Friday, March 20, 2009

A Major Statement from Jamie Galbraith

If you haven’t read his sobering analysis in The Washington Monthly yet, read it now, and then come back here. Jamie absolutely nails the limited vision of the Obama economic team, and the lessons he draws from the Great Depression are urgently needed. On the policy front, however, I think there are pieces that need to be shored up.

The most important policy directive is to stop thinking “stimulus” and start thinking about a much larger role for public investment in the long term. The analogy is not stepping off a bus and running to catch up and hop on again, but what to do when the bus breaks down. We are in this for the long haul and have to fashion programs that can employ people who will otherwise have no economic prospects for years to come. Fortunately (in the strange calculus of demand-driven economics) we have crying needs to address, especially in rebuilding our industrial civilization along the lines of sustainability. Galbraith is superb on this.

He also has the measure of our “entitlement” situation: with the collapse of private pension systems (and perhaps even many state and local public pension funds), we need Social Security more than ever. Let’s make it bigger and stronger. Jamie’s take on the housing market is also dead-on.

I would have been in reader heaven if two additional elements had been added:

1. This is a crisis of the global economy. AIG’s counterparty list should remove any doubt, and global imbalances were a critical component of what got us into this mess in the first place. Vast sums were invested in a capital stock whose profitability depended on the ability of consumers in the US to borrow without limit to finance their imports; much of this investment will have to be written off. In other words, the collapse of the US credit bubble is having worldwide ramifications, which will ricochet back, and back again, via the mechanism of global financial integration. If we let this process run its course we are in for a long, tough ride.

2. On the domestic front, there is a shortcut to the decades-long rebuilding of private assets that Jamie envisions: public banking. There is an excellent theoretical case, in my opinion, for a financial system dominated by profit-making public intermediaries, and I’m convinced that the German experience (the Sparkassen especially) confirms it. Moving quickly to establish such a system offers the hope that financial impetus can be revived over a much shorter period, and it rescues us from the odious program of bailouts that now poisons both our economy and our democracy.

Incidentally, there are two routes to public banking. The most direct, which I have advocated in this blog since last September, is to simply set up the system from scratch right now and capitalize it with funds redirected from bailouts. I admit there are loose ends to be dealt with, especially having to do with resolving the international obligations of the existing system, but that’s to be expected with any program. The second route is to hang onto the existing banks after nationalizing them. I have argued against this idea, since it would put the liabilities of these institutions on the public ledger. Perhaps this downside could be reduced by giving the banks’ creditors and counterparties a Paulson-style haircut, but this strikes me as very difficult to pull off, and, at the limit, it simply converges with the “good new (public) bank” proposal I have been pushing.

So: (1) This is a fantastic article by Jamie. I hope it is widely read and discussed. (2) I think we need to be willing to go a little further on the financial front and to take more account of how economically interwoven our world has become.

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