How Obama caused the recession

by John Quiggin on July 10, 2010

The idea that Obama (or rather, the wisdom of crowds in anticipating the election of a socialist-Islamist Obama administration) caused the recession is getting another run, this time from Nobel[1] prizewinner Ed Prescott. I haven’t been able to track down more than a precis of Prescott’s argument, but I assume it’s similar to the version put forward by Casey Mulligan. I had a go at this in my Zombie economics book [2], and here on CT, so, I thought I would link to it here, to give a bit of context to the current flap.

[1] Yes, yes, I know about the Sverige Riksbank. And winners of the economics prize aren’t the only ones to say silly things later on.
[2] Still on track for Halloween, and already taking pre-orders! Join the Facebook group here.

{ 72 comments }

1

Adam Hyland 07.10.10 at 2:13 am

Where should I go to pre-order the book?

2

Adam Hyland 07.10.10 at 2:13 am

Disregard, found links from the FB page. I was worried I wouldn’t be able to navigate it because I don’t have an account there.

3

P O'Neill 07.10.10 at 2:44 am

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.

4

P O'Neill 07.10.10 at 2:47 am

And JQ, it might have been a bit off the radar screen in Australia, but a Wall Street Journal editorial from the self-parody department arguing (with no actual evidence) that high taxes drove LeBron James out of Ohio. The supply side zombie is the strongest.

5

bob mcmanus 07.10.10 at 3:35 am

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.

6

bob mcmanus 07.10.10 at 3:46 am

And why are we focused on the crazy on the right rather a crazy on the left, like Michael Hudson

“If the financial sector can be rescued only by cutting back social spending on Social Security, health care and education, bolstered by more privatization sell-offs, is it worth the price? To sacrifice the economy in this way would violate most peoples’ social values of equity and fairness rooted deep in Enlightenment philosophy.”

Why link to Prescott?

7

Salient 07.10.10 at 4:10 am

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

8

Salient 07.10.10 at 4:13 am

Okay, to be fair, “rooted deep in Enlightenment philosophy” is about as thought-through as rhetorical appeals to what the founding fathers surely thought about gay marriage, and clearly something more precise than the entire banking sector is implicitly meant by “the financial sector” there, so let’s take a couple points off for sloppy generalist writing, but… where precisely is the crazy, again?

9

John Quiggin 07.10.10 at 4:16 am

I think Bob must be missing some irony alerts. The Hudson piece as a whole is eminently sensible, and pretty much what Krugman has been writing every second post (less notably, what I’ve been writing too).

10

bob mcmanus 07.10.10 at 5:54 am

9:No, I’m not missing any irony. I am entirely serious. Why can’t we simply scrape the cursed names Lucas, Cochrane, and Prescott off the walls of the Temple and let them be lost to memory forever?

It is about the discourse space. Even to mock or refute the freshwater crocs is to give them attention they don’t deserve.

8:Better. Let’s talk instead as to whether any cuts in social spending are a sign of the resurgence of the Counter-Enlightenment, an attempt of privileged classes to ensure their power and positions. That could be more useful than studying the drool-cups of a senile reactionary knave.

11

NomadUK 07.10.10 at 6:42 am

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

12

Don Gomez 07.10.10 at 7:24 am

So NomadUK, what do you mean when you mention the concept of ‚blue‘?

13

James Kroeger 07.10.10 at 7:34 am

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.

14

Kevin Donoghue 07.10.10 at 11:07 am

“And winners of the economics prize aren’t the only ones to say silly things later on.”

Prescott was saying silly things long before he won the prize.

15

Barry 07.10.10 at 12:26 pm

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

16

Substance McGravitas 07.10.10 at 3:13 pm

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

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

17

PHB 07.10.10 at 3:45 pm

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.

18

JP Stormcrow 07.10.10 at 3:57 pm

From your prior piece on Mulligan:

There is one problem with Mulligan’s neat explanation. Writing in October 2008, when the crisis had already erupted and when Obama’s victory was virtually assured Mulligan had this to say about proposals for economic stimulus.

You miss the point, this is simply another demonstration of the wisdom of the markets surpassing that of any one man, even Casey Mulligan. Why do you hate reality?

