2.5 Million Jobs III

From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook

CREATING JOBS THROUGH SHORTER HOURS

The Government’s Role

The government could encourage bargaining to reduce hours, set an example by adjusting hours on government work and/or enact new workweek legislation. A positive policy would require specific announcement that the Administration would not discourage reductions in hours and would welcome this, at least in particular industries, as one of the variety of measures individual industries might use to bolster employment security.

Setting an example, in its role as an employer as it has done in the past. would require establishment of new reduced workweeks for employees to serve as an experiment and broad guide for private industry. It is worth noting that about a third of U.S. municipal governments already have fulltime workweek schedules shorter than 40 hours for their administrative and clerical employees.

New workweek legislation could of course take many forms. The principal approaches suggested have called for a reduction in the 40-hour standard established by the Fair Labor Standards Act, either immediately or in several steps spread over a period of time and either uniformly for all covered industries or through a special industry committee procedure functioning on an industry-by-industry basis. Each of these alternatives has some past legislative precedent.

Another major suggested legislative approach is a flexible workweek to be adjusted according to changes in the unemployment rate. A federal fund financed by a tax on employers could be established to help maintain weekly pay and national consumer purchasing power upon such reduction in hours. If the payments from the fund were scaled according to whether the employer hired more workers when he reduced hours, there would be an additional incentive for increased employment.

The Return of Rubinomics

As the President-elect announced the appointment of Peter Orszag as head of OMB, he said something that might cheer up those deficit hawks:

In these challenging times, when we are facing both rising deficits and a sinking economy, budget reform is not an option. It is an imperative," Obama said in the statement. "We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group," he said. Obama said he would ask his economic team to "think anew and act anew" to meet new challenges. "We will go through our federal budget -- page by page, line by line -- eliminating those programs we don't need, and insisting that those we do operate in a sensible cost-effective way," Obama said.

Rubinomics – at least as I understood it – meant that we accelerate Federal spending in the midst of a recession but tell Wall Street over the long-term, we are serious about long-term fiscal restraint. We might also give tax cuts to liquidity constrained people such as the working poor but raise taxes on those who are not liquidity constrained – such as Bill Gates and Warren Buffet. In other words, short-term fiscal restraint to actually REDUCE national savings with some assurance to Wall Street that once this recession is over, we restore a commitment to increasing savings and investment.

While John Taylor seems confused about this one, Paul Krugman gets it:

Thus, John Taylor — a very good economist, when he wants to be — insists that we must respond to the economy’s temporary weakness with a permanent tax cut. Let us reason together. Does it make sense to let one recession dictate tax policy in perpetuity? What happens if there’s a boom; can we increase taxes (no, because then the cut wouldn’t have been permanent.) What if there’s another recession? Do we permanently cut taxes again? Is there a tax-cut ratchet (or maybe racket)? Think this through, and it makes no sense at all. And Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook

In just a few weeks, we will finally have a President who also gets it even if that lame duck never did.

Greg Mankiw on Obama’s Fiscal Stimulus Proposal

Does Greg Mankiw have a good point here:

Dividing one number by the other, that works out to $280,000 per job. What is going on here? Logically, it must be one of three possibilities: 1. The fiscal stimulus is going to be much smaller than is being reported. 2. The new administration is setting a low bar for itself when it comes to job creation. 3. The Obama team believes in very small fiscal policy multipliers.

Greg is reviewing to this:

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years ... Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

To be fair, I praised the size of the proposed stimulus and I also wondered why there was such a low bar for job creation over the first two years.

But let me suggest an alternative explanation (as opposed to low multipliers) based on something the President-elect has said about things getting worse before they get better. Could it be that his economic team expects employment to fall even further before this proposed stimulus turns things around? For example – suppose we wake up in the New Year to an 8 percent unemployment rate which would translate into about 3.5 million jobs lost. To get a net increase of 2.5 million new jobs would mean we would have to see 6 million jobs created over the next two years. If the actual fiscal stimulus were $500 million, then we are talking about $83 thousand not $280 thousand. And the implied multiplier would be closer to 1.2 not 0.36.

