Saturday, November 29, 2008

Conservatives – Relax: Government Ownership of Banks Will Not Be Permanent

Phillip Stevens seems worried that we’re turning into socialists:

We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers’ dollars to prop up the sinking US economy. Gordon Brown’s British government announced it would soak the rich to pay for an economic rescue package … "Something big is happening. What started out as a series of pragmatic ad hoc responses by governments and central banks is moving the boundary between state and market. Politicians are now overlaying expediency with ideology. Government is no longer a term of abuse. Things could move still faster in the months ahead. With their myriad rescue schemes and loan guarantees, the US and British governments have nationalised their respective banking systems in all but name. The banks pretend they are still answerable to their shareholders, but it is a charade. They survive only with the explicit financial guarantee of the state. Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks. Nationalisation could be the first act of an Obama presidency.

Please! The free market is not working that well right now so government has to step in lest we face a major recession. Paul Krugman calmly explains what we should be doing:

What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending ... The obvious solution is to put in more capital. In fact, that's a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country's GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets … My guess is that the recapitalization will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control—in effect, it will come closer to a full temporary nationalization of a significant part of the financial system. Just to be clear, this isn't a long-term goal, a matter of seizing the economy's commanding heights: finance should be reprivatized as soon as it's safe to do so, just as Sweden put banking back in the private sector after its big bailout in the early Nineties. But for now the important thing is to loosen up credit by any means at hand, without getting tied up in ideological knots. Nothing could be worse than failing to do what's necessary out of fear that acting to save the financial system is somehow "socialist."

Exactly. Paul also turns his attention to the need to increase government spending:

The next plan should focus on sustaining and expanding government spending—sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.

We should also keep in mind that this boost in spending will not be a permanent increase in the size of the government. The President-elect has already told us he intends to find ways of scaling back portions of Federal spending over the longer-term. Conservative critics would do well to stop and think about the difference between the short-term economic crisis versus long-run economics before writing silly things like this op-ed from Mr. Stevens.


Shag from Brookline said...

While Krugman said on Nov. 20th:

"Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while."

on Nov. 28th in his NYTimes column titled "Lest We Forget" he calls for "Financial reform: sooner, not later" closing with:

"So here's my plea: even though the incoming administration's agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now."

There is a lot of blame at the top but it trickles down to the many of us who enjoyed the inflating of the various bubbles that included our interests. Why would many of us complain if our homes, our securities portfolios, our "stuff" in our attics were all presumably making us rich? Maybe we could apply the late Walt Kelly's Pogo's "We have met the enemy and he is us" to these financial crises. After all, we all want to be millionaires. Here's another quote from Krugman's column yesterday:

"Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?"

TheTrucker said...

What matters is the "drain". What matters is how you recover the money that has been pumped into the economy. I am very saddened by Obama's shrinking from his proposal to increase the progressive nature of the tax system. If he does not strike while the iron is hot he may not be able to do what is right in the future. The Republican myth that all taxes are bad is an easy sell.

The economic knowledge necessary to support the beneficial results of reclaiming "economic rent" is not easily gained. Learning the true definition of economic rent is difficult in itself. The discussion of what to do with it is not trivial.

A highly progressive income tax is a tax on economic rent. It is the reclamation of value gains that have been created by the community/government as opposed to gains created by (earned by) individuals.

Daro said...

There are 2 states in the Universe...
what is true and what we wish was true. And the difference between these 2 is measured in ideology. "Nationilisation" is a dirty word to the right so we must continue to play this farce, this charade until they face up to reality.

Anonymous said...


Which brings up the question of who in fact controls the nation and to what ends.

Eubulides said...

The "free market" suffers from referential failure; like phlogiston. Why do so many economists insist on deploying such a stupid term?