The horizon is not so far as we can see, but as far as we can imagine

How bailing out the rich created the Depression

The other day, Krugman wrote that we’re in the beginning of a new Long Depression.

Forgive me, but he’s wrong: this isn’t the beginning, it’s been going on for about two years now.

During a Depression there are periods where GDP grows.  There are periods where jobs grow.  It’s just that the periods of job growth don’t last.

There were opportunities to end the Depression before it really dug in its heels.  The last one was at the beginning of Obama’s term.  Kicking out of the Depression required two things.

The first was an adequate stimulus. This didn’t just mean a large enough stimulus, though the one offered was not large enough, it meant one properly constructed.  Tax cuts for ordinary Americans are not stimulative, because folks like banks who have pricing power (you must have a credit card, loans, etc…) will simply take that money away by raising rates and fees.  And it doesn’t mean short term shovel-projects, it means making commitments which will last for years so that businesses, when making plans know that hiring is worth it because those employees will be needed for more than a year or so.

Likewise the US has some serious problems with the structure of the American economy.  The cornerstone of the stimulus had to be reducing US dependence on oil because as long as the US economy is so dependent on oil, full fledged growth is simply not possible.  The days of $20/barrel oil aren’t coming back, and every time the price of oil gets too high, it puts great pressure on the US economy (and every other modern nation.)

The second thing which had to be done is to force the banks to actually eat their losses.  Wipe out the shareholders and let the bondholders take their losses.  All the money plunged into the banks (and it was much more than the TARP money, which was the smallest part of it) was wasted.  Banks are not lending, and restoring lending is what the bailouts were sold as doing.  Moreover they have raised borrowing rates and fees on those who need credit most, soaking up money which otherwise would be helping the economy rather than simply being sopped up to plug holes in bank balance sheets.

The trillions of dollars spent attempting to bail out the banks weren’t just wasted, by keeping zombie banks alive they made the situation worse.  Further by not wiping out the wealth of banks and those rich folks who made foolish investments which wrecked the world economy, they created a political problem: to whit, as Durbin said—the banks still own Congress.  (Along with the military industrial complex, pharma and various other monied interests).  Because monied interests still own Congress, they have made it impossible to fix America’s structural problems.

Six percent of GDP could have been saved by doing health care reform properly, but that didn’t happen.  The current “financial reform” bill under consideration is so week that I don’t know of one credible outside analyst who thinks it is sufficient to make sure there isn’t another financial crash, and on and on.

Historically speaking periods of high concentration of wealth only end when the rich lose it in a huge crash.  They are never ended by, say, high marginal taxation—high marginal taxation only occurs after the losses have occurred as those who saw the run-up do their best to make sure it can’t happen again.

That lasts until the generations who saw the mania and crash start dying off and losing power.  So you start seeing really serious decreases in marginal tax rates and slashing of financial regulations when the generations who lived through not just the Great Depression but the Roaring twenties were no longer around.

The cliche that a crisis is an opportunity is, sadly, true.  But it is only an opportunity if you take it.  What politicians, and this includes Obama and Geithner, as well as Bush, Paulson and Bernanke, did, was they protected the rich from their own folly, and made  ordinary people pay for it.  The wealth of the rich has mostly recovered, corporate profits have recovered, but for ordinary people the economy still sucks and there is no reason to believe it isn’t about to start sucking even more.

The financial elites think that what they can do is create an economy with a permanently high unemployment rate and that Americans (and Europeans, for that matter) will put up with it, because what choice do they have?

We are going to have another kick at this can, because the legislation being put in place is not sufficient to prevent another financial crisis.  This is a Depression, and it is not going to go away.

Next time I hope we will consider doing the right thing.  Make those who crash the system take their losses and break the power of the rich over government.

Be very clear, it’s you, or it’s them.  You break their power, or they will continue to push your wages towards parity with China.

And they are very determined it’s not going to be them.

Are you determined it’s not going to be you?


What Actually Happened at the G20 Protests


Happy Canada Day


  1. Tom Hickey

    Good points, but that’s only part of it. See Michael Hudson here for what is really going on. He calls it the “New Austerity” Road to Serfdom.