An Appeal to Reason on Iran

On November 21, the inimitable Juan Cole (http://www.juancole.com) posted an appeal from 20 experts on Iran from both parties with a variety of backgrounds, including three ambassadors, for a more reasonable policy on Iran. One should go to his site to see the full discussion, but the highlights are five recommendations and the deconstruction of eight myths. I list them without details. Cole called for others to publicize this, and so I am doing so here a few days late, and making clear my agreement with and support of this appeal.

The five recommendations:
1) Replace calls for regime change in Iran with a long term strategy.
2) Support human rights through effective international means.
3) Allow Iran a place at the table in determining the future of Iraq and Afghanistan, along with other key states.
4) Address the nuclear issue within the context of a broader US-Iran opening.
5) Re-energize the Arab-Israeli peace process with the US being an honest broker.

The eight myths:
1) President Ahmadinejad calls the shots on foreign and nuclear policy.
2) The political system in Iran is frail and ripe for regime change.
3) Iranian leaders' religious beliefs render them undeterrable.
4) Iran's current leaders are implacably opposed to the US.
5) Iran has a declared intention to attack Israel to "wipe Israel off the map."
6) US sponsored "democracy promotion" can help bring true democracy to Iran.
7) Iran has clearly and firmly committed to developing nuclear weapons.
8) Iran and the US have no basis for dialogue.

2.5 Million Jobs II

From: AFL-CIO American Federationist | November 1962, pp. 19-21.
ECONOMIC TRENDS & Outlook

CREATING JOBS THROUGH SHORTER HOURS

The relative merits of alternative economic approaches are not evaluated here. The points below may be useful, however, in assessing the wisdom of hours reduction as against other measures generally:

1. Shortening of hours does not need pinpoint timing for full effectiveness but is practicality and value diminish once a full-fledged recession is in process. The workweek can best be reduced with no loss in weekly pay while the economy is still comparatively prosperous, before unemployment pressures have mounted to become the dominant economic force. If the shorter hours tool is held in reserve too long and turned to only after the full shock of recession or immense load of unemployment arrives, its practicality and positive benefits will be severely blunted. Shorter hours would likely come then largely in an undesirable worksharing, cut-wage form force by overwhelming unemployment and would not be adequate to the task of contributing substantial momentum to employment upturn.

2. Advocacy of shorter hours does not mean rejection of other measures to increase employment. The choice need not and should not be an either/or proposition. Reduction of hours should be one of many steps applied to control unemployment, with the size of the reduction determined by the effectiveness of the overall program. If other measures prove effective in providing needed jobs, hours reduction can of course proceed more gradually.

3. Shorter hours are increasingly recognized by most workers and the public generally as directly related to the unemployment problem. This is not true to the same extent for other measures, such as government fiscal or monetary policies. Because so many workers would be directly or consciously involved in a general shortening of hours, there likely would be a wide sense of participation and appreciation of the anti-unemployment campaign, with accompanying psychological benefits for the economy.

4. Many of the collective agreement and government measures used to ease unemployment effects are geared to helping the unemployed worker hunt for a new job. These include private public retraining programs, relocation aid, counseling, severance pay and approaches. A major objective of shorter hours, on the other hand, is to reduce the need for layoffs and thereby encourage retention of workers in the type of work and industry to which they are already attached and in which they have already acquired training.

5. There is rather wide recognition that rapid technological strides will enable or force radically shorter hours at some point in the future, perhaps not all distant. Reduction in typical hours of work in the present period are necessary to aid in the economic and social transition to increased reliance on technology in place of manpower.

1979: A Warning and a Prophecy for America

"Washington must realize that the dollar can no longer act as the sole reserve currency in the world. The dependence of the world on the dollar is not a blessing but a curse for America."

.....Nobody knows how Turkey Zaire, Peru and many other impecunious countries will ever pay back their loans to Citibank, Chase or the rest of the big U.S. lenders. The debtor countries, pleading poverty, could indefinitely defer repayment. Then the Federal Reserve Board would have to cover those bad debts, meaning that the U.S. taxpayer would finance the bailout. Says Zombanakis: "We have created a system in which almost the entire debt of the world rests on the Federal Reserve."[1]

These are the words of 'gunslinger' loan shark that sold syndicated loans [2] to the third world at an astronomical rate, according to economic historian and author Michael Moffitt [3].

