Defiance, Denial and Downgrades Won’t Help our Economy
Tuesday, August 9, 2011 at 9:09AM Yes, the US has a debt problem. But, more than that, it has a priorities and accountability problem. Yet, rather than giving Washington a pause for reflection, the S&P downgrade of US debt from ‘AAA’ to ‘AA+” merely gave Capitol politicians renewed opportunity for elaborately orchestrated hissy fits that won't lead to introspection or policy change.
First, let’s again acknowledge the irony that this rating agency rubberstamped $14 trillion of toxic assets in the five years leading up to the crisis of 2008, thereby enabling the Wall Street manufacturing and global dispersion machine to thrive. Then, let’s sign that Washington still doesn't get it.
We racked up debt predominantly, but not exclusively (less revenue due to fewer jobs and an antiquated system where not everyone pays a comparative share contributed, as did the cost of three wars) because of the choice to subsidize Wall Street.
Nearly 80% of the new debt created by the Treasury since the financial crisis was either sold through the banks, is sitting on the Fed's books doing nothing productive, or was used to bolster various elements of the banking system through cheap loans, guarantees for faulty assets, and other methods.
Chances are near one hundred percent, that this next round of debt will exhibit the same pattern. The Treasury will issue bonds and a big portion will wind up on the Fed’s books, doing zero for the greater population. More bi-partisan squabbling over why the economy isn’t growing quickly enough will eschew.
A few months ago, Treasury Secretary, Tim Geithner made the talk show rounds to declare empathically that there was ‘no chance’ of a downgrade of US debt. After the downgrade, with the stock market plummeting, President Obama took to the airwaves to explain that the US was ‘AAA’ no matter what ‘some rating agency says’.
As Obama opined that ‘there will always be economic factors we can’t control,’ the stock market kept dropping. Some of that fall was for ‘technical reasons.’ People and firms borrow money to bet on the market, and put down collateral (or margin) in order to do so. When the value of their purchases (stocks) falls beneath a certain amount, they are required to put up more margin to continue to participate in the market. If they don’t have the cash, they have to sell stocks to come up with it, thereby pushing the market down further. These ‘margin calls’ were the technical cause of the Great Crash of 1929.
The other reason for the drop was uncertainty, precipitating cashing out stocks to buy bonds, and reaction to the fact that no matter what anyone says, we’re not in an economic recovery, and things are getting worse. In all, the Dow Jones Index dropped 633 points during the first post-downgrade trading day, regaining a third of it the next day.
The bond market shrugged off the downgrade, meaning global investors were buying, not selling, Treasury bonds. This puts the debt cap drama and catastrophic consequence threats into scary perspective. Recall, the sky was going to fall if we didn’t bail out and subsidize the banks, too. The political fear-mongering would be laughable if it didn’t have dire consequences for the rest of us – an anemic economy unable to add jobs effectively and a banking sector floated on debt.
So, does the downgrade matter? In terms of infusing the market with more uncertainty as to whether it might lead to another one – sort of. But, in terms of Washington, it means nothing. The GOP will blame Obama for causing it by not cutting spending further. President Obama and the Democrats will act defensive and dismissive about it.
Beneath the banter, remains the stark fact that the extra debt wasn’t created to help the economy, it was created to help Wall Street. Any future political fights (and there will be many) about debt, missing that point, will therefore be unable to tackle the most important economic problem we face – lack of job and real (not paper) growth in the US and throughout the globe. Political denial and finger-pointing is not productive growth policy, no matter which party is doing what.
S&P’s downgrade got a bit of this right when it labeled Washington dysfunctional, yet, by denying there’s more to the downgrade, S&P continues to shield its own actions in the crisis build-up and Washington’s reaction to it - massive bank subsidies and a tepid bank regulation bill that didn't even break up the too big to fail banks as Glass-Steagall did in the wake of the pain banks caused leading up to the Great Depression.
A one notch ratings drop from AAA to AA+ makes no difference to the US production capacity. Indeed, with all the scaremongering about how much more expensive it would be to borrow at a higher rate (reflecting the lower credit rating), the bond market rose in a sigh of relief that the downgrade was ‘over’ rendering the cost of the downgrade minor. As for other countries dumping our bonds, though they should because our policy remains financial market subsidization through debt creation, as long as the dollar remains the dominant global currency, other countries will lend to us though buying our Treasury bonds. They don’t want their own portfolio of US Treasuries to decline in value.
Obama stated that, “we need jobs and growth.” Absolutely. But austerity compromises won’t get us there. A reality check might. He said that Americans have come through (more denial, as we haven’t come through anything, we’re still in it) the biggest financial crisis since the 1930s with grace. He made no mention of the dual DC-banks role at all.
In the 1930s, the government made a bi-partisan decision to smack the banking system into place and separate bank trading and commercial functions so banks couldn’t take risks with other people’s money; it didn’t lavish Wall Street with cheap loans and debt at the public’s expense.
All Americans should be deeply concerned that our government supported, and continues to support, banks over people. The Treasury Department and Fed continue to mislead us over this. And we all pay the price.
Reader Comments (4)
"All Americans should be deeply concerned that our government supported, and continues to support, banks over people." Fair enough - although this point has been beaten like a dead horse.
Rather than repeating the widely known symptoms of the problem, what are your specific proposals for the government supporting "people" not banks?
My proposals remain pretty much the same as when I wrote in the last chapter of Pillage: Let big banks fail, divide the big banks into pieces to avoid current repeating of same dangerous pattern which continues to destabilize economy, force banks to be less fraudulent and rapacious with public, use several trillion dollars that is doing nothing at the Fed for infrastructure and productive growth as well as aiding in housing debt restructuring and required refinancing that is effective rather than doing nothing about continued wave of foreclosing and property value destruction, etc.
Heard Prof. Galbraith give an excellent (although the NPR host kept cutting him off) explanation of the meager effect from the federal stimulus ("no strategic dimension") the other day.
President Obama is going around the country promoting "free trade" agreements for future job growth.
Gives me a deja vu moment: think I'm listening to G. Bush, Bill Clinton, G. HW Bush, and Ronnie Reagan --- I guess it's just the tune of the march of the neocons.
In your book (It Takes a Pillage) you mentioned that the final cost of those CDOs and other credit derivatives sold on mortgages should come to around $14 trillion, and that recent GAO audit on the Federal Reserve (thanks to Alan Grayson, Bernie Sanders and Ron Paul) shows they spewed forth $16.1 trillion to banks and corporations around the planet.
Pretty darn close, as it's difficult to ascertain what some of those funds were for?
Galbraith is awesome.