Monday, March 09, 2009

What is to be done? 

That's what Lenin asked, but the reality of this situation is not revolutionary. It may be true that the whole system is wrecked, but I don't think anyone -- i.e., an organized socialist party -- is in any position to do anything to bring anything good out of the wreckage. And that means that the biggest dogs will grab the biggest pieces of meat. I hope there isn't a collapse; there are non-demented people still thinking about what might be done to stave one off. They tend not to be on the "left" actually. Even the smart "progressive" critics like Baker and Krugman and Galbraith have only been talking about the futility of the bailouts, without talking about how to un-cluster the fuck. They're right of course that the solution is not to throw money into the bank-pit. But what then is the solution? I haven't heard them talk about the stuff mentioned by Ann Pettifor in this piece:

....policy-makers - at the US Treasury, the Federal Reserve and the British government - do not understand what is going on. Let us spell it out for them. Banks are going bust because their customers cannot repay debts, or afford to borrow. Customers cannot repay debts because a) these debts exceed their income and/or assets and b) because the interest rates or borrowing costs on these debts are too high, and unpayable. If you don't believe me, ask Warren Buffett. He tells shareholders that "highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.

Though Berkshire's credit is pristine - one of only seven AAA corporations in the country - (its) cost of borrowing is now far higher than competitors with shaky balance sheets but government backing."

Millions of individuals and many thousands of companies are now unable to borrow. Burdened with huge debts by de-regulated lenders and financiers, many are being bankrupted by record high borrowing costs on their debts. This is the real crisis in the economy. And the Federal Reserve declines to address this crisis of high real rates of interest.

Because they are facing insolvency, companies are firing workers. This is pushing up unemployment to levels comparable to those at the height of the Great Depression. Unemployed workers can't pay debts. It's simple.... Last week the Labor Bureau suggested that only 5 million people have lost their jobs in the last twelve months, and that only 12.5 million people are unemployed. We think that is optimistic. The Bureau does not include in the official release, 'discouraged' employees or those working part-time because they simply can't get full time jobs. Dig deeper, and the percentage unemployed today is almost double that announced on Friday: 15%. We predict if policies are inadequate and interest rates stay high, that it will be as high as 20% by the end of this year. That will bring unemployment - under President Obama's watch - close to the level it hit, 25%, at the height of the Great Depression in 1933.

....By throwing money at the banks, and by refusing to take full charge of how they are run; by refusing to lower borrowing costs, US Treasury officials and the Fed Reserve are dodging the big issue: corporate and household insolvency. Cutting borrowing costs would start to address the solvency issue. Putting a floor under insolvent companies and insolvent homeowners - would save the banks. At the same time it would release the hostages that are the unemployed, the elderly, the savers and the entrepreneurs.

The Federal Reserve can begin to lower borrowing costs by measures known as Quantitative Easing (QE). These were adopted by the Bank of Japan in March, 2001, and by the Bank of England last week. QE does not mean 'printing money' - this is a widespread misunderstanding. (For more on QE, click here.) QE will help to lower interest rates and therefore borrowing costs. Governor Ben Bernanke is still ignoring the experience of Japan and the way in which QE was used to lower rates and loosen the grip of insolvency on the economy.

The author of the above tells us more about QE here. A related idea was proposed last fall by the Reagan Republican Martin Feldstein, who has been highly critical of the Rubin/Summers/Paulson/Geithner cabal for a long time. His idea is that the government should give large long-term loans to homeowners to replace large chunks of mortgages that have become prohibitively costly. In cases where the mortgage has become larger than the market-value of the house, the government would pay the banks directly the replaced part of the mortgage loan, and the homeowner would then pay the government at a much lower interest rate over a much longer period of time. This would drastically cut the cost of the homeowners' debt, would make sure the banks get some of the value of the mortgage, and keep homes from going into foreclosure -- which leaves the debt unpaid and depresses the value of homes still further (by creating yet another empty house). Helping people to pay mortgages would stabilize the housing market -- which needed to crash but is in danger of entering a deflationary spiral, where people stop buying in anticipation of further falls in prices.

The basic idea is that debts need to be repaid, and the cost of debt is prohibitively high. The non-payment of debts causes household bankruptcy and/or forces companies to cut costs (i.e., jobs). High real interest rates keep money from being spent. Until the paralysis is broken, Obama's stimulus is pitifully irrelevant.

The Feldstein piece is probably the clearest account of the subprime crisis that I've read.


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