"...Zombanakis did not invent the syndicated loan, but he is the one who put real flesh and blood in the market. Zombanakis brought numerous countries to the market who had never borrowed in international money markets before. Jetting around the world he dropped in on companies and finance ministries drumming up loan business for Manufactures Hanover, in the late 1960s when the Shah of Iran was virtually unknown outside the Middle East, he was introduced to Europe’s banking elite by Minos Zombanakis. As one banker told ‘institutional investor’ Zombanakis almost single-handedly got Manufacrturers to make a loan to Iran when it did not even have enough reserves to cover a month’s imports.” Loans like these were extremely risky and were sold more on Zombanakis’ bravado than on Iran’s credit-worthines...."[4]



[1]
The Saudis and the Dollar
By Marshall Loeb. Monday, Mar. 26, 1979
http://www.time.com/time/magazine/article/0,9171,916691,00.html

[2] "Rather than assuming the whole risk of, for example, a $100 million loan to Mexico, the lead bank will telex a hundred others and offer them a piece of the loan. Syndicated loans are priced at the going interest rate, known as LIBOR, (London Inter-Bank Offered Rate) plus a margin known as a spread, which is inevitably proportional to the perceived creditworthiness of the borrower. For years, Brazil borrowed a tiny fraction over LIBOR. Once bankers got wind of Brazil’s smoldering debt problems, its spreads quickly soared over 2 percent. "‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.

[3] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk. Pages 57 - 61

[4] ‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk. Pages 57 - 61

Is the US Treasury Getting too Big to Fail?

For an administration based on an ideology of untrammeled capitalism and which demands that all socially useful programs meet cost-benefit calculations heavily tilted toward inaction, the government seems to be getting little bang for its buck. Here is a Bloomberg estimate of a commitment of $7.7 trillion. Yes, the government can recoup some of this money, but probably not a lot.

Pittman, Mark and Bob Ivry. 2008. "U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit." Bloomberg.com (24 November).

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

[...]

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

Mutual Aid

Recently, I was talking with a bunch of other parents of teens who have high-functioning autism.* We were talking about the massive cut-backs in public services that have been happening and loom on the immediate horizon.

But the dark cloud may have a silver lining. Here in California, it seems, parents spend tremendous amounts of time and effort on the phone and in meetings (due process, etc.) hassling with the care-givers and -financers in order to get appropriate services or something reasonably close to it. In other places (such as Australia or most of the U.S.), it seems, many fewer publicly-provided services are available. But this (bad) situation can encourage a positive response: while in California, the state-sponsored Regional Center used to provide services such as "respite care" (time away from the damned kid), in other places, the parents pool resources to provide respite care to each other. There's less time spent hassling the care-givers and -financers, because they don't do much if anything.

This kind of "mutual aid" (a concept central to libertarian socialist or anarchist thought, according to the Wikipedia) can be immensely liberating. However, I can imagine that a lot of time and effort can go into hassling other participants if feelings of solidarity are weak. If successful, this mutual aid can promote feelings of solidarity, encouraging a virtuous circle. In the US in the 19th century, labor unions were much more involved with this type of activity (in burial societies, providing unemployment insurance) than they are today (where the Andy Stern business union model of dues extraction seems the rule).

If the current recession turns into something more serious, it could combine with the longer-term trend of public-service cut-backs to encourage more mutual aid. This might in turn be the basis for broader "grass roots" political movements, independent of the political establishments (the two-party duopoly).

On the other hand, people might look to (soon-to-be) President Obama as the source of all solutions, sticking to the atomizing electoral model of politics. The latter can have the benefit of providing standardized public services. On the other hand, decentralized mutual aid tends to produce a division between groups having different amounts of income and health, belonging to different ethnic groups, etc. It does not seem to encourage mass grass-roots participation, except in short-lived waves.

I don't know what's going to happen to the economy (though it sure looks bad). What's going to happen with the society is even more difficult. With incomes falling along with public services, people could be driven into each others' arms (mutual aid). On the other hand, we may be split up into warring communities or praying that our benevolent leaders will solve our problems. Ideally, we could see the rise of new mass movements that would change the balance of political power, shifting it to the left, in favor of justice.

