After hearing Bill Clinton summarize the situation in about 5 minutes, I would confess that he would be an ideal candidate to lead the solution team. Paulson and Bernake have also done incredible jobs and, without them, we would probably already be in a depression.
We need less political rhetoric and old world (ie, before the internet, e-mail, cell phones and globalization changed everything and increased the velocity of business exponentially) solutions and new creative post-partisan approaches. The Hamilton model provides a great framework for beginning, as old as it is, the loose model remains a brilliant conception waiting to breathe life into a new and more prosperous economy.
September 26th, 2008 at 2:37 pm
ALright - this is not my area of experitse, but here is how I see the problemin the US:
Why the market is in crisis, as best as I understand it:
Assumption 1: Home prices keep falling
Assumption 2: This is a product of supply and demand, with demand having shrunk due to less credit available for marginal qualifiers
Assumption 3: lenders’ mortgage portfolios will continue to lose value as home prices keep falling
Assumption 4: This fear of lost portfolio value is creating the strangulation of the credit markets, which further impacts assumption 2, and continues a spiral downward…
Bush Solution: buy up the mortgage portfolios with high default rates with an estimated total cost of 1 trillion dollars.
Bush solution Problem: home prices will still continue to fall because of the simple law of supply and demand, with demand having been curtailed by wary lenders, yet supply remains the same.
Proposed solution: Use the 1 trillion dollars to purchase all homes that are currently in default and vacant. Assuming the national median price of $200,000 per home. That is 5 million houses or about 6.6% of all owner occupied housing in the country. Rip the houses down, recycle the materials and let individual cities decide to either resell the lots to neighbors or to developers, or better yet, make them pocket parks, community gardens or other amenities that increase local area housing value. For a while more homes will conitnue to go into default and become vacant, and are bought up by the governemnt and the land recycled to non-home highamenity uses. Not a good social umbrella for people who bought homes way over their head, but it works to the benefit of marginal subprime loans in the long run.
Proposed solution result: The market itself is not messed with through propping up dumb lenders, who are going to continue to have sever problems under the downward cycle of the Bush plan results. Most of the current bad loans are now gone since they were bought out. The housing supply is reduced by 5 million homes - or 6.6 %. Home prices rise from decreased supply. Neighborhoods once blighted by empty foreclosed house now have nice pocket parks or community garden spots. Neighborhood values also increase. Rising home prices increase the value of the mortgage portfolios, freeing up credit.
Simple market solution, with benefits to all - excpet the taxpayers of the future, but they get ripped by the Bush plan as well.
What is wrong with this idea? I’m sure I missed something in here.