How Obama caused the recession

Where should I go to pre-order the book?

It’s odd that the negative effects on labor supply of Comrade Obama are not offset by the positive anticipation of future social security benefit cuts, which will require people to work longer.

How Obama Caused the World Depression. Ian Welsh.

By bailing out the Rich at the expense of Main Street.

And I do blame Obama for the shape of the Oct’ 08 bailout. He whipped it, and as the clear President in waiting, had the power to do so. But he could have reversed course after the election.

I don’t see anything particularly crazy about what Michael Hudson said in that quote, bob.

Oh, goody. Can we then discuss whether the sky is blue and the Pope Catholic?

Barack Obama may not have had anything to do with the recession, but he did have a big role to play in the [costly and unnecessary] bailout of the banks. Along with the other key Democrats involved (Chris Dodd, Nancy Pelosi, etc.) Obama ‘swallowed whole’ the summation of the problem presented to them by Treas. Sec’y Henry Paulson, Ben Bernanke, and Timothy Geithner.

They undoubtedly told him in the gravest of tones that unless the massive bailout was provided, the banking industry would collapse, the stock market would crash, and the economy would soon seize up, and all this economic chaos would inflict an unimaginable amount of suffering on the American people. There is little doubt in my mind that they mentioned the spectre of ‘martial law’ more than a couple of times.

The only problem with this general description of the situation is that it did not inform the President Elect re: all the options that were available to Congress. They did not tell Obama that it would actually be all right to allow the financial industry collapse utterly IF Congress were to take certain precautions that would protect the citizens of Main Street, and the productive enterprises that everyone depends on.

They did not tell Obama that Congress had the ability to create it’s own bank—a ‘Taxpayers’ Bank—that could have been fully capitalized with taxpayer funds, and that this bank could easily have provided the non-financial corporations in the economy with all of the funds they’d require, at affordable rates, at the same time that private bank shares were being bought up at fire sale prices.

If Congress had created its own bank (it could have bought the shares of BOA for pennies on the dollar if it had been allowed to fail) and had spent $1-$2 trillion on infrastructure and human capital, the Main Street economy would have enjoyed a period of booming prosperity at the same time that the banks and insurance companies were paying the ultimate price for their economic sins. Moral hazard would have been restored to the financial industry at last.

After the dust had settled, and a few surviving banks were able to arise from the ashes, the government could have ‘privatized’ its bank, if it had a good reason to, or it could have simply have allowed the private banks to compete for depositors by offering higher yields (and making riskier loans) than the public bank would be offering. It would be a profitable niche for private bankers, who would cater to wealthier customers who want higher yields and are willing to take on some risk without endangering the entire economy with their recklessness.

No, Obama didn’t cause the recession, but he did fail to seize the golden opportunity that was available to ‘teach the banksters a lesson’ while the rest of the economy’s participants were enjoying an economic boom. Instead, he took on George Bush’s (and Wall Street’s) solution and made it his own.

And it’s not simply saying silly things, it’s saying silly things within the field for which one was awarded the prize.

Same old, same old.

GOP logic begins with a conclusion and works back to find out what the facts must be. Any time that the actual facts are inconsistent with the necessary ones they will scream loudly at the ignorance of people who disagree.

They are really no different from the Maoists or Leninists that they imagine themselves different from. They are an establishment party that exists only to further the interests of the party elite. The lower rungs of the party are required to believe that every problem that ever existed or could exist has been solved by the official party ideology. They attempt to intimidate anyone who disagrees with them by loudly attacking their ignorance and stupidity.

And like the Maoists and Leninists, the modern GOP see the ‘necessity’ of murdering very large numbers of people to further the party aims. George W. Bush is not quite Stalin or Hitler or even Pol Pot. But he has nevertheless managed to cause between half a million and a million unnecessary deaths. Part of accepting the party orthodoxy is the requirement to accept the necessity and the morality of mass murder in the furtherance of the interests of the party.

