Like most non-economists I have been following the financial crisis with some bemusement and no little concern. The numbers seem so staggering as to be beyond imagination. The financial instruments so exotic as to be beyond comprehension. The scale of fiscal irresponsibility with other people’s hard earned cash so huge as to be absolutely staggering. And now the consequences appear likely to be so severe as to usher in a new Great Depression, with money being issued in quantities reminiscent of Weimar or Zimbabwe, and perhaps even a World Resource War as shadowy globalised elites seek to control what remains of an increasingly devastated planet and its diminishing resources and powers of regeneration.
To the non-expert, a perhaps over-simplified series of battle lines seem to be emerging. Even the market fundamentalists like Greenspan appear to have discovered a flaw in their models of what should be happening in deregulated free market economies. But most seem to accept that there are some financial institutions which are simply too big to fail and that the consequences of their failure would be even worse than the enormous costs of bailing them out. Fiscal conservatives who baulk at even small increases in social welfare, education or public health care spending seem to have no difficulty contemplating unimaginably huge sums of taxpayers money being devoted to bailing out hugely irresponsibly if not criminally run financial institutions.
The theory appears to be that the taxpayer may get much of that money back when economies recover and asset prices eventually rise to something like their pre-bust levels. This is where the progressives like Krugman beg to differ, arguing that the market may currently be correctly valuing many of those assets, and that there is no guarantee that the taxpayer will ever get any of that money back. In their view some of the major financial institutions are unavoidably insolvent, and throwing taxpayers money at them now will simply reward gross irresponsibility without rescuing the current system in any way whatsoever. In effect, it is the heist of the century where the poor are robbed by the the rich, and the most greedy and morally corrupt rich at that.
The Obama regime now appears to be siding with the “too big to let fail” argument, and preparing to spend absolutely huge sums on trying to rescue the current system. This has progressives seriously worried that the most promising President of his generation is about to make a fatal mistake, condemning the US to impoverishment, depression and stagflation for at least a decade, and ensuring that he will be a one term President. Ironically a McCain Presidency would never had the political capital to attempt such a massive bail-out, and would have been opposed tooth and nail by a Democrat Congress if it tried.
So what is to be done? Jerome is depressed and has rightly pointed out that there is no argument for the taxpayer covering speculators bets that banks and Insurance companies like AIG no longer can. Krugman is also increasingly shrill in his opposition. And Nationalisation doesn’t appear to be on the agenda. Even if it were, would it not increase the likelihood of the taxpayer shouldering the losses after the rich have walked away with their ill-gotten gains? I want to propose what might be a simple solution, one undoubtedly suggested by others, although I haven’t seen it put forward yet. Perhaps it is my simple mind which cannot comprehend what others have proposed. Undoubtedly there will be economic experts here ready, willing and able to put me straight on this.
The problem, as I see it, is that no one seems to know what the toxic assets hidden on and off financial balance sheets are actually worth, or might be worth in the future. What seems clear is that at current valuations, many financial institutions are in fact insolvent. If the real economy does actually recover, some may be able to trade their way out of difficulty, but all will face acute cash flow difficulties as their debt obligations become due. Asset prices will remain hugely depressed for so long as the market is flooded with forced and distressed sellers.
So my suggestion is that Governments should set up huge investment funds to buy up these assets at current market prices because then the taxpayer also has some prospect of reward should assets prices recover somewhat. Effectively Governments would be putting a floor on current asset prices and thus helping to generate the confidence necessary for any future recovery. Of course this will not help those financial institutions which simply are insolvent at the moment, but taking their toxic assets off their hands at current prices will at least stop their forced disposals depressing the market still further.
It seems to me that there is no other way that current assets can be properly priced – except by reference to current market prices – as any other pricing mechanism – e.g. linked to whatever prices are required to enable different institutions remain solvent would be different for each institution and any global premium over market prices would enable some institutions to make huge profits whilst failing to save others.
It seems to me that the “gaming the system” mentality is deeply ingrained in the culture and organisational structures of those institutions – as is witnessed by their determination to continue to pay enormous salaries and bonuses whatever the real state of their balance sheets – and thus only allowing those institutions to go into Chapter 11 or whatever insolvency provisions apply can generate the cultural and political changes required to prevent similar behaviours being continued indefinitely.
So yes, there will be further Lehmens and turmoil in the stock markets, and those who measure Obama’s success via the Stock Market indices will have much to criticise him for in the short term. However it seems to me that the sums of money required to return the major institutions to solvency are so huge as to be beyond any President’s ability to deliver on an ongoing basis, and even a President with Obama’s political capital has only one more shot at saving the system by getting more funds out of Congress, and when that proves to be insufficient – as it almost undoubtedly will – not only will those institutions fail in any case, but they will have brought the prospect of any sort of progressive reform and a second Obama term down with them.
I have long had a sense that the US, in particular, is in the grips of a particularly vicious class war, but that only one side is doing the fighting. The rich are absolutely ruthless in depriving the poor of basic employment rights, social security, education and health care, whilst “progressives” are incredibly timid in terms of taking the rich on at their own game.
So my argument is that Governments should buy up assets at market prices now whilst they are cheap – whilst there is a realistic prospect of being able to sell them for more later – and screw the rich who let their greed get the better of their judgement or moral scruples. If that results in major insolvencies and financial dislocations, so be it. Far better to utilise Government resources in stimulating the real economy rather than poring money into financial black holes that – even when they were “healthy” actually produced nothing in the real world except obscenely rich speculators.
Obama and his European counterparts would need to have the balls to ride out a very sharp, but hopefully much shorter depression. However they would also then not allow themselves to be outflanked by right wing populists and demagogues who will condemn them for bailing out the banks. It’s time progressives stopped being so God-damned “responsible” in trying to shore up the current system, and realise that we are, truly, in a revolutionary epoch right now, whether we want to be or not.
Sadly the EU seems to be moving in the opposite direction. As Nanne argues, there is little prospect of an effective opposition to the re-election of Barroso as President of the EU Commission and the continued dominance of neo-liberal policies and parties in the EU Parliament itself – even though neo-liberalism has been hugely discredited by the Global fiscal and economic crisis and just as Obama attempts to move the US in the opposite direction. Is it any wonder when the EU electorates are so apathetic about the EU Parliament elections when there is virtually no alternative candidate for the EU Commission, and no significant popular debate as to the policy direction the EU should take as part of the EU Parliamentary elections?
