What happened to the global economy and what we can do about it
with 71 comments
When representatives of American power encounter officials in less rich countries, they are prone to suggest that any failure to reach the highest standards of living is due in part to weak political governance in general and the failure of effective oversight in particular. Current and former US Treasury officials frequently remark this or that government "lacks the political will" to exercise responsible economic policy or even replace a powerful official who has clearly become a problem.
There is much to be said for this view. When a minister or even the head of a strong government agency is no longer acting in the best interests of any country "“ but is still backed by powerful special interests — who has the authority, the opportunity, and the fortitude to stand up and be counted?
Fortunately, our constitution grants the Senate the power to approve or disapprove key government appointments, and over the past 200 plus years this has served many times as an effective check on both executive authority and overly strong lobbies "“ who usually want their own, unsuitable, person to be kept on the job.
Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; second, Ben Bernanke, reappointed today (Thursday).
Greenspan, as you recall, was worshiped as some sort of economic magician. Even his most asinine comments were seized upon by a legion of acolytes. Instead of providing meaningful periodic oversight, every Senate hearing was essentially a recoronation.
And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policy maker in the recent history of the world.
Some on Wall Street, of course, would disagree "“ arguing that the financial sector growth he fostered is not completely illusory, that we have indeed reached a new economic paradigm due to the Greenspan tonic of deregulation, neglect, and refusal to enforce the law. Prove the ill-effects, they cry.
What part of 8 million net jobs lost since December 2007 do you still not understand?
And now the same Greenspanians and their fellow travelers rally to the support of Ben Bernanke's troubled renomination. Certainly, they concede that Bernanke was complicit in and continued many of Greenspan's mistakes through September 2008. But, they argue, he ran a helluva bailout strategy after that point. And, in any case, if the Senate had refused to reconfirm him - financial sector representatives insist – there would have been chaos in the markets.
Take that last statement at face value and think about it. Have we really reached the situation where the Senate as a body and individual Senators "“ accomplished men and women, who stand on the shoulders of giants "“ must bow down before financial markets and high-ranking executives who are really just talking their book?
Here's what markets really care about: credible fiscal policy, sufficiently tough monetary policy, and the extent to which big banks will be allowed to run amok "“ and then get bailed out again.
Reappointing Ben Bernanke solves none of our problems. In fact, given his stated intensions, a Bernanke reappointment implies larger bailouts in the future "“ thus compromising our budget further with contingent liabilities, i.e., huge payments that we'll have to make next time there is a crisis. What kind of fiscal responsibility strategy is this?
Rather than messing about with a meaningless (or damaging) freeze for part of discretionary spending, the White House should fix the financial system that "“ with too big to fail at its heart "“ has directly resulted in doubling our net government debt to GDP ratio from 40 percent (a moderate level) towards 80 percent (a high level) in a desperate attempt to ward off a Second Great Depression.
If you think we can sort out finance with Ben Bernanke at the helm, it was sensible to reappoint him. But when the time comes for members of the Senate themselves to be held accountable, do not be surprised if people point out that pushing Bernanke through "“ come what may – was the beginning of the end for any serious attempt at reform.
Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.
By Simon Johnson
Written by Simon Johnson
January 28, 2010 at 6:38 pm
Posted in Commentary
Tagged with Ben Bernanke
Consider the following two propositions:
1) Government policy responds to short-term stock market movements.
2) Goldman Sachs has the power to control short-term stock market movements.
Does the available evidence suggest that either of these are certainly — or even very likely — false?
Nemo
January 28, 2010 at 6:47 pm
TARP came about in the same way. The DJIA trumped a massive public outcry.
Policymakers only share the public’s outrage when it is time to give a speech.
Bond Girl
January 28, 2010 at 8:28 pm
So sad. So true.
btraven
January 29, 2010 at 1:15 am
I would argue that our policy makers actually help create public outrage by pointing out the less critical problems we face like Wall St. compensation. This administration uses populist outrage to distract from their failure to get anything, really anything done at all.
Jimmy J
January 29, 2010 at 1:46 am
Not true.
The DJIA _CREATED_ a massive public outcry, which forced Congress to recant. You give way too much credit to the American public.
Remember, TARP was initially rejected by Congress, which somehow got the ludicrous notion that it was really in control of anything. Then the market makers b*&#h slapped Congress by shorting the s#*t out of pretty much everything with any short term debt rolling over (and anything with high leverage), and all the momentum players followed along (up/down doesn’t matter, as long as you know which direction to go in). Retail buy-n-holders stayed put for a bit, but when they saw the incompetence of the Bush/Paulson leadership, they too got spooked and bailed, forcing fund managers to go into fire-sale mode.
The public panicked, and realized that while they hated the banks, they feared them even more. Congress reverted, tail between its legs, duly chastised for its insolence. Meanwhile, the Fed foolishly believed that consumers would carry on with their mindlessly consumeristic ways, failing to see a collapse in aggregate demand as _real_ interest rates (not the nominal rates that “loose” money folks like to talk about) went through the roof and deflation set in.
So, the US public can rail in anger all we want and beat our chests like an angry bull gorilla confronting a hunter with a .30-06 pointed at his heart. Sad, really. One histrionic display of courage before it becomes worm food.
The credit-creating institutions have a strangle-hold on asset prices, and with every retirement-institution (and most 401k owners) in the US dependent on asset prices to support their ludicrous 8% annual growth assumptions (in order to justify insufficient direct savings/contributions, excessive payouts, and early retirement for a longer-lived population that is increasingly dependent on SERVICES which are INCREASING in price), the banks have a strangle-hold over policy. And their price of sustaining the money supply? A cut of all the money that goes through their hands.
You know it. I know it. The American public may hate itself for being dependent on banks, but they know it deep inside in places they don’t talk about at parties. It’s unsustainable, but the train’s moving too fast to get off.
Every once in a while people start to forget who is in charge, like when Obama decided to go populist. But he too got slapped around like some punk kid; Li’l Tim undercut him that very night, and not only didn’t lose his job, but was VISIBLY given a place of honor and a firm handshake at the State of the Union.
But if you think that Congress or the Fed WILL (or even SHOULD) stand up to banks given the current institutional structure, you are either hopelessly optimistic or totally suicidal.
As I’ve said before ad nauseum, we need to secure the money supply BEFORE (or at least at the same time as) we discipline banks. Otherwise, we’re jumping off a bridge with a noose around our necks…
StatsGuy
January 29, 2010 at 1:03 pm
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