Economics As If The Bible Mattered

“Pushing on a string is difficult. Pushing a zombie on a string is even harder. Pushing a zombie bank on a string is impossible.”

William Buiter

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Warning: I’m about to go on a rant.

From Sam Stein HuffPo:

During his interview with ABC’s This Week on Sunday, Vice President Joe Biden made what will be a much-discussed admission in the week ahead. The Obama administration, he said, had “misread” the extent of the economic catastrophe it inherited.

“The truth is, we and everyone else misread the economy,” declared Biden. “The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.”

True the Obama team did misread the economic situation, but not this way:

But equally problematic is Biden’s assertion that “everyone” – not just the White House – was off in their prognostications. This is simply untrue.

Host George Stephanopoulos pointed out that “a lot of people were saying that you needed to do something bigger and bolder” when it came to the stimulus package. He named New York Times columnist Paul Krugman as one example. There are many others.

The prize-winning Columbia University economist Joseph Stiglitz not only warned that the stimulus was too small during its construction, the day after Obama signed it into law he predicted how its shortcomings would make themselves apparent.

“I think there is a broad consensus but not universal among economist that the stimulus package that was passed was badly designed and not enough. I know it is not universal but let me try to explain. First of all that it was not enough should be pretty apparent from what I just said: It is trying to offset the deficiency in aggregate demand and it is just too small,” Stiglitz said.  (my emphasis)

Now the way this is framed it makes it sound like there’s some huge conflict between Biden (representing Team Obama) and Stiglitz-Krugman, et. al.  Except look closer and it’s not that way at all.  Re-read the part I italicized and boldfaced.  Think about the implications of that statement.

God Almighty help us if Joseph Stiglitz, Nobel Prize winner doesn’t get it yet.   Ask yourself whether aggregate demand is the real problem at the center of the current crisis.  Really?

Rather what if the problem is not a liquidity crisis nor a demand crisis but a solvency crisis.  (h/t the indispensable Naked Capitalism)

That link is to a must read smackdown by William Buiter.  Read it.  Re-read it.  Read it a third time and then weep that the level of discourse on this oh so important topic is of the level of the Biden-Stephanopoulos-Krugman variety.  [The GOP response such as it is from Boehner, Romney, Gingrich & Crew is insane.  The Democratic stuff is bad and wrong but not crazy.]

In the end that triumvirate totally agree that the entire economic order as is is right, it assumes that reality–i.e. that the primary thing is to just keeping “growing the economy”–while all they actually disagree about is a very small sub-topic of how much stimulus is necessary in order to increase “stuff seeking”, er aggregate demand in the population.  There’s just been a temporary failure gumming up the works, not the system itself in need of an overhaul.  If we can just get the economic engine functioning back at normal levels, all will be well.

To counter that economic tunnel vision, read Buiter’s piece.  It is tonic. I can’t do justice to the whole piece.  It is incisive and sees clearly through this morass of economic stupidity plaguing even the so-called experts.

Buiter begins by pointing out the Fed’s favorite actions of Quantatative Easing and Credit Easing are great if you are in a liquidity crisis, which we are not.  Hence they are counterproductive in this instance.  Boom…there went TARP.

Then this:

This [the failure of the actions to date based on liquidity assumptions not insolvency] is made worse by the poor state of household finances in many western countries.  With property prices down and banks tightening credit conditions, households have suddenly woken up to the true horror of their highly indebted state.  Fear and caution have taken over from optimism and an instinctive belief in the sustainability of a consumption plan financed through Ponzi finance make possible through house prices rising at a proportional rate in excess of the interest rate on housing debt.  This rediscovery of prudence by households has lead to a form of Ricardian equivalence that makes tax cuts ineffective and limits the multiplier from public spending increases.  Many highly indebted households have reduced their consumption to a (generally socially defined) ’subsistence’ level.  Any additional income is saved or used to pay down debt.  (my emphasis)

There went the stimulus plan down the toilet–and no not because it wasn’t big enough contra Kruglitz.  Because the stimulus is a response to a different problem we face.  This problem requires a different set of solutions.  For those keeping score at home,  there also went any Republican talking points about tax cutting as the cure-all.

What drives me nuts about the Stiglitz-Krugman ‘the stimulus wasn’t big enough because it doesn’t cover enough aggregate demand’ attitude is that it strips away any economic wisdom from the people on the ground.  The regular people.  The mindset seems to be:  “Well the problem isn’t they aren’t spending enough.  Aggregate demand is down.  How are we going to keep economic growth going if demand is down? Harumph, harumph.”

How about instead the people are realizing they are in massive debt and they were sold a false bill of goods and now they are left dealing with the wreckage of their lives?  Maybe there “decreased demand” is in fact an intelligent response?  Not from the point of view of economic ideology to be sure–i.e. that all that matters is growth of stuff (“aggregate demand”) with no qualitative judgment as to whether the stuff is better or worse for life (both human and non-human).

But maybe the new prudence as Buiter calls it has a certain wisdom since actual real wealth for the average US household has decreased (relative to cost of living & inflation) since the 1970s people are rightly exhausted and do not want to get back on this rollercoaster and have their earnings tossed away in stock market hyper-speculation that only serves the very well to do and the banking industry who then use their bonanza of wealth to buy political influence to cover their asses and bail them out after they blow the wads of other people’s economic lives.

There’s only one way to deal with an insolvency crisis–a crisis of debt that is.  Cancel the debts.  Buiter once more:

I propose a combination of mandatory recapitalisation of the banks and a debt Jubilee for the household sector to remove the two key obstacles to an economic revival…In preparation for the Jubilee, I am going long in ram’s horns.  In good Torah/Biblical tradition, we should have one of these every 49 or 50 years.  We skipped a few.  Let’s have a big one now.

Now we’re talking about economics in its rightful place–as a form of moral philosophy not mathematical wanna be physics.  Without such freedom, the enslavement to economic dogma will only worsen.  Namely since we have over-valuated to the extreme the idea of growth we are forever creating credit (read debt) to cover the desire for growth but in the process causes debt.  The credit or creation of fiat money is nothing othan the creation of debt.  The debt requires us to work harder and harder to pay off the debt plus grow the economy (“more stuff!!!!”) for which you need more credit, meaning more debt and the process never ends.   Unless a year of forgiveness is proclaimed breaking the debt cycle.

In fact having watched documentaries like this one on the housing foreclosure crisis, reading this passage on the Jubilee from the book of Leviticus (over 2,000 years old and still unheeded) is completely heartbreaking:

13 In this year of jubilee you shall return, every one of you, to your property. ¹⁴When you make a sale to your neighbor or buy from your neighbor, you shall not cheat one another.