* It's the kids who have it, not the parents. That ambiguity is a problem with the "PC" language that prescribes "a person with a disability" to replace "a disabled person." I'm generally in favor of that "person first" language, by the way, because in the latter case the person is identified with the disability instead of having the disability seen as contingent.
--
Jim Devine

Deflation!

Some people in the media are freaking out about the possibility of steadily and/or steeply falling prices, i.e., deflation. So I figured out what kind of deflation was currently being expected by those in financial markets.

I calculated the expected inflation rate implied by the difference between the rates on constant-maturity non-indexed 5-year government bonds and the inflation-indexed version of the same bonds. This number was steady at between 2 and 3 percent per year from 2003 to early July of 2008, which in general fits with the inflationary experience of the time. Then, there was a sudden fall. (What happened on July 2 or thereabouts?) As of November 20, it was –1.79%!! It's not just the media. The finance types are also freaking out.

Why is deflation a bad thing? Part of it is if people expect prices to fall, they delay purchases. Also, if prices are falling steadily, people don't want to borrow because the real value of their debts would rise. It's the opposite of the case of the inflationary 1970s, when people wanted to borrow a lot because the debts would lose value over time.

In looking at loans economists use the "real" interest rate, which is the nominal or money interest rate minus the expected inflation rate. Suppose I pay 4% interest on a loan. At the same time, inflation is barreling along at 2% per year and I expect it to do so in the future. That means the money I'm paying my loans back is losing 2 percent of its purchasing power each year. Thus, I subtract the inflation rate (2%) from the nominal rate (4%) to get the real rate, the interest rate in constant purchasing-power money (2%).

If the inflation rate that people expect goes from 2% per year to -2% and the interest rates appearing on loan agreements stays put at 4%, the real interest rate rises from 2% to 6%. And it's this rate that counts in determining decisions. The nominal rate can fall, of course, counteracting this. But it can't fall below 0. After that, increasing rates of deflation mean rising real rates.

Rising real rates make the recession worse by discouraging borrowing and spending. Recession then encourages further deflation. It can be a vicious circle.

It’s more than a matter of expectations. If people are locked into long-term loans with constant nominal interest rates and amortization rates on principal, and if nominal wages and salaries generally fall with prices, that means that debt service rises relative to wages due to deflation. If general enough, this phenomenon encourages bankruptcy.

Key to the last paragraph is the assumption that nominal wages and salaries fall with prices. A “true” deflation can be distinguished from a minor one by saying that in a true one, we see a wage/price spiral going downward. If wages and salaries don’t fall as quickly as prices, on the other hand, a mild deflation causes profit squeezes. Both are unpleasant in a capitalist economy.

--
Jim Devine

Tyler Cowen on Investment During the 1930’s

Tyler Cowen has been busy opining on macroeconomic policy during the 1930’s including a November 23rd NYTimes oped critiqued by Econoclast but let us turn attention to Tyler’s critique of what Brad DeLong had to contribute. While I am grateful that Tyler pointed out my graph of net investment, I’m puzzled by this:

Only in 1941 did net investment exceed its 1929 level. Here's a chart which seems consistent with these claims and which shows the difference between the net and the gross series for investment. The waves are very similar but at different absolute levels. Can any readers explain what is going on In this time period, using this data, is net or gross investment a better indicator of recovery and economic conditions? Is the pro-New Deal claim that making net investment "less negative" (but still negative) counts as a success or rather that the gross investment series is what matters?

Whether one uses gross investment as Brad did – or net investment as I did (given the George Will tirade) – the measured increase in investment demand was roughly the same. So Tyler’s first question seems silly from a Keynesian perspective, while the answer to his second question is YES.

One might be wondering why I choose to graph exports (EX) minus imports (IM) as a share of GDP (all series in real terms) for the more recent years in a post about net investment during the 1930’s, but this is by way of an analogy. We have had negative net exports (NX) for quite a long time but we are not shy about saying how an increase in export demand had been fueling economic recovery until recently. So I do not see anything odd about Brad showing us gross investment without including the depreciation chart.

Now if Tyler wants to lament that the capital stock fell during the 1930’s, he has a point but a very different point. Incidentally, the net financial wealth of the U.S. has also been eroding during this prolonged period of current account deficits.

