There is no other way to get our economy back to normalcy. The Wall Street banks must be broken up just like AT&T. The competition created by the AT&T breakup benefited the American people greatly. Monopolies and oligopolies do not benefit the people.
The bad debt that saturates our system must be purged. The write-off of this bad debt in conjunction with breaking up the Wall Street banking cartel would result in a sharp economic contraction, but it would be short lived. An economy freed from the shackles of Wall Street greed, Federal Reserve interest rate manipulation and government control over our economic system would be able to grow. Saving and investment would make sense.
Chris Whalen, Bill Black, Jesse, John Hussman, and a few other honest souls have been right on this issue for years. Their voices will not be heard. We are destined to become Greece before change happens.
Return to Normalcy: The False Argument of “Austerity” vs. Growth
May 21, 2012
F.A. Hayek, 1978
In this issue of The Institutional Risk Analyst, we feature a comment by IRA co-founder Christopher Whalen that was originally written at the request of ForeignAffairs.com, but was killed just prior to publication. Their loss, our gain. Enjoy.
Return to Normalcy: The False Argument of “Austerity” vs. Growth
To rescue Europe, to reinvigorate the United States, and to set the global economy on a sustainable path toward expansion, the current debate offers a so-called “choice”: either slash government spending or spend your way to growth. In Europe, German Chancellor Angela Merkel is one of the most prominent proponents of fiscal restraint — in part because Germany is picking up the tab for the continent’s debt crisis. And in the United States, economist and New York Times columnist Paul Krugman (who’s just come out with a new book on this subject) is the fullest-throated supporter of more government spending.
But framing the discussion between austerity and stimulus is a canard that has enveloped economists, commentators, and policymakers in a collective delusion. There is no more “normal.” Significant economic growth — akin to the rates seen in the developing world since World War II and particularly since the 1980s — is something of the past. Over the past three decades, the United States’ growing economy was a function of falling interest rates and increasing fiscal deficits. Both tendencies fueled global commerce. But depending on your view of inflation, the intrinsic growth possible in the major economies going forward is likely to be nominal, at best. Existing debt, unfavorable demographics, and lacking political will to raise taxes will keep G-20 economies from returning to the happy days of economic growth above the expansion of working age populations.
The key question facing the global community is how to manage the transition to a less robust, but also less volatile period of growth without sliding into another world war. A true solution will have to involve not only governments reducing public debt, but also restructuring insolvent industries to fuel real, sustainable growth.
When the political leaders of the G-20 nations such as Merkel and U.S. President Barack Obama say they cannot dismantle large banks or reduce national debt levels that are choking consumption and job growth — most say that doing so would introduce “systemic risk” into the economy — what the political class is really saying is that they do not want to risk their careers by championing policies that will inconvenience their sponsors in the business community. But the recent elections in France and elsewhere in Europe prove that voters think otherwise. In fact, the EU, and the United States for that matter, are only beginning to see the full public reaction to the crisis. As in the 1930s, it may take a decade for Americans to get angry enough to force major political changes.
Indeed, to give Merkel her due, the key obstacle to global growth today is excessive government spending and public debt. But the United States, and, in fact, the majority of G-20 nations, have ruled out broad debt reduction and financial restructuring of insolvent banking systems. Spain is a prime example. Put another way, G-20 leaders are telling their citizens to prepare for a new era of reduced expectations with no accountability. Large banks in the United States openly facilitate fraud against investors, as with Lehman Brothers, the case of Bernie Madoff and the recent implosion of financial firm MF Global. But consequences — especially criminal — are minimal. Through a financial lens, one could call this a policy of “extend and pretend.” But over time, there will be toxic political consequences. What’s ironic, and most damning, is that nearly all of the lessons of the 2008 crash have been forgotten. More, the refusal to restructure and reduce debt in the United States and the EU will almost assure low growth and further instability in the global financial markets.
Over the past 80 years, the leaders of the industrial nations have bought into a narrative that says economic growth can be managed with levers such as fiscal and monetary policy — but there is no need, so the thinking goes, for constraints on public debt or even rates of inflation. This narrative goes back to the economic template the United States set for the world after World War II. Under the Bretton Woods framework, the world equated the dollar with gold, allowing U.S. policymakers to expand the global economy upon a sea of fiat paper dollars. But as “managed stability,” fueled by U.S. monetary emissions, is now falling by the wayside, G-20 leaders need to develop a new means of attacking joblessness and deflation. To start, we must build a new narrative free of neo-Keynesian fantasies about consumer purchasing power trumping true wealth creation.