He didn’t cause the recession. he did make sure it would turn into a Depression by not handling it properly.

There comes a time where Bush is no longer your get out of jail card. Handle it or step down.

Quite a lot of free-market leaning economists think that Prescott, Lucas and Barrow are generally wrong. Their view isn’t the only view that supports a free-market economic policy position.

Obama’s support of the bailout during the election is understandable. As the candidate of the non-presidential party, and the leader in the polls, he easily could have and in fact would have been portrayed by the media as “crazy” and “irresponsible” if he didn’t go along. Plus it probably would have not stopped the bailout once the Congressional leadership had signed off. But coming out against the bailout was a viable, if risky, option for McCain who was behind in the polls and has less to lose (it helps also to think about game theory when approaching this).

After the election he could have reversed course, and he didn’t have to make some of the architects of the bailout part (actually all) of his economic team.

Substance M:
Would congress have taken steps to protect the rest of the world too?

If Congress had circumvented the private banking industry with its own bank, and had thrown a massive $1-$2 trillion stimulus at the non-financial-industry-economy, there is every reason to believe that it would have taken deliberate action to help all the other nations of the world that had been victimized by banksters.

Of course, most of that help would have consisted mainly of advice, that they follow America’s example in using the powers of government to bypass the private banking industry completely.

Unfortunately, it doesn’t appear as though American politicians/economists are currently prepared to embrace such advice. It’s difficult to find a ‘liberal economist’ anywhere in America who is willing to acknowledge that the American economy could prosper at the highest levels of achievement while relying on a banking sector that is almost entirely publicly-owned. This, in spite of the example that China has provided for several decades.

I’m not even sure that they can conceptualize a ‘mixed’ banking sector that is dominated by a publicly-owned bank that handles most mortgages and most of the least-risky types of business lending (including installment credit purchases) while yielding the riskier segment of the lending industry to private banks. I’m afraid that it is the only kind of banking sector would provide society with the security (against financial upheavals) that it has a right to expect.

Mr. Quiggin,

As an unabashed layperson, but (hopefully) broad enough generalist, I would think that anyone with a mental age above that of an eight-year-old would recognize that the efficient and rational market assumptions are so much dreck and doo-doo. I really didn’t need to read “Myth of the Rational Market” or N.N. Taleb’s books and essays to reach this conclusion. One need only look at our fellow creatures for more than an hour or so to nail it down.

My shallow readings of history make me conclude that bankers fuck up every pie they stick their fat little fingers in.

Much as I would delight in the juvenile fantasy of lining them up in front of a firing squad, I doubt this will occur, or at least not in the near future. The question is since (apologies to Clemenceau) Capitalism is too important to be left to the bankers, and clearly their elimination would be no better a simplistic solution than blaming Obama (or Bush) and removing them from power, what are we to do with these fuckers?

Are you seriously argueing that the bankbailout was bad. Wasnt Lehman enough? Fixing the financial system is far more essential than all this gamensmanship debates about deficit spending. Obama was right to support the bankbailouts, because it was the right thing to do. Simple. Why the bailout was constructed in a way that shoveled as much money as possible to bank employes and shareholders, thats another story.

weserei 28:

I just don’t see the evidence that he should take particular blame for the recession, which was fundamentally the result of an overvalued housing market in the US.

So no one has ever spelled it out for you?

The overvaluing of the real estate [and every other asset] market occurred as a direct result of Republican/Bush tax policies. In slashing the taxes of the wealthiest of Americans, Bush put millions of extra disposable dollars into the pockets of The Rich. What they naturally did with all those extra dollars is throw them at the asset markets: e.g., the stock, art, and real estate markets.

The boom we saw in these markets was almost entirely an inflationary event in which few, if any, real improvements in economic efficiency occurred.

