Bob Cropf

Posts Tagged ‘bailout’

Did Obama’s team incorrectly diagnose the economic crisis?

In Keynesianism, Obama, stimulus on May 4, 2009 at 1:34 PM

In the April/May issue of the liberal-leaning Washington Monthly, James K. Galbraith writes that the team behind Obama’s economic recovery plans all share the same background and creed (you can find the article online here.). The problem with that, according to Galbraith, is that this leads to severe limitations in their vision of the possibilities of the economy.

Geithner, Summers, Romer, Orszag, et al. all share the underlying belief that the economy will right itself. The chief difference between Obama’s economic team and conservatives, however, is that Obama’s advisers believe that the economy needs a little help from the government to get back whereas economic conservatives assert that such help would actually do more harm than good. Galbraith argues that this could lead to a weak approach to fixing the current mess:

“If recovery is not built into the genes of the system, then the forecast will be too optimistic, and the stimulus based on it will be too small.”

Interesting point: The article claims that the hopes for a quick recovery are based on the assumption that this recession will be no worse than the 1981-82 downturn, the worst in recent history. However, if this is not the case, then the models that have been used to predict a rapid turnaround would be wrong.

If we discard as “normal,” postwar economic experience, then there might not be a near-term recovery at all. A strong argument could be made that the situation we now find ourselves in is vastly different from the postwar economic regime that we are familiar with.

Galbraith argues that Geithner, Summers, et al. are primarily concerned with restoring the pre-crash economic order, which was built on the predominance of private banks. Galbraith quotes the Treasury Secretary, Geithner as telling CNBC:

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

In the past, economic downturns were shallow enough to permit a bank-led recovery. However, this time things are radically different, according to Galbraith. Millions of families have lost a huge proportion of their wealth. As a dire consequence, for many Americans, Social Security and Medicare represent their chief source of wealth.On top of that, the nation’s largest banks are bankrupt or nearly so. Thus, any attempt to restore the pre-crisis regime is automatically doomed to failure.

The article goes on to say much more. Galbraith is a respected economist, who holds a prestigious chair in Government/Business Relations at LBJ School of Public Affairs, University of Texas at Austin, so he is someone whose words count for something in Washington, DC.

I bring it to the class’ attention because while much of the mainstream media focuses on the conservative attacks on the Obama economic plan, there is also a liberal critique that has not received quite as much attention. Galbraith is a good example of the “loyal opposition” within the left.

RC

Bailing out bankers rather than banks

In economics on March 18, 2009 at 10:41 AM

David Leonhardt in today’s NY Times, writes a good article pointing out the fallacies in A.I.G’s claims that the bonuses the company paid out to its employees for “retention purposes.” He systematically discredits this argument on several grounds:
1) They’re totally unnecessary. He points out that almost no executive has left one company for a similar position at another company.
2) For jobs below that of CEO, it is not necessarily a bad thing for turnover to happen. After all, isn’t the case that the Financial Product division is the one most responsible for getting the company into its current mess?
Leonhardt also dismisses A.I.G chief, Edward Liddy’s claim that the bonuses are needed to keep top talent in the firm by pointing out that a) it hasn’t worked–52 employees receiving bonuses still left and b) none of the employees are truly
indispensable; all could without a great deal of trouble be replaced. The whole situation points to the need for increased government oversight of the industry, which should have been in place years before, so that the situation we now find ourselves in would probably never have happened. This is what occurs when you leave the asylum to be run by its inmates. How could anyone expect things to turn out differently?

As a side note, there is a very interesting video of a lecture by Alan Blinder at Princeton’s Woodrow Wilson School, which was given in November 2008 and is well-worth watching. The lecture is entitled “The Origins of the Financial Mess.”

AIG (or is it the US Government?) Paying Bonuses

In 1 on March 15, 2009 at 4:41 AM

The New York Times reports today that AIG is paying $165 million in bonuses to the financial services unit (the origin of of the CDSs, etc. that made some really bad lending by banks affect EVERYONE). This is in addition to the $121 million paid across the rest of the company.

The US government owns 80% of AIG, having given it $170 billion (so far) in bailout money, and Geithner did “pressure” them to cut bonuses for top executives and *gasp* tie the rest to performance. But they are going ahead with it because they are “contractually obligated”…

Just as Jon Stewart pointed out on Thursday, most of the people at AIG are hardworking, honest people who should not be held morally responsible for the bad decision making of those at the top. But there are plenty of people whose only connection with the entire mess is their company can’t get its regular line of credit from lending institutions that are not only not getting their bonuses, they are having health insurance, employer contributions to retirement, pay, and even their jobs cut… all things their company was “contractually obligated” to pay until they found themselves unable to pay their bills.

Marx would have approved of banks bail-out

In economics, Free-market on February 20, 2009 at 8:58 AM

This tongue-in-cheek article in the Financial Post, a Canadian online publication, makes the case that Karl Marx would have endorsed last year’s bailout of the US financial sector. According to the article, Marx would have joined such stalwarts of conservative economic thought as the Heritage Foundation and the Wall Street Journal’s editorial page in applauding the $700 billion bank bailout. As we have often said in class, sometimes the current crisis makes for some interesting bed fellows.

The article itself presents a fairly standard neo-classical argument against the bailout. It goes on to say:
“At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets? ”

The author, who is a free-market Canadian journalist, is probably thinking that somewhere Milton Friedman is spinning in his grave.

Obama plans executive pay ceiling

In economics, Obama on February 4, 2009 at 5:56 AM

The Obama administration plans to restrict executive pay to $500,000 annually, according to this article in the New York Times. This restriction would only apply to the executives of companies receiving significant amounts of bailout money.

The article goes on to say “Executives at companies that have already received money from the Treasury Department would not have to make any changes. But analysts and administration officials are bracing for a huge wave of new losses, largely because of the deepening recession, and many companies that have already received federal money may well be coming back.”

This is a politically popular move in light of rising taxpayer fury at the recent Wall Street bonus scandal and through-the-roof executive compensation packages.