Friday, February 06, 2009
But, even so, it is important for leftists to step back a moment and consider whether the stimulus plan is the appropriate response to the accelerating downturn. With the exception of Marxists and anarchists, there has been near unanimity, especially among liberals, that a Keynesian version of shock and awe in the hundreds of billions of dollars, if not a few trillion dollars, is necessary to arrest the deflationary, depressionary spiral.
Is this true, though? Some readers may recall my December citation of Financial Times reporter Martin Wolf for the proposition that the US, as a country already running enormous trade and budget deficits, is ill-suited under classical Keynesian doctrine to deficit spend the global economy into a recovery. Instead, the US is likely to spend itself into bankruptcy through a Keynesian stimulus program and an ongoing bailout of the banking system unless Americans are willing export more, import less and accept sharply reduced domestic budget deficits. Or, to put it more bluntly, the US is likely to go bankrupt unless Americans are willing to accept a lower level of consumption and a curtailment in public services.
I am very sympathetic to this view, so much so that I believe that we should have pursued another approach from the inception of this crisis. Hopefully, it is not too late to do so, and such an approach would have been centered around two principles: First, the US should, along with other countries, reorganize the global financial system through liquidation and consolidation. The G-7, along with China and India, would do so through the creation of a multinational authority empowered to immediately write down bad debt and liquidate insolvent institutions, so that the remaining ones can lend money to one another, and thereafter to the general public, without fear of the unknown. Recapitalization of banks would be financed through transaction fees placed upon the transfer of financial instruments in global markets. Nationalization would be a last resort, resulting in public ownership and the creation of governance structures consistent with such ownership.
Second, within the US, the federal government would deficit spend primarily for the purpose of providing a safety net for those facing severe hardship as a result of unemployment and the loss of the homes. Along these lines, unemployment insurance funds, now within the jurisdiction of individual states, and, in many instances, bordering on insolvency, would be completely federalized for a specified period of time, say two or three years. The federal government would then pour billions into these funds so as to guarantee a much more generous minimum benefit, say 60% of one's salary prior to discharge, with a maximum yearly benefit amount of around $50,000. Of course, these benefits would be untaxed at both the state and federal level.
Such a program would be matched by a loan modification program whereby the banks would be required to refinance the mortgages of people facing foreclosure at existing market rates for those properties. They are already begrudgingly moving in this direction, as they are going to have to eat the losses, anyway. After all, why foreclose on the mortgages when they can instead create a new stream of income by substituting new ones, especially as they are desperate for new transaction fees and revenues going forward.
The problem, as documented frequently in recent months by Mr. Mortgage, is that the terms of modifications currently offered by lenders are extremely adverse to borrowers, so much so that they are analogous to renting the properties, with the borrowers responsible for additional interest payments, property taxes and maintenance. As Mr. Mortgage correctly observes, the only way for the housing market, and, indeed, the US economy to recover, is for lenders to provide permanent principal balance reductions. Instead, the government is allowing lenders to create a new generation of debt that will expose its toxic character in a few years.
I am admittedly no economist, but I believe that the overall cost of these measures would have been much less than what has already been expended upon the banks through the Federal Reserve and the Treasury, and even less expensive than the current stimulus plan moving through Congress. Of course, there should be no tax cuts, but infrastructure improvements are worthy of consideration, as long as they are effectively targeted to employ large numbers of people to address known deficiencies, such as an improved transportation system, including mass transit and school construction. Employment through infrastructure programs would reduce the amount of funds required to federalize the unemployment insurance programs of the states and guarantee a reasonable benefit amount.
Overall, my approach is based upon the notion that wealthy speculators in the financial sector should be subjected to the brutalities of the market that they celebrated as it enriched them, if only, in some instances, for a brief period, while those of us who were involuntarily subjected to the consequences of the financial catastrophe that they created should receive extensive financial assistance to avoid losing our homes, our families, and, in extreme cases, our lives. Unfortunately, the incoming Obama administration, like the Bush one it replaced, is doing the opposite, devising new ways to channel government funds to bankrupt banks while avoiding the appearance of doing so. It is hard to see how this is going to arrest the free fall in the global and domestic economies.