The second round of Bush tax cuts for America’s wealthy was even more instrumental in producing the real estate bubble than the first, for it was the cut in the capital gains tax that directed an increasing share of the disposable dollars of the wealthy into the booming housing market. If Bush and his Republican cohort had never cut the taxes of the wealthy, the bubbles we saw in the asset markets would likely have never occurred.

And then, of course, we had the declared intention of the Republicans to ‘de-regulate’ the markets. It was the key flaw in their agenda that almost guaranteed the implosion of the financial sector of the economy that eventually occurred.

Hopefully this brief review of economic history will help you to see why Bush, and the Republican policies he touted, were primarily responsible for the Financial Meltdown of 2008.

Any chance that it succeeded? :)

@31: I’d be interested to see the data component of your argument. Were there particular spikes in housing prices associated with the Bush tax cuts? Conversely, was there a particular dip in housing prices associated with the Clinton tax increases? I can’t seem to find any data that indicates anything of the sort.

Also, what Jim said about the Clinton era.

And hix 29: yes, the bank bailout was bad. It was the worst. It was a Bush proposal to rescue the Wall Street fat cats, enacted mostly by Democrats (most Republicans voted against) with Obama’s backing. It wrecked his presidency and destroyed the best chance of progressive reforms in a generation.

Love the book jacket.

piglet:

Instead, that rage is now being directed against him, because he allowed the bank bailout (which was of course a Bush proposal) to be associated with his name.

I’m afraid you may be right, piglet. It really is amazing when you look back on events.

First, the Republicans destroy the economy by running it “their way” for a lengthy period of time. Then, when it becomes evident that they really screwed things up and are likely to lose the next election, they still manage to get the opposition party’s leadership to sign on to an inherently flawed, politically indefensible ‘fix’ that they designed to serve the interests of their primary constituency. Now, irony of ironies, they intend to use the most unpalatable aspect of their fix—its cost in borrowed dollars—to brand the opposition party as a tool of the wealthy banker elite.

The question is why the left is so incapable of tapping into popular anger.

I wrote something on this topic after John Kerry lost to Bush in 2004. Here’s a relevant excerpt:

…it’s not really the words or value-associations that matter so much; it’s the emotions that are expressed when words are used. How is it, after all, that the word “liberal” acquired the negative connotation that it has today? The Republicans created that negative connotation by repeatedly expressing scorn and derision whenever they used the word to describe their Democratic opponents. They expressed disgust for anyone who would be foolish enough to be such a person. (Whenever politicians express strongly felt emotions, Swing Voters tend to grant them a greater measure of authenticity. After all, why else would they be so upset?) Think also of the times when Republicans laugh at Democrats. They don’t just laugh in a way that shows they have a good sense of humor; they laugh in a way that communicates their contempt for Democrats.

http://nontrivialpursuits.org/printer_friendly_nemesis.htm

When Republicans express strong emotion while attacking the Democrats, they are modelling the kind of feelings that they want the undereducated masses to feel toward the Democrats. When the Democrats fail to respond with equally compelling emotion (e.g., mocking ridicule), the Republicans gain the upper hand.

When Obama took office, he could have surfed on a wave of public rage against the banks, against corporations, against their corrupt GOP backers.

This may come as a surprise to some people, but it’s difficult to govern responsibly and effectively while surfing on waves of rage. If you don’t particularly care about the effect of your policy on the country, on the other hand, it becomes a good deal easier.

The Democrats’ big disadvantage is unwillingness to let Rome burn. It’s certainly true that the awareness that politics is not a game, but something with seriously consequential outcomes, limits their tactics. Nevertheless, wishing that they would give up their obsession with the effects of policy on people’s lives so that they could win some political fights seems… odd. (Although not half so odd as the idea that they should prefer to lose their fights, in public, with results that are both politically and substantively bad, rather than compromise.)

Also: comment 35 is particularly funny given which presidency also produced the biggest (indeed, only) progressive reform in *several* generations. After nearly 30 years of constant rightward movement which the one Democratic President in that time period responded to by vacillating between collaboration and a halfhearted rearguard action, the country finally took one (albeit halting) step to the left and… for his troubles, the purity vanguard of the left proclaims a “wrecked” presidency. I’ll take the “wrecked” Obama presidency over the famously accomplished Reagan one any day, thanks.

