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Thursday, July 9, 2009

Marshall Auerback and too much political capital used by Obama in bailing out the banks?

It's a rough job, maintaining coherence and continuity while making radical change. So far, too much continuity and not enough change.
Is market fundamentalism, like the zombie banks it protects, too big to fail?
from New Deal 2.0
by Marshall Auerback

The problem with the misconceived bank bailouts is this: Obama has used too much political capital, satisfying the economic interests of finance capitalism via his banking bailouts. With this misdirected move, he has discredited the notion of fiscal policy achieving anything positive, given that the bailouts have not served their intended effect of “unblocking” credit.

As we’ve indicated over and over again, fiscal and monetary authorities around the world continue to proceed from a flawed paradigm. They keep thinking that if they provide “liquidity” to banks, the banks will go out and lend. They don’t seem to understand that credit is not a “flow” but a two-way contract between lender and borrower: You have to improve incomes first before you can improve credit conditions. Rising incomes create improved credit worthiness and ultimately improving asset values. As a result of the embrace of this flawed paradigm. we continue to witness the spectacle of the world’s leading central bankers - Jean-Claude Trichet of the ECB, Ben Bernanke of the Federal Reserve, and Mervyn King of the Bank of England - all making extremely unhelpful, and highly politicised remarks about the “unsustainability” of their respective governments’ fiscal expenditures, despite the fact this is the only thing likely to improve aggregate demand and incomes.

These esteemed central bankers, who zealously safeguard their respective institutions from supposedly populist political pressures, abuse their independence mandate to bully the politicians to cut back on their respective fiscal programs. This in turn creates the risk of a 1937 relapse, as Nobel laureate Paul Krugman recently pointed out.

Our monetary officials compound this problem of declining incomes through a misconceived embrace of “quantitative easing,” where the world’s Central Banks accumulate higher yielding securities in exchange for reserve balances, and thereby lower interest paid by governments on their securities, due to the lower rates. All this does is to contribute to removing interest income from world consumers, but it gives a nice subsidy to the banks.

The official sector has the gall to complain when people start challenging them on their quaint notion of central banking independence. But “independence” is simply a cover, allowing them to enforce the economics of the rentier class - clearly a very political action on the part of central banking officialdom.

Money profits require that firms earn more than they spend. That requires some other sector be willing and able to spend more than it is earning - i.e. intentionally deficit spend. Households and maybe foreign trading partners can draw down cash balances to do that before they need to go to net new lending. If you actually plot the time series of US real GDP momentum and credit growth by sector, you will what leads real GDP growth: government debt growth, mostly because fiscal policy is countercyclical (with a lag). As the US economy emerged out of the Great Depression in the spring of 1933, it went on a tear that few people seem to know about. There was virtually no bank credit growth for several years. I know, the Austrian nut jobs will all say that public works were simply stealing resources from the private marketplace that otherwise would have been used by entrepreneurs once the (relative) price was right. If the bureaucrats, including Hoover, had only allowed lower prices and wages, the market would have self-adjusted to full employment equilibrium on its own in due time. FDR just prolonged the agony of adjustment.
In spite of much evidence to the contrary, it really is remarkable the degree to which investors, economists and others cling to this misguided belief in the ability of markets to self-adjust, even when they are self-destructing, as during a debt deflation process. I sincerely wish there had been an Austrian School republic somewhere that could have been run experiments on their theories in a live fashion. But then, the Austrians cannot settle amongst themselves the proper monetary system that would be imposed or evolve spontaneously.

A number of them are willing to recognize that uncertainty is endemic and they emphasize the role of entrepreneurs and investors in searching for the most valuable combinations of productive resources. But Keynes also recognized fundamental uncertainty, and then went about showing why private agents form ways of making decisions in the face of uncertainty that contribute to booms and busts. That’s what Ch. 12 was all about in the General Theory, and it really tends to resonate with investment practitioners.

Too bad that this crucial insight of Keynes is ignored, as the rest of us remain guinea pigs in an experiment wedded to market fundamentalism. As the Too Big to Fails are protected, those of us too small to be seen wait to find out whether the experiment will succeed.

Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.

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