    Here is a comment I posted on the point Hudson makes, first at Bill Mitchell’s place and then Warren Mosler’s (Warren called Trichet “the emperor of Europe>”)

    “The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank…sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.” (Carroll Quigley, Tragedy and Hope, 1966)

    Professor Quigley (who was teaching history at Georgetown University when I was a student) had it right. Since he wrote these words, the direction has been clear. It is epitomized by the BIS, the IMF World Bank, etc., and especially the EMU, in which the ECB is a central bank without a corresponding political counterpart, there being no European sovereign central government.

    The push will be on for currencies managed by central banks like the EMU, to whom sovereign governments cede monetary sovereignty. The end in view is a single global currency managed by a world bank without a corresponding democratic world government. That consolidates the control of wealth without political accountability, which is the overall objective.

    This is the real motive behind central bank independence in the first place — which is why I am opposed to this institutionally as anti-democratic. While the New World Order conspiracy theorists are confused about the facts and issues, the basic insight that independent central banking is anti-democratic and threatens liberty is correct. As Michael Hudson observes, the road to serfdom now lies through debt peonage to financial capitalism rather than the totalitarian communism that Hayek opposed.

    Financial capitalism now depends on central bank “independence” and state capture to operate freely. The wealthy have always distrusted democracy, which is a reason that most democracies are representational rather than direct. These are in effect oligarchies controlled by the powerful and influential through state capture. The result is de facto oligarchy, specifically plutocracy. These people think that this is a natural state since they are the ones who have come out on top, or share in the genes that came out on top. Hence, they rule by “evolutionary” right, which is just another form of the ancient idea of aristocracy based on birth. We see this is the BP chairman’s calling his victims “the small people” and Alan Simpson’s echo of it in ‘the lesser people.”

    [Initially posted at billyblog here]

  2. Bernard

    we have been in a recession for sure. the lack of jobs will turn the recession into the resulting depression. since the powers/elite have decided to keep their money out of the American economy, we will just have to see how long and how deep this depression becomes.

    that the rich won’t and don’t care one iota about the “lesser” folks, we will have to wait until forces change this equation. who and what these forces are, only time will tell.

    this depression will last a long time, if the current dynamics aren’t changed.

  3. anon2525

    Next time I hope we will consider doing the right thing.

    “Next time,” because we who weren’t the beneficiaries of the bailouts assume that we won’t be able to do anything now. The only peaceful way that I can see for affecting change would be a national strike. Representative democracy is not working.

    “Next time,” because for the 10% of the population that needs a job right now and are falling through the unemployment insurance safety net, there is no crisis right now? They’ll wait until “next time.”

    J.H. Kunstler made this observation yesterday:

    …President Obama made a very interesting remark when the financial regulation package passed in the senate the other day. He said the bill would make sure that “Main Street is never again held responsible for Wall Street’s mistakes.”


    That was the sound of something going over America’s head. Something about the size of Rodan the Flying Reptile. And frankly I don’t think the president even meant to be coy or deceptive. It just means he doesn’t get it either. Never again….

    Never again?

    What the fuck?

    Why even this time? Why isn’t there an army of federal attorneys out there, their teeth bristling with subpoenas, beating the bushes in every lane and skyscraper floor of lower Manhattan (and Fairfield County, Connecticut, not to mention a thousand office parks around the USA) to roust out the grifters and swindlers who took Main Street to the cleaners this time.

    “Next time,” because there is no “crisis” unless Obama’s socioeconomic class is affected. Those who were the beneficiaries of the bailouts will continue with their rent seeking.

    We’re hoping that they won’t use the Shock Doctrine again as they did after Sept. 2001 to get the Patriot Act and, later, the AUMF passed; as they did after the Lehman collapse to the get the TARP passed. We’re hoping that their lobbyists won’t be successful “next time” in preventing any reform, as they were with Medical Services Industry Care and Big Bank Care. We’re hoping that when the economies of Europe collapse if the Europeans go forward with draconian cuts, the decision makers in the U.S. won’t use Shock Doctrine to pass cuts to Social Security and Medicare.

    Unless we’re contemplating something like a national strike, all that we’re hoping for is that these leopards will change their spots “next time.”

