It seems to be economic history. Wednesday, February 11, 2009, was the day that business with the stimulus bill was finally settled:
Moving with lightning speed, the Democratic-controlled Congress and White House agreed Wednesday on a compromise $790 billion economic stimulus bill designed to create millions of jobs in a nation reeling from recession. President Barack Obama could sign the measure within days.
Everyone agreed that something will be done to head off the collapse of the economy and another Great Depression, or something worse. So that’s settled.
The Democrats were pleased, with Senate Majority Leader Harry Reid saying “more than one-third of this bill is dedicated to providing tax relief for middle-class families, cutting taxes for 95 percent of American workers.” Well, that was what they wanted to do, among other things. The Republicans got the tax cuts they wanted, of course – or most of them – so corporate interests were served too, as they believe what will get things moving again is freeing businesses from taxes and regulations and just letting things rip. But in the end, no one much objected to infrastructure spending – schools and roads and such, although proposed school construction was cut back by two thirds. Direct aid to states was put back in, at about a quarter of what had been originally proposed, as everyone figured out that having states and major cities go belly-up and lay off teachers and police and cut essential services to the bone might be political suicide – this was not to time to teach anyone a hard lesson in fiscal responsibility, even if it was tempting to scold this governor or that mayor to make yourself look good. The newly unemployed would not be impressed with your righteousness, even if you might be, in some ways right.
Of course, not one House Republican will vote for the bill that goes to the president – as discussed in detail here. They have no problem with what is now included in the fully reconciled House-Senate bill, it’s just that they think no one treated them with sufficient, appropriate respect, and they don’t like being ignored and insulted – in short, their feelings were hurt. On the Senate side that was harder to maintain, as Obama had, as with the House, hauled his ass down there to listen to what they had to say and talk things over, and many of the senators were on record being impressed that they were being taken seriously – but for John McCain, who said Obama had only pretended to listen, or some such thing. McCain’s thought was that if this really was a bipartisan bill, then Obama would have more than three measly senators who crossed over to vote for the thing – Snow, Collins and Spector. But Obama had perversely refused to drop all spending proposals and make the legislation entirely corporate tax cuts, so all he got was just enough votes to break the de facto Republican filibuster, which McCain said proved Obama was railroading everyone with crap the American people hated. Then he shouted at the kids to get off his lawn, or so it seemed.
The other big event of the day was the public flogging:
Wall Street bank executives squirmed under a public scolding in the U.S. Congress on Wednesday over how they used $176 billion in bailout money without noticeably improving the battered economy.
“America doesn’t trust you anymore,” Massachusetts Democratic Rep. Michael Capuano told eight bank chief executives during six hours of congressional questioning on the troubled bank bailout plan.
The lawmakers reflected public outrage…
Of course this was cathartic without being the least bit enlightening – they were sort of sorry, or so they said, and explaining little. And this matter is not settled.
Yes, there are two separate considerations here – the stimulus, which is about restoring a basic level of somewhat normal economic activity, with people working and deciding it was okay to buy things beyond the bare necessities, generating demand for goods and services, and saving the banking and financial system, and the credit markets, so money could move around at any velocity at all – which it wasn’t doing.
You see, some had spilled the beans about last September 18:
On Thursday (Sept 18), at 11 am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn’t be further panic out there.
If they had not done that, their estimation is that by 2 pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.
We are no better off today than we were three months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.
This has little to do with building roads and schools or fiddling with the corporate tax rates, or both. See this analysis from Mike Allen’s Playbook:
An oft-quoted investment banker e-mails us: “There is no capital in the entire global financial system. None. When I say ‘financial,’ I mean banks, hedge funds, private equity funds, homeowners and other leveraged players. There is some capital among the ‘real money’ players such as sovereign wealth funds and central banks. And the U.S. can ‘print’ some. But that’s it. …
The problem with the distressed assets is not that there are no buyers. There are plenty of buyers; I speak to them every day. The problem is there are no sellers; that is, the banks won’t sell. Because to sell is to book a loss on what you have sold and what remains. And to do that is to die. That’s what it means to be insolvent.”
To clarify matters, all the debt obligations – promises to pay, in the form of mortgages or credit card balances or car loans or whatever – that had been sliced and diced and combined and compiled and repackaged again and again, that had been collateralized and sold around the world – were lovely assets on your bank books. Legally binding promises to pay you are, in fact, assets. But no one now knew what they were really worth, if anything at all. There may be no value there to speak of, or very little. No one really knows. People want to cash out, to step back from this fog, so you get bank runs, these days of the electronic sort. But the banks cannot sell off this stuff to give you back the money you put in when you decided to buy a share of their quite hypothetical assets. They’d get pennies on the dollar, at best, and they know it – and the whole house of cards would collapse. So no one does anything, lending freezes at all levels – bank to bank and down to your car loan. It’s a bit of a Mexican standoff – the giant banks pretend they’re solvent and everyone else pretends their money is safe, when there isn’t any capital there, or anywhere. But the banks are insolvent.