19

Ian Welsh 07.10.10 at 8:20 pm

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.

20

Watson Aname 07.10.10 at 8:46 pm

Ian, while your latter statement is obviously true, there is a problem with the timeline.

Two terms of Bush and company consisted of such gross neglect that the effects will be felt well past any single presidents potential terms. You can’t dig out from under it in a couple of terms, so the thing to do is judge current and future presidents on the role they play in cleaning up the mess. But the mess doesn’t go away magically.

Note I’m not claiming that Obama stacks up well so far.

21

Current 07.10.10 at 11:52 pm

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.

22

piglet 07.11.10 at 2:21 am

I am not entirely unsympathetic to Bob and Ian. Back in fall 2008, I thought for a while Obama was losing the election by supporting the bailout. That didn’t happen but what did happen may well have been worse: Obama threw away the presidency by aligning his administration with Wall Street interests from the very first second. It strikes me as typical that liberals like JQ would rather talk about the right-wing lunatics blaming Obama for Bush’s failures. But we do need to talk about Obama’s failures. Ignoring them isn’t going to make things any better.

23

Ed 07.11.10 at 5:36 am

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.

24

John Quiggin 07.11.10 at 7:58 am

Piglet and others, we are talking at cross purposes here. I’m not writing as a US liberal, seeking to place the blame on Bush rather than Obama for the crisis.

I’m writing as a (broadly) Keynesian economist, making the point that the market economy is inherently unstable and that the crisis should have delivered the final death blow to (among other things) real business cycle theory. The book spells all this out at greater length.

25

James Kroeger 07.11.10 at 10:52 am

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.

26

Matt McIrvin 07.11.10 at 12:13 pm

Obama’s failure, to the extent that it exists, is not being leftist enough. The problem with an American simply blaming Obama is tbat, in the impoverished context of American politics, it automatically implies support for right-wing fiscal policies. The lesson that the American media are drawing from the persistent recession is that government stimulus is inherently impossible and austerity measures will somehow save us.

Look back at that US Chamber of Commerce article–the guy is able to raise the specter of Carter-era inflation and high interest rates and say “we can’t go back,” and people don’t just laugh him out of the room, even though we’re in danger of a deflationary spiral and interest rates are almost zero. Part of the problem is that we have a lot of people who remember Jimmy Carter and almost nobody who remembers Herbert Hoover.

What we really need is just not present in the spectrum of political positions that are open to discussion, and the problem is moving the frame somehow.

27

Irrelephant 07.11.10 at 1:26 pm

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?

28

weserei 07.11.10 at 3:07 pm

@20: I think Bush was a terrible president, but I don’t buy the idea that he represents a singularity in terms of presidential quality. It’s an awfully convenient excuse, both for the Obama administration (which is hoping to wriggle out of any responsibility for accomplishing anything positive, for reasons we can speculate about) and for the Republican Party (which badly needs votes from outside the 25-30% of the American electorate that thinks he was a good president, and therefore needs people to forget how thoroughly they backed him on almost everything).

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. More specifically, in about half of US states. The US federal government doesn’t assess private property and is constitutionally barred from taking property taxes. Its influence over housing values has always been limited and has always been based on regressive redistribution from renters to landowners.

When this overvaluation started to correct, some very large banks found themselves in a very tight spot, and credit got tighter for both employers and consumers. Therefore recession.

I don’t really see how this is a Bush Administration problem, as opposed to a problem of American political culture in general. Would President Gore or President Kerry or President Obama have defused this situation before it got out of hand? How?

29

hix 07.11.10 at 3:24 pm

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.

30

Ed 07.11.10 at 3:28 pm

The funny thing is that Truman gave the better part of a speech to Congress in either 1947 or 1948 about how to keep housing values from rising to rapidly. An increase in house prices at that time was regarded as enough of a catastrophe for the president to have to address it; how were returning soldiers going to buy houses?

The idea that increasing house prices and rents should be an objective of government policy represents a complete change of mindset. And its one of those things that people just accept but doesn’t make sense once you think about it. You are basically reducing people’s discretionary income and yet this is a national policy objective, embraced by both parties.