  4. Bolo

    Stirling had a great post up recently that covered some of the same territory:

    In our present the key moment was when the financial system needed to have paper money made, and not have insolvency rules enforced. The result, a home run derby run for Wall Street. But now, they don’t need particular help. Obama’s administration is trying to tighten in dollops, tighten, then ease again. Bernanke signaled that his last round of tightening is over for the moment, in part because other countries are going Hooverite, and that means that the US can ease up a bit on tightening.

    As long as this dynamic is going on, where at the top there is raging inflation, and they want to compress the bottom so the bottom works for them cheaper, and gives up more resources, while the bottom is intent on gutting other members of the bottom in hopes of being one of the ones saved, then the long term continues to be bleak: there is no money for transforming the economy to a better basis.

    This is why the government has “run out of money,” not that there could not be more exchanges, that is to say more economic activity, but because the wealthy want more control and luxury, that is to say they want their currency to be more valuable, and the elites have decided that keeping the wealthy happy is more important than keeping their own populations happy. The rising tide of labor discontent then, is going to continue to rise, until such time as governments, such as the one Obama is in charge of, stop holding people in contempt. That will not stop until the public stops hoping to be the half of the poor that the rich will hire to kill the other half of the poor.

    The lever the wealthy have is that if the US government just prints money, then China does, and the oil producers raise the price of oil and demand higher returns to provide liquidity. When the price of oil makes the NEG Globalized economy blow up, it is the government, not the wealthy that takes the fall. Heads the rich win, tails the poor lose. The oil archies, with the examples of Afghanistan and Iraq to point to, know that the US cannot invade a mineral rich state in the middle east, and profitably extract the money. The headline today said that Afghanistan may have a trillion dollars of minerals. That means if the US government took all of it, we would still not break even. For comparison, there is about 1 trillion dollars of natural gas under the Catskills in New York, we’d be better off invading that and forcing the residents to allow fracking to get at the gas. Just sayin’.

  5. I agree particularly with Stirling here (emphasis mine):

    As long as this dynamic is going on, where at the top there is raging inflation, and they want to compress the bottom so the bottom works for them cheaper, and gives up more resources, while the bottom is intent on gutting other members of the bottom in hopes of being one of the ones saved, then the long term continues to be bleak: there is no money for transforming the economy to a better basis.

    One way or another, the bottom of the pyramid participates in the dynamic.

  6. anon2525

    This is why the government has “run out of money,” not that there could not be more exchanges, that is to say more economic activity, but because the wealthy want more control and luxury, that is to say they want their currency to be more valuable, and the elites have decided that keeping the wealthy happy is more important than keeping their own populations happy.

    I don’t think this is why the “government” (that is, the right-wing, including Obama) has “run out of money.” It has “run out of money” because the people who would benefit from the proposed additional spending are not the right-wing or their wealthy sponsors, and those wealthy sponsors fear that they might be taxed (directly or through inflation) to pay for this additional spending.

    Stirling’s explanation is that greed for more money is their motivation. My explanation is that fear of having less (or less valuable) money is their motivation.

    Of course, both could be true. I use cheney as my guide to how they think: “Reagan showed that deficits don’t matter. This (the tax cuts) is our due (because the repubs had increased the number of seats in congress in 2002).” They fear that they will lose their gains from tax increases more than they are motivated to gain more wealth by producing something of value. In the case of the banksters, they fear that the wealth that they got through the use of leverage will be lost through deleveraging as loans are defaulted on.

  7. anonymous

    I dunno. I agree with everything, but I think Ian is being a bit picky about the term “beginning”. I think 2 years is still beginning stage of a long depression. I don’t have any impression that Krugman is claiming that this “depression” started just recently. As cautious as he is (despite the rep as shrill), at last someone with some mainstream credibility is calling it like it is. I can’t get over how many people in my family, office, etc. think this is just like 2001 and the economy will be turning the corner any day now. Except for the unemployed and soon-to-be unemployed, I don’t have the impression that the situation is sinking in yet. Even the couple of u/e friends I have don’t seem to get just how bad things are or how long they will last. They are still looking for jobs in their previous fields of employment after a year of u/e.