Keynes of course was no apologist for public debt. But when former National Economic Council Director Lawrence Summers talks about the horrors of austerity and the need for more fiscal stimulus, debt reduction is tacked on — when it is mentioned at all — as an afterthought. More often, more debt is the solution. Inflation is an assumed but unspoken part of the pro-stimulus agenda. But these same liberals refuse to accept that the marginal increase in GDP per a given amount of new public debt is now just about zero.
Or take Krugman arguing in The New York Review of Books: “The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending.” But is this really true? Spending increases are never temporary and such a strategy will lead to an economic dead end, with rising inflation for consumers and no appreciable job creation. Alex Pollock at American Enterprise Institute argues a debt that cannot be paid must default, but the “neo-Keynesian” socialist tendency led by Krugman and Summers cannot imagine a world without lots of public debt. Without big government and big debt, the political left in the U.S. and much of the G-20 has no future. If you understand that FDR’s New Deal and World War II enfranchised the Democratic Party after decades of GOP hegemony (with near total business support), the prospect of fiscal cuts spells political doom for the children of the New Deal. This is precisely the strategy of American conservatives, to starve Washington to death by limiting tax revenues and forcing fiscal crises.
The best way forward is to first manage public expectations over future economic growth instead of promising miraculous salvation from austerity. In the absence of war and new frontiers, the real economy in most parts of the world typically grows in low to mid-single digits of GDP annually. While there are situations where growth can be higher, overall one can make the case that the true baseline for real growth in any real economy is somewhere in mid- to low-single digits. Going forward, something else has to happen, something more radical: break up the big banks and renew the fight against financial fraud. In the United States, Obama has given Wall Street a pass on the worst financial fraud since the 1920s and has hurt investor confidence and left the public outraged. But his inaction with respect to the economy is the president’s greatest fault.
Governments of industrialized nations must restructure many of the G-20 economies — such as Spain, Greece, the United Kingdom and even the United States. A combination of public debt reduction and restructuring in the U.S. banking and housing sectors will help to improve new credit creation and stimulate growth. For the past four years, the Obama Administration has studiously done precious little about housing and fraud on Wall Street, so it’s no surprise that business and investor confidence is lagging. Contrary to the Krugman model of increased public sector spending and defending the large banks, the United States needs to rebuild private markets and restore private credit creation to create real jobs.
So it is ironic that the proponents of breaking up the big banks, such as Dallas Fed President Richard Fisher and former FDIC Chairman Sheila Bair, are actually taking a far more populist and progressive stance than the defenders of American liberalism. Going back to the activist principals of President Theodore Roosevelt, dismantling large, monopolistic banks and reducing excessive debts is the one true way to create new economic growth.
The big banks of 2012 are just as toxic as the great trusts of a century ago, yet liberals such as Krugman openly defend them. For one thing, the top four “too big to fail” banks have monopoly control over the U.S. mortgage market. This cartel denies more than half of US home owners their legal right to prepay high cost mortgages and refinance, thereby blocking Fed efforts to boost consumer activity. Breaking up the top four banks would have enormous benefits to competition in the US mortgage sector.
But entrenched political elites in all of the G-20 nations see their personal and political doom facing them in any earnest restructuring effort. In France, the issue of “austerity” dictated by Germany already is leading to political change. Spain and other nations will follow in rejecting German fiscal dictates and reducing debt. In the United States, public anger against Obama and Washington over the actions of Wall Street is rising. But the biggest threat to Obama is the fact that the US economy is worse off today — more debt, lower home prices, fewer jobs — than in 2008. In November all incumbents will face tough challenges. And come 2013, a new, even angrier Congress is hardly going to be in a mood for compromise regardless of who occupies the White House.
When a political leader talks effectively about ways to pursue less volatile economic growth in a framework of limits on public spending and debt, such an individual will find a large and eager audience. The supposed debate between austerity and stimulus is false in economic terms, politically duplicitous, and, when one considers basic arithmetic, unsustainable. More debt and inflation is not a solution. The first politician to stand up and say just that in an intelligible way gets to set the course for the G-20 industrial nations over the next century.