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The Path Not Taken – NYTimes.com

The Path Not Taken – NYTimes.com

The Path Not Taken

Financial markets are cheering the deal that emerged from Brussels early Thursday morning. Indeed, relative to what could have happened — an acrimonious failure to agree on anything — the fact that European leaders agreed on something, however vague the details and however inadequate it may prove, is a positive development.  But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine.

 

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price.  So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.

 

The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.

 

Latvia, which in the aftermath of a terrible recession, managed to reduce its budget deficit and convince markets that it was fiscally sound. That was, indeed, impressive, but it came at the cost of 16 percent unemployment and an economy that, while finally growing, is still 18 percent smaller than it was before the crisis.   So bailing out the banks while punishing workers is not, in fact, a recipe for prosperity. But was there any alternative?

 

Iceland was supposed to be the ultimate economic disaster story: its runaway bankers saddled the country with huge debts and seemed to leave the nation in a hopeless position. But a funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net.

 

Iceland hasn’t avoided major economic damage or a significant drop in living standards.  But it has managed to limit both the rise in unemployment and the suffering of the most vulnerable.  “Things could have been a lot worse” may not be the most stirring of slogans, but when everyone expected utter disaster, it amounts to a policy triumph.

ChrisB- I am still of the opinion that bailing out the banks probably saved us from a pit of despair and enormous levels of unemployment.  However, it is about three years after the initial meltdown and the banks are still not lending any money.  Worse yet, they collect interest on the money they are not lending stored at the Fed.  They can then turn around and borrow additional money at our expense.

When you can borrow money for nothing, and lend it back to the government risk-free for a few percentage points, you can COIN MONEY. And the banks are doing that. According to IRA, the “net interest margin” made by US banks in the first six months of this year is $211 Billion.

We are certainly not Iceland, an island with a fairly homogeneous population a hundredth our size, but I don’t think our banks need us to throw them any more life preservers.  The training wheels need to come off, and they need to feel the pain like everyone else.  I am not for some kind of “welfare state” where we just throw money to the masses, but I surely would like to see help going to struggling mothers instead of banks.

 

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