  8. Forgive me, but he’s wrong: this isn’t the beginning, it’s been going on for about two years now.

    I’m guessing that by the end, this will feel like the beginning. Bernard’s summation is pretty accurate – this thing won’t get better until attitudes are changed at the top of the pyramid. Like everyone else here, I don’t see how that will happen, at least not in the near term.

  9. bob mcmanus

    Covers the important points succinctly. I am glad Stirling’s back, but this is great. Thanks Ian.

  10. Curmudgeon

    I think you’re being overly optimistic. Future generations might have a shot at getting wealth regulation right, but no one reading this now will live to see it, any more than anyone alive in ancient Rome in 430AD lived to see the development of modern Italy.

    The brief period from the end of WWII to the oil shocks was a singular moment in human history when anyone not deemed subhuman could earn a fair, living, wage in exchange for fair work. It was an exception in the recorded history of human relations since the development of agriculture.

    1960 wages are not coming back. We’re not reverting to a golden age–we’re reverting to the mean of economic practice. And that mean is the boot of an aristocrat stomping on the face of humanity forever.

    A future generation might be able to extract enough concessions from the aristocracy to enjoy the briefest flash of a comfortable life, but if it happens it will be so far into the future to be as relevant to us as Berlusconi is relevant to Caligula.

  11. The Buddhist idea of winning merit takes future generations into account. We should not only accept doing that, but embrace it.

    Meanwhile, one thing that those at the bottom of the pyramid can clearly do is remove themselves from the rent-seeking systems of the elite as much as they can. Since what they care about, all they care about, is sucking the substance out of your life, deny them that. En masse, that can have a positive effect. And I keep focusing on food, gardening, and all that not only since I would like to continue to eat, but because these are neighborly activities that make the “crabs in a basket” tactics so favored by the elite less effective.

  12. Believe it or not, very much of the public has a lot materially invested in the system as it is. Your call for the public to return to a labour-intensive, self-sufficient lifestyle in any numbers that make a difference to the rentier class will definitely go unheeded for a long time yet. If any change is going to come in the near-to-moderately-distant future, a good chunk of that is going to come via extant systems, or it is not going to come at all.

    No, the question is at what point extant political systems must be written off. Because the alternative is unthinkable, I am inclined to suggest, “Not just yet.”

  13. b.

    “soaking up money which otherwise would be helping the economy rather than simply being sopped up to plug holes in bank balance sheets.”

    Many people still phrase this as if this was a mistake, an Obama accident. That was The Plan. The price for protecting elite wealth is the taxation – direct or indirect, cost, rent, inflation, denial of services paid for – of those whose poverty is not maximized yet. Poverty maximization is the founding principle of the modern “recovery” of a nominal wealth temporarily exposed as a void claim on an unlikely future.

    I agree that the Long Depression started long ago – inflation adjusted, it started 2007:

    But that does not matter any more, “looking foward”. What does matter is that we are on the brink of another significant drop down, and all the chips – bailout deficit spending, the Social security trust fund default, Federal Reserve interventions backed by illegal Treasury guarantees for garbage securities force-fed to Freddie/Fannie – have already been priced in. For the next collapse, they have to psyche the markets by committing claims on the future alreayd mortgaged to the hilt. If that doesn’t work out, “Long” vs. “Deep” becomes simply a matter scaling the axis.

  14. And Stirling Newberry’s post quoted above also helped me put my finger on what was bothering me in the back of my mind about MMT. Sure it may all be technically true that the only real constraint on government spending is the actual value of the production potential of society, and so the government can and should expand to occupy idle capacity, which is in reality very costly.

    But the idleness of production has a purpose. The whole point is inequality. MMT policies are overall equality-increasing. The super-rich have enough control over capital to go on strike over this…

    If the problem is inequality, then we should cut to the chase. Better explicitly say that we don’t want too small groups of people to have too much control over finance. At the very least, impose some kind of a wealth cap, and confiscate any excess that isn’t invested productively. That’s the point, right? Unemployment in a fiat currency world means that someone, somewhere is hoarding money. Aren’t they?

  15. I don’t know how I can make it any more clear that I’m not calling for a return to “self-sufficiency” than by advocating for “neighborly activities” — given that the two concepts are opposed. And let’s not confuse money “invested” with material invested, mkay? I’ve got a lot materially invested in my garden, and if heating oil spikes to like $10 a gallon, my odds of eating are a lot greater. My neighbors too.