This administration (for all that it is a frustrating collection of half-loaves) really is the most liberal action the country has seen in my lifetime, and I’m not so young. Of course it’s possible to construct a theoretical world in which it could be better, but recent history abounds with examples of how very, very likely it is to have been worse.

“comment 35 is particularly funny given which presidency also produced the biggest (indeed, only) progressive reform in several generations.”

Well that is debatable and many of us disagree. I also disagree with the false dichotomy you present us between populism and responsibility. FDR didn’t “let Rome burn” and he didn’t think that political responsibility prevented him from campaigning aggressively against corporate interests. Consider that at this point in Obama’s presidency, the banks are the *only* sector of the economy that is doing fine. Don’t tell us that “we had to save the banks to save Main Street” or such BS. That is just fantasy.

In his own diary (at ianwelsh.net, though I can’t find the specific post right now), Ian Welsh said the only way the power of the wealthy is ever lost is through an economic crash (including, I assume, one accompanying revolution), not through higher taxation. This is what happened in the Great Crash of 29, and the high taxes of the postwar era served to prevent the re-emergence of great concentrations of wealth, not to destroy them where they existed. Something like the bank bailout has been liberal orthodoxy for some time: the notion that the mistake the government made in the Depression was to not save the banks, turning a panic into a long-term catastrophe. However, if that was what was needed to change the power dynamics of the society, perhaps the error was not in rebuilding more decisively, rather than in not preventing collapse. Now, we saved the banks, the same people are still in charge, and Krugman suggests we could be in depression anyway. I’m kind of thinking aloud here, but perhaps the orthodoxy both on what the Fed should have done in 29 and how to deal with excessively-concentrated wealth needs to be re-evaluated.

Chris, we currently have the most progressive and strongly-Democratic Congress in years, and they passed health care reform.

Well, sure, I’ve argued the importance of Congress both here and elsewhere. But if you’re going to blame Obama for everything under the sun and then say that accomplishments during his administration are all Congress’s credit, that looks an awful lot like a double standard.

He does have influence, of course, but the evidence is that his influence was largely spent watering down the effort from the likes of Pelosi.

You neatly omit the fact that if *someone* didn’t water down the House bill, it would have simply died in the Senate like so much other promising legislation. How much of the watering down was Obama’s as opposed to someone else’s, and how much was necessary to get the bill passed as opposed to gratuitous stabbing the progressive movement in the back, can be debated until the cows come home, but in the end something that moved the state of US policy to the left did pass, which is more than you can say for anyone since, IIRC, LBJ.

Appointees are very much not independent of Congress. And in fact Obama’s appointees have been obstructed at historic levels — if he had any tendency toward “partisanship” in his appointees it might be worse (although it might not, too, if the Republican plan is just to gum up the works and then rail against the inefficiency they created). The bank bailout was a piece of legislation, and most military policy (including one of the currently most salient parts, DADT) is also set by legislation.

Civil liberties is one area in which I pretty clearly disagree with Obama. However, no other candidate with a significantly nonzero chance of winning election had (or has now) a better (IMO) position, therefore it can’t exert any leverage on my candidate choice, no matter how important I think it is. If there were an “Obama, but better on civil liberties” candidate with a realistic chance of winning I probably would vote for him. But there isn’t and you can’t vote for rainbow unicorns. He can be the best currently available candidate without being perfect — and I notice how few of his critics have anyone, even an also-ran, to point to as an alternative.

Ultimately, the United States keeps getting not-so-liberal politicians because it has a not-so-liberal electorate that will sometimes support some liberal policies in a poll but won’t vote (in sufficient numbers) for the candidates that would actually implement them, and as much as I disagree with that, I have to acknowledge its reality, and that politicians have to work within those constraints.