The fact that the main method of finance for local governments is through property taxes, meaning if real estate prices fall local governments (which already have a financial problem with their pension costs) are in financial trouble. Plus in many parts of the country there is not much rental stock, so either you give people cheap credit to buy homes or you have a serious homelessness problem. This is a bipartisan problem, and bailout has been pretty standard government practice for dealing with financial crisises since the 1980s. I’m not sure how helpful it is to take the politician in office during the latest economic catastrophe and to blame him or her, except for wanting the job in the first place.

31

James Kroeger 07.11.10 at 4:34 pm

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? :)

32

Jim Demintia 07.11.10 at 5:34 pm

It’s not just the Republican mania for de-regulation that set the stage for this crisis. Any review of the causes has to go back at least to the Commodities Futures Modernization Act of 2000 and its role in de-regulating derivatives trading. That act was signed into law by none other than Bill Clinton.

Fundamentally, the crisis is the direct result of the neo-liberal economic policies that both Democratic and Republican governments have embraced since Reagan. They may squabble about the framework and implementation of these policies, but the fundamental assumptions are always drawn from neo-liberal economic theory. This is why Obama has been so consistently disappointing. Even landmark legislation like the HCR bill relies on markets and direct market subsidies to create public good. Markets and corporations are always the primary beneficiaries of U.S. state largesse–any public benefits are always indirect and mediated by corporations. The bailouts are our neo-liberal New Deal.

33

weserei 07.11.10 at 9:00 pm

@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.

34

piglet 07.11.10 at 11:24 pm

Just read an article by George Monbiot that I feel is relevant here. Monbiot points to the facts that the extreme right is making political gains with a program that is completely bogus, with claims as absurd as the “Obama caused the recession” referenced here. The question is why the left is so incapable of tapping into popular anger. And this gets us back to my point. When Obama took office, he could have surfed on a wave of public rage against the banks, against corporations, against their corrupt GOP backers. 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.

http://www.monbiot.com/archives/2010/06/14/bogus-misdirected-and-effective/

35

piglet 07.11.10 at 11:27 pm

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.

36

PHB 07.12.10 at 12:34 am

I am pretty sure that however the current recession was caused, that it would be lot easier to deal with it if the Clinton surplus had not been pissed down the drain to provide tax cuts for the super-rich and an unnecessary war in Iraq to let chimpy get one up on pappy.

The spending on the war does not have anything like the stimulative effect as domestic spending on infrastructure. Most of that money is being spent abroad and is stimulating the Iraqi and Afghan economies, plus an assortment of gulf states. In stimulus terms, even spending on football stadiums would be superior.

Investment at home on infrastructure has a much bigger stimulative effect and produces assets that continue to stimulate the economy.

37

Helen 07.12.10 at 2:28 am

Love the book jacket.

38

NomadUK 07.12.10 at 5:54 am

I find it really amusing reading all these comments bemoaning the mistakes Obama has made, and how the bank bailout and other actions have ‘wrecked his presidency’, as though, somehow, these things weren’t perfectly in line with Obama’s intentions all along.

The idea that the man is some sort of progressive whose left-wing agenda has been derailed by forces beyond his control is nothing short of delusional.

39

James Kroeger 07.12.10 at 11:23 am

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.

40

novakant 07.12.10 at 2:22 pm

The idea that the man is some sort of progressive whose left-wing agenda has been derailed by forces beyond his control is nothing short of delusional.

Indeed – he’s just another sellout. But it’s hard to endure cognitive dissonances …

41

chris 07.12.10 at 5:45 pm

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.

42

Current 07.12.10 at 7:00 pm

John Quiggin writes:
> I’m writing as a (broadly) Keynesian economist, making the point that the market
> economy is inherently unstable and that the crisis should have delivered the final
> death blow to (among other things) real business cycle theory. The book spells all
> this out at greater length.

In many of JQ’s posts here he equates the New Classical or Real Business cycle theorists with free market policies. Certainly they support free market policies. But, they aren’t the only economic schools that do, so do Old Monetarists, Monetary Disequilibrium economists and Austrian Economists. Showing that the New Classical school is factually wrong or inconsistent doesn’t prove that the Keynesians are right, or even more right.

