No Return to Normal-Why Economic Crisis & Its Solution Are Bigger Than You Think-By James Galbraith

[kpete]

No Return to Normal

Why the economic crisis, and its solution,
are bigger than you think.

By James K. Galbraith

The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this. . . The difference between conservatives and liberals is over whether policy can usefully speed things up.

...............

Third, the initial package was affected by the new team’s desire to get past this crisis and to return to the familiar problems of their past lives. For these protégés of Robert Rubin, veterans in several cases of Rubin’s Hamilton Project, a key preconception has always been the budget deficit and what they call the "entitlement problem." This is D.C.-speak for rolling back Social Security and Medicare, opening new markets for fund managers and private insurers, behind a wave of budget babble about "long-term deficits" and "unfunded liabilities."

...................

The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?

Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. And the borrower must meet two conditions. One is creditworthiness, meaning a secure income and, usually, a house with equity in it. Asset prices therefore matter. With a chronic oversupply of houses, prices fall, collateral disappears, and even if borrowers are willing they can’t qualify for loans. The other requirement is a willingness to borrow, motivated by what Keynes called the "animal spirits" of entrepreneurial enthusiasm. In a slump, such optimism is scarce. Even if people have collateral, they want the security of cash. And it is precisely because they want cash that they will not deplete their reserves by plunking down a payment on a new car.



more at:
http://www.washingtonmonthly.com/features/2009/0903.galbraith.html

[leftstreet]

1. K&R

That's what I keep asking - return to what exactly?

[Delphinus]

5. Me too.

There's simply no way, given what this world is facing, that go back is an option.

[Blackhatjack]

2. The bailouts seem to be proof of wealth consolidation into the hands of the few ....

Once you have depleted the assets of the middle and lower classes, and they no longer are able to buy the services and products the corporations and wealthy wish to sell them, there is only one recourse .... move in on the last source of ready wealth, taxpayer money, and concentrate on selling those goods and services outside the US.

There we are... the NEW NORMAL.

[bvar22]

3. This is my chief problem with Geitner & Obama.

They are doing NOTHING to address the real problems, but seem preoccupied with slapping another temporary patch on the rotten inner tube hoping to nurse another few miles out of this wreck.

When are they going to start doing something about "too big to fail", or even acknowleging that as the root of our problems? In diverse, decentralized markets with genuine open competition, frauds are quickly exposed by those doing honest business.

Stimulus money spent at WalMart (or any Big Box) is removed from the community in one quick step.

[Mithreal]

4. Doing? They won't even discuss the root causes.

With a few notable exceptions like Senator Bernie Sanders.

[ThomWV]

6. K&R and I recommend everyone read the full article

It will take a few minutes but it is well worth the time. There is stuff in there that I hope catches the eye of the President.