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by Gfranc
5361 days ago
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Fair enough and interesting reading...thanks for taking time to write the replies. When I speak of corruption, I’m speaking primarily in banking. Banks know this game. Banks also know the position that the fed is in, and what decisions it must make. I can agree that Krugman is likely the wrong target, but I still don’t' think that Keynesianism is. Wouldn't you agree that the majority of the mess we're in right now was and is caused by misapplied Keynesian theory? Misapplied subsidies, interest rates, monetary policy? What I'm trying to understand still is how anyone believes (including Krugman) that Keynesian theory can ever be successful in a political system as we have now or in a banking system as we have now. The fed has simply been a tool for achieving whatever Washington and corporate elites plan next. I have a hard time believing it will ever be anything but. Taking that power away from Government and living with natural fluctuations in the economy seems a far better option. We got off the original track here… I can tell you why this original post sparked my interest, and it’s that I was angered by #OWS’s attacking business and corporations, when the vast majority of them (my employer) are innocent and profoundly important. I was intrigued by your reply but I disagreed that they weren’t attacking manufacturing or retail. What else is “corporate greed”? Then you stated that the “ Federal Reserve is funneling free money to banks” and I thought, of course they are. I kept hearing Krugman’s arguments that they didn’t do this or didn’t do that…and my thought was, when are you (Krugman) going to realize that they aren’t going to? When will you realize that this theory will never be applied in a manner that is actually helpful? As long as we live in a divided state, with a fed that is manipulated and a banking industry that is guaranteed by their importance to the fed philosophy… the application will always create messes like this one. I firmly believe the next one will be even bigger. Krugman may be right on his grievances, but I think he’s wrong to ever believe it will be done right. We simply keep getting left with fewer and fewer options. |
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What does any of this have to do with Keynes or government spending? Absolutely nothing. The private sector took advantage of financial deregulation in the late 1990s and 2000s to leverage up and start betting in new markets. The trigger was the dismantling of the Glass Steagal act which prohibited bank holding companies from owning speculative investment houses. The economy was certainly weakening in 2008, but it did not need to collapse into Depression-era levels of unemployment and misery.
Obama has made three big policy mistakes in my opinion. The first was not nationalizing the failed banks as Krugman and many others advocated, wiping out the shareholders and recapitalizing the husks into smaller banks which posed no systemic risk to the economy and which could have engaged in lending that would have translated low interest rates into actual business lending. Instead the Obama administration did nothing out of a fear of provoking capital flight from the remaining banks and making nationalization inevitable. This left it to the Federal Reserve to try and keep credit flowing using the only tools at its disposal: low interest rates and creative lending. Bernanke gets a lot of flack but this was good policy which probably prevented financial apocalypse. It is just turning out to be really expensive in the absence of a political willingness to demand anything in return for the bailouts, since the banks are simply using the cheap capital to return to speculative and leveraged investment plays rather than renewing their lending to the private sector. Case in point: the government should not be borrowing from itself and paying the banks interest for the privilege.
The second was agreeing to extend the Bush tax cuts in a tit-for-tat exchange with the Republicans over health care. The administration justified this as a form of economic stimulus, but it was a horrible misuse of the term, since the relatively wealthy who benefit from the cuts tend to save/invest capital instead of spending it right away, which is the point of stimulus. Bush II did the same thing and that is one of the causes of the weak recovery from the last recession and the reason the Fed kept interest rates low after the first dot-com boom.
The third was the failure to pursue real Keynesian stimulus when aggregate demand plummeted. Standard economic projections in 2008 predicted a 2 trillion shortfall, and called for 1.2 trillion in stimulus to keep unemployment under 7 percent. And yet Obama's team never tried for more than 800 billion because they didn't think they could push it through Congress, and because the Republican party was trying to spark a debt crisis by questioning the solvency of the US government and calling for financial austerity!
I am sure there is a conservative blogger out there willing to dump the thing on Keynes and Krugman as "liberals" who promote "government spending". The sad thing is these people have been empirically wrong for ages, and their proposals of what needs to be done are dangerous and ignorant.