James Kroeger writes:
> 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.

Many in this thread and many on the left have written similar things. However, just because there was rhetoric about “deregulation” doesn’t mean that so much deregulation actually happened in practice.

In the developed economies the interest rate and monetary base are still controlled by the central banks. That is a very significant state intervention. There are many others I could mention, such as deposit insurance and different taxes on debt and equity.

Finance is not a free market by a very long chalk. The Austrian Economists and Monetary Disequilibrium economists have given theories that explain how central bank policies can lead to booms and busts. I don’t think the left have really tackled “neoliberal” economics until they have an argument against those theories.

43

piglet 07.12.10 at 7:46 pm

“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.

44

Martin Bento 07.12.10 at 8:23 pm

Chris, we currently have the most progressive and strongly-Democratic Congress in years, and *they* passed health care reform. Obama seems to be getting all the credit for legislation, where he has no formal role till veto time. 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.

Where Obama has had a freer hand is in appointees, the bank bailout, civil liberties issues, and military policy – these are the areas where we can judge his actions independently of Congress – and here the news is mostly very bad, extremely bad in civil liberties.

All that said, 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. The financial collapse had us all over a barrel because there is no Plan B if the banking sector tanks. We should be looking at ways to remove ourselves from that situation, and the best remedies are structural. We tried regulation, and it worked for a while. One ironic consequence of its success, though, is that the need for it became less clear over time, so it become politically possible to dismantle it. The pro-regulation side is not experiencing overwhelming, only qualified, victory even now, while we are still in the steaming ruins of the crash. I don’t see a pure regulation play as politically stable over time. We need to make the financial industry expendable.

How about public option credit cards? Say up to a $1000, regardless of credit. Government could charge a flat 6%, pay 3% on bonds, have very low overhead from not caring about evaluating credit, and being able to use the IRS for collections. It would take a very high default rate for that not to be profitable, and it’s defensible as a public good even if operated at a loss. People who are very diligent with their public credit could get more for specific purposes, like college or home purchase.

We need to move beyond analysis to proposals.

45

Martin Bento 07.12.10 at 8:37 pm

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.

46

piglet 07.12.10 at 9:12 pm

“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.”

Certainly not. I’d love to have a Sparkasse in town.

47

chris 07.12.10 at 9:20 pm

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.

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piglet 07.12.10 at 10:00 pm

“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”

Mark Thoma comes to my mind, he kicked me out of his forum at the time for opposing the bailout. I think I was right and he lost his marbles over the issue. Dean Baker comes next to my mind, who has consistently criticized the bailout. Krugman, unfortunately, hasn’t written much worth reading since Bush is gone. What bother me among some of our “progressive economists” is when they cite the stimulus package an achievement of the Obama administration. The stimulus was an emergency measure. An emergency measure, even though it may have been necessary and may have had some of the intended effect, cannot be cited as a “progressive achievement”. An achievement would have been a lasting policy change in favor of working people, a reduction in poverty and/or inequality. Again, compare this to FDR. Why are we willing to set the bar so low?

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y81 07.12.10 at 10:04 pm

“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?

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Substance McGravitas 07.12.10 at 10:21 pm

What possible reason is there to believe that a Taxpayers’ Bank would do better than any other GSE?

No pressure to innovate but simply to do the boring work that makes banks profitable?

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Martin Bento 07.12.10 at 10:37 pm

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.

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hix 07.12.10 at 11:04 pm

The Sparkassen system failed catastrophic during the financial crisis. They were the major purchaser of all those fraudant US real estate packaged credits. Theres lots of of sales pressure to sell overpriced crap at Sparkassen. Not quite the level of private banks, but a lot more than at cooperative banks. They abuse their quasi monopoly on atms to get rid of private online competitors.

The Sparkassen system as it is now is a horrible mixture of market lets rip off everyone spirit and bureaucratic public sector thinking with idears like: What, a crisis, no need to work on Sunday). Board ah right thats the place to give every policitician a high paid do nothing job, while the new taff high paid managers that get paid outside the public sector tarif system build up fake profits in some Irish conduit.