    As for using “extant systems” that are simultaneously controlled by small groups of rentiers… Well, I just prefer to do something that can be done by several million people than believe impossible things before breakfast. Take the 13% of the population who think that HCR isn’t liberal enough as a rough proxy for how many liberals/left/actual progressive/greens/etc there are (Newberry’s third pole), and that’s a number that can have some impact. If they all withdraw their money from the big banks, that can only be good.

    Best of all, these quietist, localist actions don’t contradict anything else that might need to be done at all. We are definitely in both/and rather than either/or territory here.

  16. Different terms, but same concept. People have always done those kinds of “neighbourly activities” in highly localized, labour-intensive subsistence societies. The comparatively easy life of the modern world comes in large part from its high integration and the ability of consumers to exert their economic impetus at large distances through necessarily complex institutions.

    The whole point is that what is at risk is the ability of most people to have at minimum a fair shot at benefiting from the fruits of that level of integration. If our only route to achieving that is to start sacrificing it, I suggest that there is either a problem with the theory or that there simply is no solution, and as Curmudgeon mentions, wait for some civilization to solve it after we’ve long been interred.

  17. Best of all, these quietist, localist actions don’t contradict anything else that might need to be done at all. We are definitely in both/and rather than either/or territory here.

    You can do them, but don’t pretend that they are activism any more meaningful than writing blog entries (probably less so). I mean, if gardening is your hobby, more power to you.

  18. Ian Welsh

    Actually, this is a discussion Stirling and I have had explicitly — people dropping out of the system. It /is/ going to happen. Bank on it. (But not at Citigroup). Why? Because it is the rational thing to do when you have no pricing power — people will move as much as possible to the grey market and to barter.

  19. I don’t doubt that. I see it even now, increasingly. And I see some of the positive benefits of it when done at a distance, over the internet, such as one long-time SF author’s turn to self-distribution of her electronic backlist—“disintermediation”.

    I only dispute its glorification as a mode of political change, and its effectiveness as anything other than a reaction.

  20. ” [I]f gardening is your hobby, more power to you.”

    Oh, dear. Where to begin? Rather, I might as well end, since obviously, nothing can be achieved. If we had some bacon, we could have bacon and eggs, if we had some eggs. Eh?

    Once helplessness is learned, it’s very hard to unlearn, isn’t it? Which is all fine, we all do what we’re good at. The only difficulty comes when the helpless begin to teach the lesson they’ve learned to others. (Stirling, by the way, may recognize some of his ideas from long ago here.

  21. Oh, and who’s “glorifying”? For pity’s sake.

  22. I still don’t get the learned helplessness accusation. I’ve told you where the avenues for change still ultimately lie; you dismissed them when you told me that they were “impossible things before breakfast”, in the middle of proposing something certainly no more plausible.

  23. Or rather, longer: Because I’ve played this game before, Mandos, way too often. The opportunity costs of playing it yet again is far too great. I should never have engaged to begin with; it was a waste of time. My bad. Apologies to all.

  24. beowulf

    Tom, check out Hudson’s May 27 column. He goes into the weeds of tax policy and economic theory but he has some very interesting things to say. For example, that unearned income should be taxed so labor income can be untaxed

    Lambert, keep your chin up. Its like Goethe said, “Let everyone sweep in front of his own door, and the whole world will be clean”. I thought about you the other day when I saw this book at Costco– The Backyard Homestead.
    “From a quarter of an acre, you can harvest 1,400 eggs, 50 pounds of wheat, 60 pounds of fruit, 2,000 pounds of vegetables, 280 pounds of pork, 75 pounds of nuts”.

    If nothing else, the rabbits in your town will love you (assuming you don’t, umm, harvest them). :o)

  25. I mean, lambert’s gotta protect his brand. It certainly doesn’t help to be seen arguing with the little people, nope.

    But the point is, we invest real power in the formalities of government. One such formality is election. Unless you have a means of altering those formalities from without, the only real way to change anything is to elect someone who will. Why? Because change takes power, and temporal power over life and death lies with the sovereign state. Without that power, loudly declared quietistic localism means nothing when those now with actual power really choose to coerce.