Globalised banking 1944 - 1983

The following flow chart describing developments in the global banking and finance industry between 1944 and 1983 has been mostly compiled from information provided in Michael Moffitt's 1983 book 'The World's Money - International banking from Bretton Woods to the brink of insolvency'[1]. The common theme is clear; that the form of globalisation that has taken place over those decades has been largely determined by (mostly) western transnational corporations and with one overriding goal - worldwide profit maximisation.

Bretton woods (1944). -->The birth of the Eurodollar (1949) --> accelerating concentration of industry and banking --> American, Japanese and European corporations extend their global reach. --> the spectacular rise of the intracorporate (nonmarket) economy of the global oligopolies --> increasing intervention of government into the “private sector”--> A common tilt in investment and speculative decisions. US pressures European countries to restore convertibility of their currencies under the provisions of Bretton Woods (1958) --> Marked speculation in currencies begins with the re-emergence of hot money --> Development of the Euromarket (mid 1960s) --> a new generation of young bankers with the desire to go global. --> desire to build a global bank free of government regulation. US government prohibited interest on chequing accounts --> corporations and wealthy individuals transferred money out of these accounts and into financial products that earned interest (eg Treasury securities) --> banks forced to find new ways to attract corporate savings to stop the drain of funds --> negotiable certificates of deposits invented (CDs) by Walter Wriston of Citibank. --> banks bid competitively for corporate funds. --> the Euromarket undermines domestic monetary policy (1966). The 1973 oil shock [usury?] --> Petrodollar recycling 1973 --> bankers court the Saudis for deposits and conglomerate international banks try to drum up loan business from the 3rd world --> syndicated loans -->Growth of 3rd World debt --> Debt extended with eye to natural resources --> Interbank market--> Vast new opportunities to wheeler deal on a global scale --> Governments lose influence over events -->A regime of floating exchange rates is midwifed by massive speculation against the US dollar (1975)--> Despite the IMF the banks soon take over the business of lending to governments --> No way of recognizing a loss on a sovereign loan [Usury] -->European, Japanese and Arab banks take US share of global finance --> East-West Trade increased dramatically. Meaner terms are implemented on 3rd World loans [Usury]--> further debasement of credit standards in loans to 3rd World --> new forms of big business emerge in advisory role on loan reschedules to the 3rd World --> US Government bail out banks that made irresponsible loans to the 3rd World --> House of cards --> Global debt crisis now permanent. Usury in the form of extraordinarily high interest rates is institutionalized to preserve dollar hegemony (Volker, Oct 1979 ) --> IMF is now a supranational agency intervening in domestic politics --> Zero coupon bonds created by banks to avoid Government tax on interest. -->Economic and social disaster in poor countries (1983) --->



“…In the short run, the challenge of the global corporation concerns stability; in the long run, development. There has never been a time since the Great Depression when there has been more economic uncertainty around the world [1974]. But the corporate prospect of a world without borders offers something more distressing than uncertainty. It is a vision without ultimate hope for a majority of mankind. Our criterion for determining whether a social force is progressive is whether it is likely to benefit the bottom 60 percent of the population. Present and projected strategies of global corporations offer little hope for the problems of mass starvation, mass unemployment, and gross inequality. Indeed, the global corporation aggravates all these problems, because the social system it is helping to create violates three fundamental human needs: social balance, ecological balance, and psychological balance. These imbalances have always been present in our modern social system; concentration of economic power, antisocial uses of that power, and alienation have been tendencies of advanced capitalism. But the process of globalisation, interacting with and reinforcing the process of accelerating concentration, has brought us to a new stage…” [1]

[1]‘The World’s Money – International banking from Bretton Woods to the brink of insolvency’ by Michael Moffitt. Touchstone Book, Simon and Schuster New York. 1983. ISBN: 0-671-50596-3 Pbk.