Maybe if the Sparkassen would still be run by public servants that earn a bit less than a Professor at the highest ranks, if there would have been no pressure from cash straped municipalities and the EU (encouraged by private bank lobbyists) to act more for profit, if there wouldnt have been such high productivity gains through onlinebanking that made tellers obsolete that had to reinvent themself as snake oil salesmen, maybe in that case, the Sparkassen concept could have been a source of stability. But the real life Sparkassen system did worse than private banks.

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lemuel pitkin 07.12.10 at 11:39 pm

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.

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Robert 07.13.10 at 12:39 am

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

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lemuel pitkin 07.13.10 at 12:44 am

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.

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lemuel pitkin 07.13.10 at 1:07 am

Also:

Robert, the stuff on your webpage is very good. Do you have an academic position? Do you want one?

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y81 07.13.10 at 2:06 am

“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.

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Substance McGravitas 07.13.10 at 2:25 am

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.

I wish I had not read that.

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lemuel pitkin 07.13.10 at 2:37 am

S. McG. for the win.

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Robert 07.13.10 at 10:15 am

Lemuel, thanks for the compliment. I am not an academic and not trying to be one.

Greg Mankiw, fool or knave? His deletion of the commenting capability on his blog, including old comments, show him to be craven.

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John Quiggin 07.13.10 at 11:34 am

I’d give New Keynesian economics the compliment of saying it deserves serious criticism rather than the mockery appropriate to efforts like those of Mulligan and Prescott. My critique of NK is the part of my book I think is most new and interesting. Much of the book is an elaboration of arguments I’ve been making for some time, bolstered by the experience of the crisis, but the macro chapter is a new direction for me.

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Barry 07.13.10 at 1:42 pm

Robert 07.13.10 at 10:15 am

“Greg Mankiw, fool or knave? His deletion of the commenting capability on his blog, including old comments, show him to be craven.”

He deleted the comments because J. Random Commenter kicked his intellectual *ss on a daily basis. That was because Mankiw was posting GOP crap, and not even high-quality crap.

Mankiw is a knave.

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piglet 07.13.10 at 4:21 pm

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.

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hix 07.13.10 at 6:43 pm

You fell for the rethoric of the Sparkassen. The Landesbanken are an integral part of the system. Individual Sparkassen are usually to small to do the gambling stuff on their own(a few bigger ones did anyway), sure, thats why the toxic stuff was usually under the Landesbanken umbrella. Its the same organication. Makes as much sense to say my local X bank branch did nothing bad because it was all done in the Frankfurt/New York/London division.

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Tim Wilkinson 07.13.10 at 6:45 pm

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.

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y81 07.13.10 at 9:41 pm

The casual observer notes that many Harvard undergraduates are fools, but very few Harvard professors are. However, there are many knaves in both categories, maybe even more among the professoriate. So the a priori answer is clear (unless we indeed have a false dilemma, where the answer might be neither or both).

Of course, as I made clear, to me Prof. Mankiw seems like a man of impeccable credentials, wide learning on topics of which I know little, and unfailing courtesy. If your aim is to persuade, these are good impressions to convey.

67

James Kroeger 07.13.10 at 10:10 pm

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.

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Robert 07.13.10 at 10:42 pm

I’m not sure why y81 wants to repetitively proclaim his inability to tell whether Mankiw is a fool or a knave and his ignorance of the anti-intellectualism (over decades) of mainstream economists in the Harvard economics department.

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y81 07.13.10 at 11:10 pm

@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.

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Substance McGravitas 07.13.10 at 11:19 pm

The normal person has no way to discover the one crank in the world who might be correct, and discounts them all.

Have you met Metamorf?

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Robert 07.13.10 at 11:59 pm

“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.

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ScentOfViolets 07.14.10 at 12:46 am

Just as a heads-up, y81 was at one point a very prolific, very pro-business commenter on Megan McArdle’s blog, subtype pro-business libertarian. And of course, despite all the high-flying libertarian rhetoric, someone who despises unions.

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