Add this Page to Facebook!   Submit to Twitter   Submit to Reddit   Submit to Stumble Upon   Pin It!   Fark It!   Tell A Friend  
Printer Friendly Page Save As Favorite Save As Favorite View Article Stats
7 comments

OpEdNews Op Eds

The Economy: "No Return to Normal" - Galbraith

By (about the author)     Permalink       (Page 1 of 3 pages)
Related Topic(s): ; ; ; ; ; ; ; ; , Add Tags Add to My Group(s)

Must Read 3   Valuable 3   Well Said 1  
View Ratings | Rate It

Headlined to H2 3/20/09

opednews.com

reprinted from Dailykos.com

No Return to Normal: Why the economic crisis, and its solution, are bigger than you think, by James K. Galbraith

Galbraith conducts an introductory inquiry into the basic assumptions behind the economic policy responses of Team Obama, and warns that they fail to come to grips with the severity of the liquidity trap the entire world has now fallen into.

The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this. . . The difference between conservatives and liberals is over whether policy can usefully speed things up.

But, Galbraith argues, we are in a collapse of the financial system, and the only comparable event, the Great Depression of 1929-1939, simply is not built into economists’ models. For example, there is the assumption of a "natural rate of unemployment" of 4.8 percent; Galbraith notes that the CBO’s economic "model moves the economy back toward that value no matter what."

Galbraith highlights other crucial assumptions of Team Obama that are dangerously in error.

Third, the initial package was affected by the new team’s desire to get past this crisis and to return to the familiar problems of their past lives. For these protégés of Robert Rubin, veterans in several cases of Rubin’s Hamilton Project, a key preconception has always been the budget deficit and what they call the "entitlement problem." This is D.C.-speak for rolling back Social Security and Medicare, opening new markets for fund managers and private insurers, behind a wave of budget babble about "long-term deficits" and "unfunded liabilities."

Galbraith argues that this economic downturn is so severe, that the thing to do now is to increase social security benefits and lower the mandatory retirement age, because we need to

offset the violent drop in the wealth of the elderly population as a whole. The squeeze on the elderly has been little noted so far, but it hits in three separate ways: through the fall in the stock market; through the collapse of home values; and through the drop in interest rates, which reduces interest income on accumulated cash. For an increasing number of the elderly, Social Security and Medicare wealth are all they have.

Finally, there is the assumption about the primacy of finance in the economy.

To Obama’s economists a "normal" economy is led and guided by private banks. When domestic credit booms are under way, they tend to generate high employment and low inflation; this makes the public budget look good, and spares the president and Congress many hard decisions. For this reason the new team instinctively seeks to return the bankers to their normal position at the top of the economic hill. Secretary Geithner told CNBC, "We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system."

But the plain fact is that the big banks are insolvent, and actual examinations of the loan files which were securitized reveal "a very high proportion of missing documentation, inflated appraisals, and other evidence of fraud" that make it extremely unlikely that derivatives based on these loans will ever again reach a market price that will make the banks solvent.  And, there has to be a sea-change in the way bank managers see and work with the world:

Ultimately the big banks can be resold as smaller private institutions, run on a scale that permits prudent credit assessment and risk management by people close enough to their client communities to foster an effective revival, among other things, of household credit and of independent small business—another lost hallmark of the 1950s. No one should imagine that the swaggering, bank-driven world of high finance and credit bubbles should be made to reappear. Big banks should be run largely by men and women with the long-term perspective, outlook, and temperament of middle managers, and not by the transient, self-regarding plutocrats who run them now.

Galbraith then turns to a discussion of the liquidity trap, which is entirely outside the experience of all economists living today.

The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?

Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. And the borrower must meet two conditions. One is creditworthiness, meaning a secure income and, usually, a house with equity in it. Asset prices therefore matter. With a chronic oversupply of houses, prices fall, collateral disappears, and even if borrowers are willing they can’t qualify for loans. The other requirement is a willingness to borrow, motivated by what Keynes called the "animal spirits" of entrepreneurial enthusiasm. In a slump, such optimism is scarce. Even if people have collateral, they want the security of cash. And it is precisely because they want cash that they will not deplete their reserves by plunking down a payment on a new car.

Next Page  1  |  2  |  3

 

anonymously sourced from either the web or a forwarded email.
Add this Page to Facebook!   Submit to Twitter   Submit to Reddit   Submit to Stumble Upon   Pin It!   Fark It!   Tell A Friend
The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Writers Guidelines

Contact Author Contact Editor View Authors' Articles

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

Jim Cramer Uses CNBC to Manipulate Stocks

Video: Is Bristol Palin Baby Trig's Mother? Evidence & Pictures

BabyGate: Explosive New Details and the Smoking Gun Photo

Romney's Storm Tips

Feeding The Homeless BANNED In Major Cities All Over America

Most Massive Natural Disaster in US History-- and you don't know what caused it.

Comments

The time limit for entering new comments on this article has expired.

This limit can be removed. Our paid membership program is designed to give you many benefits, such as removing this time limit. To learn more, please click here.

Comments: Expand   Shrink   Hide  
6 people are discussing this page, with 7 comments
To view all comments:
Expand Comments
(Or you can set your preferences to show all comments, always)

It is refreshing to learn from an economist who ha... by Jason Paz on Friday, Mar 20, 2009 at 2:48:44 AM
I was fortunate enough to hear Galbraith deli... by Ivan Hentschel on Friday, Mar 20, 2009 at 7:09:19 AM
Thank you for a very informative article.I would h... by William Whitten on Friday, Mar 20, 2009 at 8:01:09 AM
Well, here you have the economists' problem in... by Jim Eldon on Friday, Mar 20, 2009 at 9:22:35 AM
THE BANKS (Bankers, Wall Street, Political & J... by boomerang on Friday, Mar 20, 2009 at 11:41:07 AM
 NWO on [FFWD>>] MOSCOW, March 19 (Reut... by William Whitten on Friday, Mar 20, 2009 at 8:25:08 PM
Our new President may be the only person in the wo... by Perry Logan on Saturday, Mar 21, 2009 at 5:39:21 AM