However, while I’m still electrified: LI readers should check out the discussion between James Surowiecki and John Quiggin
about nationalizing banks, since it gets to the heart of a matter that has been obscured by the thousandfold murk of pundits and University of Chicago economists.
Surowiecki starts things off by putting all his cards on the table:
“Like Kevin Drum, I think that as the “nationalize now” meme has taken hold in the blogosphere, people are talking about nationalization “awfully casually.” One way this manifests itself is in the argument that the only reason people are skeptical of nationalization is because it’s “un-American,” when, in fact, I think people are skeptical of it for two big reasons:
1) Two years of financial crisis does not invalidate the general principle that private enterprise is typically better at efficiently allocating resources than government; and
2) the idea of the state literally determining which companies and individuals do or don’t get credit is, even to a non-libertarian, at least a little troubling.”
Quiggin keeps the discussion confined, unfortunately, to the technical question of the state of the financial services sector:
“What’s needed in the present case is not only to fix the problems of individual banks, problems on a much bigger scale than have been seen before (even in the leadup to the Great Depression, the financial sector played a smaller role in the economy than in the recent bubble), but to reconstruct a failed global financial system. It’s kind of like rewiring an electrical system in near-meltdown, while keeping the power on (this is possible, but tricky and dangerous). The job is likely to be much slower than the rescues mentioned above, and the institutions that emerge from it will be very different from those that went in.
But, contra Surowiecki this time, this only strengthens the argument for nationalisation. Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.”
I commented extensively at CT. Arguments which I’ll repeat here.
“I like the way Surowiecki casts the terms of the argument. It is precisely the fact that, contra his Chicago-ish point of view, private enterprise did not do a good job of allocating capital which is the strongest argument in favor of a national bank.
Was the allocation of capital towards financial innovations and away from, say, energy innovations, and towards inflating assets, like homes, and away from infrastructure an accident of the system? I’d argue that it wasn’t. That is, I’d argue that the private enterprise system was caught in a trap in which it couldn’t profitably allocate capital in the most efficient way. The allocation of capital to the housing market was both inefficient and the best solution that the private enterprise system could come up with. Like all bubbles when they pop, the housing bubble is now being seen as one big mistake. It wasn’t – it emerged from a crisis in the system of the Great Moderation as a logical solution to the problems caused by the collapse of the tech bubble. And, in fact, it was entirely rational to bet that rising housing prices would still find a market with a population of homeowners who, in the nineties, seem to shake off the slowdown in the rate of income increases they’d suffered under Reagan and Bush. I believe the standard ratio for buying a house is that its price be three times the yearly income of the household. From what I read, nationwide, in the naughties, that ratio went to 4:1. If you look at the spread, you’ll see that this reflects, exactly, the stagnation of incomes over the last eight years. And that reflects, exactly, the cul de sac in which we sit with a system that has overemphasized free market solutions over the last thirty years.”
Now, an objection was made to my statement of the case by a conservative, who brought out the argument that conservatives have now been forced back upon. Basically, we are told, due to the government refusing to regulate Fannie Mac and Freddie Mae, this mess happened – so it is the government’s fault again.
I find this argument false in its details, but, more than that, misplaced in terms of the level of argument. In actuality, as conservatives happily pointed out in 2005, and as neo-liberals pointed out extensively in the nineties, we live in an economic environment in which business is freer to operate as it will than at any time since the 1920s. If this isn’t true, than of course we need some explanation of what happened to the Republican revolution of 1994, what happened to the innumerable references to the American model versus the European one, or what happened to Alan Greenspan, or what happened, indeed, to Greg Mankiew, one of Bush’s economic advisors in 2003-2004, who is now promoting the Fannie Mae story. Memory hole has never widened so suddenly or so fast.
So, let’s hypothesize that the conservatives, before the crash, were right – that is, their description of the general tendency of the American economy was right.
This, then, is what I would say:
“But, in essence, that is neither here nor there. In fact, the private sector acted as rationally as it could by pumping money into the housing bubble. In other words, it wasn’t some contingency that caused the private sector to misallocate capital. Nor was it interference from the government – in fact, the degree of government regulation diminished. Rather, the problem was one of structure. The private sector, contra the neo-classical model, doesn’t operate under conditions of full employment, and does operate within a business cycle that determines the investment landscape at any one time. In other words, it was due to the structure of the private sector that capital was allocated suboptimally and inefficiently. The conservative economic policies of the Clinton and Bush administration had retracted the kind of positive interference by the government to give the private sector the fullest possible space to maneuver. And the private sector took advantage of that space – in fact, in 2004, you would find conservative economists or publicists, like Mankiw and Larry Kudlow, bragging about how well it was operating. It was a boom. However, this boom depended on battering the bargaining power of labor so that there was no median rise in household income, while at the same time creating more credit for the median household to use.
The housing bubble, in other words, was the best solution the private sector, under the freest conditions since the 1920s, could come up with.
Now, those conditions are not going to be changed no matter how much money is poured into failing banks and hedge funds. They are only going to be changed by inflating incomes. This will not come about if business and commerce aren’t revived. But there are no sources within the private sector for that revival. Which is why liquidate liquidate liquidate will only lead to ever worse conditions. To revive the economy in this phase of the business cycle, command and control economics, using the power of the state to, for instance, capitalize a Reindustrialization facility, is the best and shortest way.
Again, the argument here isn’t whether the Democrats or the Republicans should have done x or y to regulate Fannie Mae. The argument is that the regulatory environment was the most business-friendly since the twenties, and the Free markets responded by allocating capital in those ideal conditions as the market decided was most efficient – that is, most profitable. it seems to me that you don’t get to test many economic models as well as we get to test the model of free markets lately.”
To put this as strongly as possible: the housing bubble saved our national ass in the post tech crash. It was deliberately intended to. The private sector was allowed to allocate capital with few strings attached. The mangle of inequality – that is, the increase in both the relative poverty of the median household and the increase in its buying power, or credit line – worked to create the necessary political atmosphere in which business could operate with less and less regulatory supervision by the government. The crash we are feeling intensely now was simply postponed a few years by policies that allowed ever more money to be made by the ever fewer. And the result is this disaster. But this disaster would have happened in 2003 without a deliberate policy of easy money and de-regulation. We are suffering through a structural contradiction that was bound to hit us one day or another.