See Ezra Klein on what that investment banker said:
Just to clarify those last sentences: The banks bought the bad assets at high prices. They need to sell them at low prices. But this banker is arguing that they are too financially stressed to absorb the losses that would entail. Conversely, so long as they don’t sell the assets, they can pretend they haven’t lost any money on them, as they can pretend that they will rebound to a better price once the mania is over. The other way of putting this is that much of the banking sector is already insolvent – it’s just not prepared to admit it.
As in Japan, in the nineties, these are Zombie Banks – they do banking, of sorts, but they are the living dead. They are propped up by government money, and everyone agreeing to lie to each other.
Duncan Black puts it this way:
There are various ways to tell this story, but the punch line is always the same. The financial institutions are insolvent. For some time many of the people in them perhaps honestly believed that it was a temporary liquidity issue, that the assets were worth more than they could sell them for. That time has long passed. They bet it all on Big Shitpile and lost. And they know it.
Well, we can keep shoveling money at the banks. It seems the stimulus things was the easy part of this.
Of course, things aren’t bad everywhere. Fareed Zakaria here explains why Canada is in much better shape than we are:
Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it’s Canada. In 2008, the World Economic Forum ranked Canada’s banking system the healthiest in the world. America’s ranked 40th, Britain’s 44th.
Canada lucked out a bit – up there housing prices have not fluctuated as wildly as down here. Our home prices are down twenty-five percent, theirs half that much. Zakaria suggests that’s because the Canadian tax code does not provide “the massive incentive for overconsumption” – there you cannot deduct the interest on your mortgage. And then he adds this:
Ah, but you’ve heard American politicians wax eloquent on the need for these expensive programs -interest deductibility alone costs the federal government $100 billion a year – because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian homeownership? It’s 68.4 percent.
Damn – we must be mad. And Zakaria adds this.
Canada has been remarkably responsible over the past decade or so. It has had 12 years of budget surpluses, and can now spend money to fuel a recovery from a strong position. The government has restructured the national pension system, placing it on a firm fiscal footing, unlike our own insolvent Social Security. Its health-care system is cheaper than America’s by far (accounting for 9.7 percent of GDP, versus 15.2 percent here), and yet does better on all major indexes. Life expectancy in Canada is 81 years, versus 78 in the United States; “healthy life expectancy” is 72 years, versus 69. American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America’s largest car-producing region.
Okay, but we’re not Canadians. We don’t want to be Canadians. And as for saving our banking system, President Obama says we don’t want to be Swedish either:
Sweden… had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would – our assessment was that it wouldn’t make sense. And we also have different traditions in this country.
Calculated Risk responds with this:
…stop and think about what Obama is saying. We know the correct answer, but we are afraid to do it – because of our “culture” – so we are going to follow the Japanese plan.
Nouriel Roubini says we should just do it now:
Wasting another 6-12 months may risk turning a U-shaped recession into an L-shaped near depression but currently [nationalization] is not yet politically feasible.
The full passage from Obama was to ABC News’ Terry Moran, on why he’s rejected a Swedish approach to this part of the financial crisis:
There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would – our assessment was that it wouldn’t make sense. And we also have different traditions in this country.
Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core – core investment needs of this country.
And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.
That’s a little more subtle, and Matthew Yglesias is not happy with that subtlety:
Obama makes two arguments here, one about scale and one about national tradition. I think the argument about tradition is clearly true -this is a big barrier to a Swedish-style solution. But I don’t think it’s a valid objection for the President to offer. What he’s describing is precisely the situation I fear; a situation in which public officials are refusing to do what needs to be done out of what amounts to ideological rigidity. This is the United States of America, so we can’t have widespread nationalization even if we should.
The argument about scale is different. You could see it being the case that what works in a small open economy wouldn’t work in a large somewhat open one. There are, in fact, lots of situations like that. The sort of unilateral fiscal stimulus we’re attempting isn’t really appropriate to small open economies. So I could be convinced that this is correct.
On the other hand, it’s not clear to me what about the Obama/Geithner alternative to nationalization actually meets this problem. It’s inherently more difficult to conduct oversight and administration in the United States, which really could make it harder to make nationalization work. But the Obama/Geithner alternative will also work poorly unless oversight and administration can be made to work. This amounts to saying “just because nationalization worked in Sweden doesn’t mean it’ll necessarily work here, so I’ll try something else, that also might not work.”