Don’t tell us that “we had to save the banks to save Main Street” or such BS. That is just fantasy.

Oh, well, if some guy calling himself “piglet” on the Internet says it’s fantasy, then I should just ignore the fact that even progressive economists said then, and still say now, that the bailout mitigated what could have been a much worse catastrophe. Krugman comes to mind, unless you think he’s an apologist for malefactors of great wealth too.

Certainly it could have been done better — in a perfect world. Operating within the US political system I’m not at all surprised that some people demanded, and got, pounds of flesh for permitting it to be done at all, and that people who could disclaim responsibility for the outcome of inaction proudly proclaim that they would never have sullied their hands.

“I think the most interesting thing in this thread, which no one appears to be prepared to take up, is James’ notion that banking need not be entirely private.”

I don’t get that. We have publicly-funded, publicly-guaranteed, politically responsive entities making mortgage loans. They didn’t make wise decisions about where to invest. They went bankrupt and they have cost a bundle to bail out. They aren’t currently buying distressed assets at pennies on the dollar and they aren’t in a position to do so. What possible reason is there to believe that a Taxpayers’ Bank would do better than any other GSE?

Chris, no, it’s not a double standard. Legislation passed is to Congress’ credit or blame, because they are the ones that pass it. If the legislation is explicitly designed by the Administration, as with the stimulus, well, then, they can share in the credit and blame, but that was not the case for health care. The only place where Congress had a real impact on the War in Afghanistan was in voting for the supplemental, and Rahm made clear that any opposition to that would be greeted by being cut off from any help from the Administration on re-election. There is no evidence that similar threats were ever made regarding health care. Rather, Baucus, Stupak, and the rest were treated as people with legitimate concerns that should be addressed, whereas opponents of the Afghan supplemental were overtly bullied.

Nobody forced Obama to appoint Summers, Geithner, Bernacke, and Gates. Those posts cannot stay empty long, so the Repubs could not sustain a filibuster. He could have nationalized the banks, the TARP program was almost entirely to his discretion in how it was used – in fact, he used some of it to bail out Detroit, which is something Congress never authorized, so , no, Congress was not part of the decision-making on TARP beyond approving the program under Bush.

And civil liberties are not just one issue among others; they go to the fundamental nature of the country. We can leave Afghanistan or stay, expand the welfare state or contract it. Those are the normal decisions of politics, they do not change the nature of the country. Doing away with the right to trial makes this a fundamentally different kind of country. Now that it has the stamp of approval of both parties, it will be very hard to reverse.

I’m with piglet.

There’s not much evidence that the downturn in the real economy is due to a lack of access to credit stemming from the financial crisis. And there’s plenty of evidence that the recovery of the financial sector has been “pushing on a string”, as far as the real economy is concerned. A much more convincing story is that the end of the housing bubble led, more or less independently, to sharp falls in both demand for real goods and services, and the value of financial assets. But while both the financial crisis and the real crisis stemmed from the same root, the former was not the cause of the latter. So while the Bush-Obama bailouts were very good news for financial institutions and financial asset-owners, they were irrelevant to the rest of us.

Irrelevant directly. But very harmful indirectly, in two ways. First, because the public perceived, correctly, that the government was focused on saving Wall Street, and became more skeptical of any kind of government response to the crisis. And second, because the financial elite (which these days is almost just the elite; nonfinancial corporations hardly exist any more, at least sociologically) perceived, also correctly, that their fortunes weren’t linked to those of the bottom 95% (98%? 99.5%) and lost whatever openness to more comprehensive reform they might have felt in the heat of the crisis.

I’m not criticizing John Q. here, tho. Whatever the failures of Obama, real business cycle theory is still sufficiently pernicious and widespread that mocking it is useful intellectual pest control.

Yes, it should. But while I certainly have disagreements with John Q., I don’t think he identifies as an NK. Krugman, on the other hand, continues to write some very mockable stuff, especially on trade.