[2]‘Global Reach – The power of the multinational corporations’ by Richard J Barnet & Ronald E Muller. Simon and Schuster1974. SBN 671-22104-3 Paperback. Page 364

Significant Stimulus ASAP

Jack Tapper reports some good news:

Democratic sources tell ABC News that President-elect Obama's transition team is working with lawmakers on Capitol Hill so that on Obama's first day in office, Jan. 20, 2009, an economic stimulus package has passed both houses of Congress and is awaiting his signature … On Monday morning in Chicago, Obama will introduce key members of his economic team -- Geithner and soon-to-be National Economic Council director Larry Summers -- and will reiterate what he said in his Saturday weekly radio address: that he will push for a massive stimulus package proposal, one much larger than the $175 billion he proposed as a candidate, perhaps as high as $500 billion.

The story continues by noting that some Democratic officials argue that $500 billion might be too pricey and would invite a GOP filibuster. What – recessions are costless? My only complaint is that we can’t have this stimulus before Obama takes office. Then again - Gail Collins has an excellent idea:

Thanksgiving is next week, and President Bush could make it a really special holiday by resigning ... Putting Barack Obama in charge immediately isn’t impossible. Dick Cheney, obviously, would have to quit as well as Bush. In fact, just to be on the safe side, the vice president ought to turn in his resignation first. (We’re desperate, but not crazy.) Then House Speaker Nancy Pelosi would become president until Jan. 20. Obviously, she’d defer to her party’s incoming chief executive, and Barack Obama could begin governing. As a bonus, the Pelosi presidency would put a woman in the White House this year after all.

A Greenspan Moment for Summers

So Larry Summers will return to government in a key role on Obama’s economic team. It is said that he has a new outlook, less enamored of markets, more concerned with the fate of the bottom 90%. Fine. I’m all for a second chance, or a fifth or twelfth for that matter. I just want to see a Greenspan moment, with Larry facing the cameras and saying “I was wrong. Not just about a few small things or for a short time. I was wrong about the main thing, the idea that markets can be relied on to regulate the economy in the public interest, and I remained wrong throughout my earlier career in government. I cannot undo all the mistakes I made, but by acknowledging them I hope I can convince you I have learned from that experience, and that I will approach the crucial decisions before us with an open, humble and non-doctrinaire mind.”

I feel petty, oh so petty.

On the Genealogy of Moralism

Once upon a time, the left (or most of it) thought they had history all figured out: they could interpret day-to-day politics in light of the tectonic shifts in social formations, and they had an endpoint to aim at, a model of an alternative, noncapitalist economic system. For some, this became an excuse for amoralism, the notion that the glorious revolutionary ends justified actions that would be morally repugnant by any other yardstick. The intellectual reflections of this amoralism, the writings on this topic by Trotsky, Merleau-Ponty, Fanon and the rest, are now seen as little more than an embarrassment.

Today the problem is more likely to be the reverse. Lacking a convincing view of history or the potential transformation of the existing order—in other words, lacking the basis for a systematic strategy—activists on the left are at risk of embracing an extreme moralism. If we don’t know how to change society, at least we can separate ourselves ethically: we can be the good people in an evil world.

So much political debate today has the unspoken premise, “How can I protect myself from being guilty?” Not in my name, they say, although the horrors are no less when some other name is invoked. Actually, wanting to not be guilty is a fine emotion, but it should be a springboard to effective, strategic action, not a politics of personal virtue.

Don’t Nationalize the Banks

In the latest issue of The Nation, Bill Greider expresses what has become the mantra of the left at this moment of high fiscal drama: nationalize the banks. Rather than just injecting passive capital, we are told to take a decisive position in common (voting) stock, so we can change the management, put our foot down on compensation, and generally change the whole modus operandi. It sounds very radical, harking back to the days when socialists saw nationalization of the commanding heights of the economy as the first step toward nationalization of the minor peaks, foothills and ultimately just about anything above sea level.

But it’s a bad idea. If you want the banks, you can have them. After the hammering they’ve taken in the market the last few months, their combined capitalization is a tiny fraction of the Fed’s new, gunky portfolio. And there’s a reason: they’ve got a solvency gap of trillions of dollars. Buy a bank and its liabilities are now yours. If you happen to be the US government, your full faith and credit is on the line for every penny.

There is nothing radical, not to mention equitable or practical, about underwriting the vast quantities of dubious financial instruments that metastasized during the past decade. You want a publicly owned and managed bank to lend against the tide and finance reconstruction? Start a new one.