The reasoning doesn’t go through without the first consideration – we’re not nationalizing the banks because, damn it, we don’t do that sort of thing in the United States. To which I say that nationalizing the banks’ losses doesn’t exactly fit in with American cultural ideas about rugged individualism either.
Well, when you do shovel money at the banks – to recapitalize them, as they say – you really are nationalizing their losses. We, the taxpayers, pay for them, and hope for the best, which seems kind of stupid.
Yglesias recommends Paul Krugman – nationalization is more American than Obama thinks:
Yes, Obama is impressively articulate and well-informed – and his response shows that he has actually considered the issue. It is light-years better than what we’ve grown accustomed to in recent years.
But his two main arguments aren’t actually very good. Yes, we have thousands of banks – but the problems are concentrated in a handful of big players. In fact, the Geithner plan, such as it is, already acknowledges this: the “stress test” is to be applied only to banks with assets over $100 billion, of which there are supposed to be around 14.
And the argument that our culture won’t stand for nationalization – well, our culture isn’t too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out.
Oh, and not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie.
Or it’s Swedish meatballs. Yglesias end with this:
My bottom line: Visit the Nordic countries and you’ll be impressed that their civilian public agencies are much more effective than ours. Arguments which observe that things their institutions can do, our institutions might well screw up are valid. At the same time, there are things that require effective public agencies to do that need to be done. In fields like educating poor children, we’re simply not doing them, and a price is paid. But it’s a price that most middle class Americans don’t see or pay personally. If it turns out that we can’t manage a financial panic adequately, we’ll all be paying the price. I don’t think assuming failure in advance and therefore adopting unlikely-to-work policies makes sense. Abraham Lincoln and FDR both asked the government to do things it didn’t have the ability to do; that meant they had to build the institutions.
But we seem to want to make do only with the institutions we have, for no particular reason. We’ll have to live with that, even if we won’t live well.
And Yglesias also points out there is a connection between the stimulus stuff and any sort of banking rescue, with this:
You want the money to circulate smoothly and efficiently from those who have it to those who need it. That doesn’t mean everyone needs to spend the money instantly. But it means that when people want to park their money, those funds should come available to other people who have good business opportunities that could be exploited with the assistance of a little credit. That’s where a healthy financial system comes in.
You may have heard tales from Japan’s “lost decade” in which stimulus measures failed to actually get the economy moving. Part of the problem was somewhat ill-conceived and ill-executed stimulus. But perhaps a bigger issue is that they didn’t actually clean up their banking system. Instead, they put it on life support. And then they used fiscal stimulus to put employment on life support.
But we don’t want life support, we want stimulus that actually brings us back to life. And that requires a financial rescue package. Of course it also requires a financial rescue package that works and the jury’s still out as to whether that’s what the administration’s come up with.
This is not easy stuff. And nothing will be fixed quickly, which may drive everyone crazy, although one of Andrew Sullivan’s readers offers this:
What many do not understand is that the government is playing for time, not some brilliant economic miracle. We do not have the money or political leverage to solve this problem from the top down by divine fiat. We have to buy time – literally – for the ten-thousand smaller acts of restoration and renewal to take place. All this flow of money, this vast seemingly indiscriminate transfusion of economic blood, has one purpose: to keep the patient’s heart pumping until the systemic crisis is past – another 6-12-18 months. It is messy, sloppy, gross heroic medicine. Sure there’s tremendous waste. Get used to it. And get these people out of the operating room!
It is very interesting to watch how this crisis reveals and highlights character: the sniveling privileged Wall Street upper-crust, the semi-hysterical, uninformed punditocracy, the puerile Republican opposition – and Obama, cool as a cucumber, playing his game, five steps ahead, setting up moves that won’t come to fruition for months or years, while his opposition flails at the thin air where he used to be. I love it. …
The Republican reaction to this stimulus package is on a par with McCain suspending his campaign during the primary to “handle” the economic crisis back in Washington – completely clueless, cynical empty gestures. They think we’ll forget. They’re wrong. What Karl Rove wanted, and was willing to steal by any means necessary, Obama will get, handed to him as a free gift by the American people: real political power, the power to transform society for a generation or more.
Well, maybe – we’ll see. Sullivan says he’s learned not to underestimate the man, as has everyone, save for the pundits and the Republicans.
But that’s neither here nor there. We have a mess of a compromise stimulus package, and zombie banking system. It’s a good thing Obama ran on hope. That’s about all we have now, and you can’t take that to the bank.