“New Keynesian economics – which is neither new nor Keynesian – also known as saltwater economics, should also be mocked.”

I am not an economist, certainly not a macroeconomist, only the holder of a bachelor’s degree in the topic. Which is why I never make snarky comments on macroeconomics, because I am not sure what is true. But I have to say that mockery, other than the most genial, is not very persuasive to the unconverted. So I find Greg Mankiw much more persuasive than Paul Krugman, on that basis.

Other unpersuasive attitudes include raging against the elite. I stopped reading Arn0ld Kling, because it’s boring and unconvincing.

S. McG. for the win.

hix 52: “The Sparkassen system failed catastrophic during the financial crisis. They were the major purchaser of all those fraudant US real estate packaged credits.”

Absolutely not true. The publicly owned Sparkassen were not totally immune but they didn’t fail and in general benefited from the crisis because the public trusts them even more than before the crisis. Some of the Landesbanken had problems but it is important to recognize that the Sparkassenverband is a resilient network of hundreds of independent local institutes. In addition, there are networks of cooperative banks (like Raiffeisen) that also offer an alternative to big for-profit banks.

Greg Mankiw, fool or knave?

This raises a terminological question – dull, but one I recently encountered and couldn’t really answer.

Should this be called a false dilemma, false dichotomy, or something else? Both terms commonly involve two elements: the alternatives are presented as (1) mutually exclusive (¬p∩q), and (2) jointly exhaustive of the alternatives (p∪q). ‘False’ could apply either to exclusivity, or to exhaustivity, or to both. Here, only the exclusivity is false.

y81:
We have publicly-funded, publicly-guaranteed, politically responsive entities making mortgage loans. They didn’t make wise decisions about where to invest….What possible reason is there to believe that a Taxpayers’ Bank would do better than any other GSE?

Privately-owned, for-profit entities [that are publicly-funded and publicly-guaranteed] are not government entities. What they are is a typical example of Crony Capitalism. Privately-owned entities that enjoy special privileges/opportunities from the government are not to be mistaken for government entities, outright.

The big difference is the profit motive. Privately-owned ‘entities’ exist to make profits for their owners. True government entities exist to serve the general public interest. If they are managed and staffed by individuals who take that duty seriously, the results are usually very good.

The profit motive is a good incentive in certain [very competitive] industries, but in the private banking/finance industry, the profit motive was THE problem. Society needs to ‘nationalize’ any industry that requires more honorable incentives than simply the craven lust for profits.

The other “possible reason” why a Taxpayers’ Bank could be expected to do better is one that I already mentioned. China’s publicly owned bank has done a stupendous job of orchestrating multiple decades of dynamic economic growth, without any recessions, without any ‘runaway’ inflation.

If you have your incentives right, that’s the kind of thing that is possible.

@68: See, that’s what I said about Arnold Kling. When you complain that Harvard is anti-intellectual, or that the whole system is rigged against your own iconoclastic brilliant ideas, you sound like a Oxfordian (as opposed to an Oxonian) or a Single Taxer or an anti-AGW advocate, i.e., a crank. The normal person has no way to discover the one crank in the world who might be correct, and discounts them all.

“When you complain … that the whole system is rigged against your own
iconoclastic brilliant ideas…”

I don’t why y81 thinks telling obvious lies about what others say
“persuade[s]” or is an example of “unfailing courtesy”.

And I still don’t know why y81 wants to repetitively proclaim his ignorance of quite famous events in the Harvard economics department. I think of the Sweezy
brothers; later events with, for example, Samuel Bowles and Herbert Gintis; and
even more recent events with Stephen Marglin.

Their treatment of Paul Samuelson was despicable. Andrei Shleifer, the knavish
thief, brings them no honor. Mankiw’s predecessor in teaching Econ 10 reacted
in a foolish way to demonstrations that he was simply wrong about Social
Security.

I suppose y81 will once again re-iterate his ignorance.