Comment about this article from an economic advisor:”This writer’s take on the TARP mirrors that of the press but is inaccurate; the money put into the banks usually involved sale of debt (bonds, preferred), not a ‘bailout’ and as such repayment was required and in fact most of the dollars have been repaid.
The four biggest institutions that haven’t paid back their TARP money include only one bank, Citigroup; the other three are Chrysler, General Motors, and AIG. Six of the ‘Big 7′ banks have paid back their TARP funds, and the government has made about 15% on those investments.
Also I would blame the Great Recession, at least in the immediate moment, on two factors – the big push for housing and specifically FNMA and FHMLC, which have been around since the 1970′s, and the lack of regulation in the derivatives markets, specifically credit default swaps and their various offspring. There are many other underlying causes, many of which the writer mentions.
The comments on Keynes and the misapplication of his writings was excellent and right on the money. The paragraph that begins ‘While the system is so labyrinthine as to be impenetrable…’ may be the best summary of those things that economists agree on that I’ve seen.”
Farm underwriting is no news. It originated in the Great Depression — along with Social Security, the w.p.a., the c.c.c., etc. — when family farms were folding right and left and vast numbers were unemployed.
The idea originated as social programs to help the most desperately unemployed and poor, though it would mean deficit spending. Previously deficit spending had happened only in wartime. The idea of peace-time deficits originated in the theory of British economist John Maynard Keynes, who advocated that — if a nation operated with a balanced budget or a modest surplus in flush times — a depression could be abbreviated if a government spent into debt to generate jobs, stimulate industry, and get money flowing again … provided they afterwards paid back their debt when stability returned. Taking a chance, the US adopted this policy and launched small programs, of rather modest impact given the depth of the depression (though those who found work through government programs were grateful, and a lot of lasting public works were accomplished). But it was massive deficit spending required by World War II that turned out to be the boost that jump-started the economy, proving Keynes to be correct that government spending could bring a country out of economic depression. But anyone who says today’s cumulative debt is the result of Keynsian economic theory is either ignorant of — or willfully ignoring — his full argument that presumes paying off debt in prosperous times.
Most Depression-era programs were discontinued in time, with the exception of Social Security, a variety of farm aid programs, and (indirectly) veterans’ benefits. In time, with broad changes in American public conscience toward poverty and racism, Johnson’s Great Society Programs were added in — aid to dependent children, head start, medicare, etc., some of them (welfare) replacing old state-run poor-relief programs. In time it got out of whack and expensive. Starting around the end of the Vietnam War the national debt grew and was not repaid. More and more programs were added, mostly with good intent, but the number of people qualifying for support (“entitlement”) kept growing too.
As recently as the 1950s Republicans were socially liberal and fiscally conservative. Recall that for a brief moment both the Democrats and Republicans considered Eisenhower as their candidate. But from Reagan onward these stances were reversed, as the party sold its soul to evangelicals to buy their votes (though in fact harshly indifferent to evangelical social causes), and became the party socially rabid and fiscally irresponsible. Most of the current national debt has been accumulated since then, the vast majority of it (but not all) under Republican administrations and congresses, through a combination of increasing debt (through entitlement programs and wars) and simultaneous cuts in taxes. That’s a little bit like quitting your job and going on a spending spree. Recall that almost the only balanced budget we’ve seen since Eisenhower was under Clinton’s second term. (By the way, the annual deficit and cumulative debt are not the same as international balance of trade).
Reagan does get legitimate credit for taking some really unpleasant steps to stabilize the economic mess that had been taking shape since Nixon’s era; he allowed the Federal Reserve Bank to adopt controls on quantities of cash awash in the market place. It was painful but it worked. Reagan also set in motion the consecutive tax cuts and deregulation that would come back to bite us all later. His party continued with deregulation and tax cuts for the next thirty years. Clinton gets a share of blame for signing some legislation passed by the Gingrich Congress (pressing Ginnie Mae to extend mortgage credit to people who really weren’t qualified). Bush II’s tax cuts combined with his puzzling war in Iraq added immensely to cumulative national debt. With these expenses and still more tax cuts, annual revenue fell ever shorter of annual expenditures. The end-of-year debt just keeps getting rolled over into cumulative debt that requires interest payments. If the day comes that interest payment (“servicing the debt”) equals or exceeds revenue, we’ll see a collapse that will make the Great Depression will look like a Sunday school picnic. If Reagan wanted to “starve the beast” of Big Government… we may be seeing the beginning of it now.
Meanwhile, in the Reagan spirit, his party set about de-regulating banking, investment, and other financial industries because they (correctly) saw that there was great growth possible with removal of these barriers. These regulations had been put in place after the Great Depression. For a reason. You will recall that the first signal that deregulation wasn’t such a great idea was the collapse of numerous Savings and Loan banks just as Reagan wound up his career and passed the torch to Bush I. Their party may have led the stampede for deregulation, but they probably weren’t alone in voting for it; it would be instructive to see a vote-by-vote tally of every deregulation vote in congress since 1980. Read the rest of this entry »