Tuesday, February 24, 2009

It’s the debt, stupid

A classical liberal myself, I’m so sick of the liberal hue and cry for bigger deficit spending.  The problem is not that the government is not spending enough money, it’s that there’s a wad of bad debt clogging up the banking system, and more government spending isn’t going to make that go away.  It looks like the government is just going to turn lots of bad private debts into taxpayer burdens, and ultimately, very possibly, into bad public debts.

Keynes once wrote that most politicians and policymakers are merely repeating the words of some academic scribbler from fifty years ago.  This is true of the liberal push for ever bigger fiscal stimuli without preconditioning it on writing down bad private debt.  They’re confusing the real economic effects of the recession with the financial effects.  In unemployment terms, the current slump is approaching the severity of 1981-1982, and my models point to a stabilization of real output soon; unemployment will continue to rise, but probably will not hit double digits.  But the way things are going, the banking system will probably remain clogged up.

Fiscal deficit spending only makes sense if the banking system writes off its bad debts—doesn’t add them to the government debt.  Otherwise we’re just bailing out the wealthy, and adding to a mountain of debt that will likely crush us in time.  But why should our ruling class care?  They will have had their cake and eaten it too.

America has more debt than it can handle.  Fiscal “stimulus” (deficits) that includes covering bad private debt will lead to ruin, if history teaches us well.  See previous post for details. 

Otherwise I’d guess we are indeed headed toward the crisis at the end of the saeculum.



Comment written after President Obama’s speech:  Okay, Ben, so you’re not going to nationalize, you’re going to pump in money “as needed” to capitalize what most experts agree is a on-net insolvent banking system—and then take “disciplinary action” (actually write off bad debts?) when?  After putting another few trillion on the taxpayers’ tab? 

It may just be that I’m tired, but I don’t get it.

.     .     .

Comment written at 4:00 A.M.:  Why not just lower capital requirements to recapitalize banks?  The public doesn’t care, so long as their deposits are safe.  No toxic assets would be turned into Treasury obligations.  We still get zombie banks, which is what both Geithner and Bernanke seem to fancy, but these banks can in principle still lend while working off their losses.  The Fed and Treasury could recapitalize the whole system with a $10 preferred injection to each bank and an infinitesimal capital requirement.  If it comes to a choice between lowering capital requirements and the Treasury injecting capital that will never be paid back by the banks but will sit on the Treasury’s books for a generation, I’ll go with lower capital requirements—and, one would hope, more effective regulation—any day.  We’re pissing our national treasure away at light speed to bail out the plutocrats on Wall Street….


What defines a good 'bad bank'?
   Lessons for the US from the Swedish Bank Crisis

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