    For all their faults—and they are many—the bigger prog blogs like Kos and all the rest at least have something to say about electing people. Whether it was any good, will work in an acceptable time frame, etc, etc is another matter; but at least it’s something. What have their left-wing critics wrought? What is the proposal for electing people?

    That isn’t to say that they don’t deserve left-wing criticism. But many of their more strident critics have no viable alternate proposal on the actual matter of obtaining formal power. Gardening is not going to do it. They will tear up your garden and issue you a ration card, or has no one here watched e.g. Pan’s Labyrinth?

    Then there is the whole business of “inflicting pain” or “negotiation” or whatever. It all makes sense when you have a strategy to elect someone better and sustain them in power…

  26. anon2525

    …they will continue to push your wages towards parity with China.

    I was hoping that someone else with some insight would comment on this point. There appears to be some right-wing rule of arithmetic that I don’t understand. The same people who are pushing housing and asset prices up are pushing wages down, but they — somehow — appear to be expecting those people whose wages are falling to pay for the more expensive housing and assets (stocks). How?

    Note that this is how the housing bubble came to be. After a century (from 1895 to 1995) of median house prices rising in lock-step with the growth in the median income, house prices started diverging, increasing faster than median income. This didn’t work out, unless privatizing profits/socializing losses is thought to be a sustainable economic model by the right wing?

    Of course, if the whole situation is simply the result of criminal thinking, then it doesn’t need to make any long-term economic sense.

  27. anon2525

    Oh, and about Krugman being wrong, how about his (non-macroeconomic) observation that we should
    all hail Nancy Pelosi, arguably the greatest Speaker ever?

    Meanwhile, she just pulled a legislative maneuver comparable to the way in which the Commodity Futures Modernization Act was passed in Dec. 2000, that is, wait until after the election (bush v. gore, no less) during a lame-duck session while people are concentrating on how little they will have for the “holidays” to slip in something that you want to do, but which will be quite unpopular.

  28. Ian Welsh

    Oh, Krugman’s right on plenty of things, it was just a nitpick.

    I am very dissapointed in Nancy Pelosi today, however.

  29. anon2525

    I am very dissapointed in Nancy Pelosi today, however.

    You must have seen something in her that I didn’t. Not to out-cynical you, but this is the democrat who said “impeachment is off the table”, who followed that up by saying that impeachment was infeasible because “there is no evidence” of bush&cheney’s crimes, and who never found a spending bill for the military occupations that she couldn’t vote for. Not to mention the democrat who (accurately, it turned out) laughed when asked about whether the progressive caucus would present any difficulties for passing Insurance Care. As with Obama, why would any progressive who has been watching be disappointed in her? Surprised when either of them did something worthwhile, but disappointed?

    (And what does it say about “liberals” in her district that keep re-electing her? Clueless? Unprincipled? Both?)

  30. Ian Welsh

    The thing about Nancy is that she regularly put out bills that are to the left of both the White House and the Senate. Yeah, she was never a liberal hero, but she was (and probably still is) to the left of both Obama and Reid. And while I often rail against lesser evil arguments, she is also the left of anyone who could replace her as Dem House Leader (most likely Hoyer, who is far worse.)

    I never got or get the feeling with Obama that he ever wanted to be Liberal. In fact, he exudes contempt for liberals and progressives.

    Nancy, otoh, I thought, wanted to be more liberal than she felt she could be.

    Yes, that may be shit (guilty of reading in) and I may have been engaged in wishful thinking, but eh.

    As I say, I am very disappointed in her today. Especially as she knows that she has a good 50/50 chance of not being Speaker in the next Congress.

  31. anon2525

    And while I often rail against lesser evil arguments, she is also the left of anyone who could replace her as Dem House Leader (most likely Hoyer, who is far worse.)

    Yes, she has that in common with Obama, as Jon Stewart showed recently. Don’t like Obama? Vote for Palin! Don’t like Pelosi? Vote for Boehner or Hoyer! It’s good for your career to have a much worse replacement waiting in the wings.

  32. “lambert’s gotta protect his brand.” Lovely.

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