We Are So Screwed

There were already lots of economic discussions today but I couldn’t resist this over-view for non-economists. I found a conservative economist I mostly agree with but don’t panic, it hardly ever happens.

This is seriously an interesting and informative piece from a conservative economist who helped develop Reaganomics. Of course he has since tried to re-formulate the plan and was also a huge critic of Bush, the Iraq War and Bush’s economic policies. I’m pretty sure I’ve quoted him before and gotten an onslaught of criticism for doing so from conservatives, but I’m just going to go ahead and do it again. I understand that he is no longer a revered voice in conservative circles and that some of his criticism of Bush was beyond the pale, but this is still a good read and gives an historical reference that some of us non-economists crave in order to understand the larger view of the mess that 2008 has wrought on the world. BTW, he is a critic of both Republican and Democratic economic policies and seems to place a high value on a thriving middle class, me too. I may be missing some essential economic reality or other so feel free to point it out, but most of what he says sounds about right to me. I placed just a few quotes below so read the entire piece if you’re interested. I’ve been accused, lightheartedly, of linking to rather esoteric economic journalism, so I imagine this is another one in that vein. I can’t seem to help myself.

Paul Craig Roberts (born April 3, 1939) is an American economist and a columnist for Creators Syndicate. He served as an Assistant Secretary of the Treasury in the Reagan Administration earning fame as a co-founder of Reaganomics.”[1] He is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service. Roberts has been a critic of both Democratic and Republican administrations.

More of his bio from Wikipedia

Quotes from a piece in CounterPunch today:

Economic policy in the United States and Europe has failed, and people are suffering.

Economic policy failed for three reasons: (1) policymakers focused on enabling offshoring corporations to move middle class jobs, and the consumer demand, tax base, GDP, and careers associated with the jobs, to foreign countries, such as China and India, where labor is inexpensive; (2) policymakers permitted financial deregulation that unleashed fraud and debt leverage on a scale previously unimaginable; (3) policymakers responded to the resulting financial crisis by imposing austerity on the population and running the printing press in order to bail out banks and prevent any losses to the banks regardless of the cost to national economies and innocent parties.

To deal with the adverse impact on the economy from the loss of jobs and consumer demand from offshoring, Federal Reserve chairman Alan Greenspan lowered interest rates in order to create a real estate boom. Lower interest rates pushed up real estate prices. People refinanced their houses and spent the equity. Construction, furniture and appliance sales boomed. But unlike previous expansions based on rising real income, this one was based on an increase in consumer indebtedness.

There is a limit to how much debt can increase in relation to income, and when this limit was reached, the bubble popped.

The Paulson Bailout (TARP) was large but insignificant compared to the $16.1 trillion (a sum larger than US GDP or national debt) that the Federal Reserve lent to private financial institutions in the US and Europe.

In making these loans, the Federal Reserve violated its own rules. At this point, capitalism ceased to function. The financial institutions were “too big to fail,” and thus taxpayer subsidies took the place of bankruptcy and reorganization. In a word, the US financial system was socialized as the losses of the American financial institutions were transferred to taxpayers.

He goes on to talk about Greece, the IMF and our very own Fed and QE3 and then concludes with this:

For four years interest rates, when properly measured, have been negative. Americans are getting by, maintaining living standards, by consuming their capital. Even those with a cushion are eating their seed corn. The path that the US economy is on means that the number of Americans without resources to sustain them will be rising. Considering the extraordinary political incompetence of the Democratic Party, the right wing of the Republican Party, which is committed to eliminating income support programs, could find itself in power. If the right-wing Republicans implement their program, the US will be beset with political and social instability. As Gerald Celente says, “when people have have nothing left to lose, they lose it.”

14 Responses

  1. Well, aren't we just full of sunshine and rainbows today? I would have written the headline as: "We Are Screwed" This is a fascinating article. I wonder what parts jump out at everyone. Kind of a Rorschach test. As you can imagine, point 3 (run the printing presses) get's my hackles up, b/c I think that the first 2 become solvable problems absent the Fed artificially keeping the cost of the mistake low and insulating the responsible from bearing it. And then to exacerbate the problem by creating a real estate boom. "Hey, we've outsourced their jobs and destroyed the value of their savings. Let's get them to over-leverage themselves in housing." The one line that you didn't quote that I'll add here: "In addition, in America today savings earn nothing. Indeed, they produce an ongoing loss as the interest rate is below the inflation rate."

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  2. I know, I guess I should change my avatar again, can I borrow yours? I had trouble picking out the quotes. I hope people read the entire piece. We haven't been well served have we?

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  3. I should find a hippie-dude avatar and we can switch for a day. blow QB's mind.

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  4. lol, he loves that thing. It's so funny because I decided to adopt it at the Plumline because that's what several commenters called me, so I figured I might as well just put it out there right off the bat. And really I outgrew that stage at least a year ago.

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  5. Can I borrow your title with one edit? Okay, thanks.

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  6. absolutely — feel free to add as much profanity as you deem necessary.

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  7. Believe me, that's what I thought when I read it. I really enjoyed the monotone tenor of the piece, it seemed so non-academic and lacking in sensationalism compared to what I was reading.

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  8. "Hey, we've outsourced their jobs and destroyed the value of their savings. Let's get them to over-leverage themselves in housing."Quick, we need another bubble. I know creating new jobs is an important task, but in our focus on that problem, we've ignored the fact that we are making less and less money every year thanks to stagnant wages, increased health care cost on top of losing money because the interest rate is below inflation. Even if we start creating more jobs, we'll still need to resolve those other problems in order to thrive again and those other problems have existed since before 2008 so presumably such long standing problems won't be easy to fix.

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  9. ashot, it's really tough to know where to begin isn't it? I think that's one of the reasons we're still here, all that debt needs to go somewhere first. But keeping people working, even at the governments expense, will help not only the unemployed but the overall economic outlook I think.

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  10. you all have a good night. i'm headed to daycare to pick up NoVA jr. after he goes to bed I'm going to over-leverage myself in whisky.

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  11. See ya manana NoVA, better take a couple of Excedrin before bed.

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  12. lmsinca- Yes, and I didn't mention needing to fix the housing problems. I agree on the unemployment issue. It's incredibly hard on consumer confidence to see high unemployment numbers every month. To those who are more knowledgeable in the ways of economics, how does our economy go about responding to stagnant wages? Obviously "tricking" people into ignoring the issue with low interest rates on mortgages is not the answer. Do prices eventually start to drop simply out of economic necessity like they have with housing? Lowering taxes only helps so much and at this point are accompanied by spending cuts in areas that often help those who are benefiting those who had their taxes cuts so it's the two policies almost offset each other.

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  13. What sort of whiskey do you drink NoVa?

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  14. I saw this advertisement on the linked-to article, and now I really want to read the book just because of the title: Weaponizing Anthropology.

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