Now, you need to step back and understand where we were and where we need to go with our economy. I don’t think that anyone believes that the economy is where it needs to be. The question is what could have been done to correct the economy that President Obama didn’t do. That’s the question. (more…)
I’m trying to post to my blog using my iPad and the WordPress app. I’m not sure about this. I think that I’m going to have to edit this when I get home.
Dean Baker, economist, makes a great point. We can reign in Wall Street without killing the economy or letting them run free. There is a middle ground. Our economic meltdown was the end result of two decades of deregulation. I’m sorry to say that both parties– Democrats and Republicans – believed in this craziness. Stupid ideas, like the self-correcting market, were eagerly embraced by nearly everyone. Democrats and Republicans bowed to the greatness of Wall Street. Complexity was mistaken for the soundness of the product. We were told by Greenspan and others that these new highly complex tools decreased risk when in fact they increased risk; not to the individual company, but to the system as a whole. these derivatives multiplied the risk to the taxpayer.
So the question is how to fix this mess. What are our goals? First, we have to decrease risk to the taxpayer, you and me. If someone on Wall Street would like to invest in AAA-rated mortgage back securities that are really worth the price of one month old popcorn, then we shouldn’t have to bail that guy out. We have to decrease the risk to the American people. Wall Street shouldn’t have the ability to play with our home mortgages. For more than 50 years, home mortgages or simple contracts between a local bank and a homeowner. The bank made money. Homeowners rarely defaulted. There was nothing wrong with that system.
Secondly, over the last 20 years Americans have gone on a spending spree. We all decided to use credit cards which were rarely using in the 70’s. We decided that flipping our house was not just an interesting TV show but a great idea that could lead to financial freedom. After the bust, we change our minds. Americans have decided that using our house as a piggy bank was probably a terrible idea. So, we aren’t going to spend as much as we did a couple of years ago. We aren’t going to try to keep up with the Jones’. With less spending our economy has to contract. This isn’t Obama’s fault. It is our response to the economic collapse. To be honest, our response to Wall Street is 100% understandable. In times of uncertainty we need to save money and not spend it.
For years, the American economy hummed along just fine without credit default swaps, collateralize debt obligations or synthetic collateralized debt obligations. These are simply instruments which hide risk. They have nothing to do with manufacturing or improving Wall Street. They are a great way to suck money out of mainstream. We need more than simple regulations. These are simply high-stakes bets and when the music stops we are left holding the bag. This is no longer acceptable. If Wall Street wants to play casino, that’s fine but they just can’t play it with my house and my money.
Finally, we haven’t addressed “too big to fail”. We have a huge concentration of money in only a couple of companies. Because these companies are so big, if they take stupid risks with large sums of money, there is an assumption that the we, the American people, are going to bail these guys out. Companies that invest in crazy investments should feel the sting of failure. We need to limit the size of these huge companies so that they can’t threaten our pocketbooks.
besides tying Wall Street bankers to a pole in time square, what are your thoughts on Wall Street reform? How do we fix Wall Street?
Conservatives have taken to saying that FDR’s New Deal didn’t work. Nothing can be further from the truth. It is a lie. It is the worst kind of lie, designed to hamper our recovery today. Conservatives love to say that government spending didn’t work in the 1930’s and it isn’t going to work today. Well, let’s look at the evidence.
Since some commentors thought my post was a little thin, the following is from an earlier post:
In my mind, we need to focus on one (the economy) and then the other (deficits). We need to create jobs, high-quality jobs which will put money in the pockets of average Americans. Once Americans began to feel that they have a steady income and that their jobs are safe, they will begin to spend money. Currently, our economy suffers from too much supply and not enough demand. Once Americans began to spend money that will help decrease supply and spur business to begin to increase production again.
Once the economy is fixed, we must then begin to figure out how to balance the budget and how to pay down our debt. President Herbert Hoover, in the face of an economic crisis, decided to balance the budget and to decrease government spending. We all know that did not work out so well for him (or for our grandparents).
Dean Baker from the Center for Economic Policy Research said it much better than I could –
The moral to this story is that the economy must take priority, not only because the state of the economy is what most directly determines people’s well-being, but also because the state of the economy will be the most important determinant of the deficit.
The experience of the 1990s provides an example of exactly this sort of story. In January of 1994 the Congressional Budget Office projected that the deficit in 1999 would be $204 billion or 2.4 percent of GDP. This projection incorporated the impact of President Clinton’s tax increase and spending cuts.
It turned out that there was a surplus of $125 billion in 1999, or 1.4 percent of GDP. This shift from deficit to surplus of 3.8 percentage points of GDP (equivalent to $540 billion in 2009) was not caused by further spending cuts or tax increases, it was caused by the strong economic growth of the period.
There is no guarantee that President Obama’s policies will be successful in restoring strong growth, but they are clearly a step in the right direction. If we have strong growth, then our deficits will be manageable. If the economy remains weak, the deficit will remain a serious burden no matter how much we raise taxes or cut spending.
