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.”

by Anonymous 

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.

At any rate, deregulation gave rise to moral hazards — a technical term for leaving an opening (usually inadvertent) for risky behavior that inevitably invites risky behavior. Deregulation allowed the amalgamation of banks till they became “too big to [dare let] fail” which appeared to operate smoothly, for a while. Meanwhile, deregulation invited the risky investment gimmicks that in time brought down the US and then the world economies. This was exacerbated by liberal directives to Fanny Mae and Freddy Mac to issue mortgages more freely to poorer people than had hitherto been eligible; nice social intentions, but it brought into the real estate market people that just could not afford it, a detail that combined with general prosperity (on paper at least). The frenzy of buying of course generated a frenzy of building, especially in the Sun Belt states like Florida, Arizona and Nevada. In those states, growth itself became an industry, creating its own jobs to support further growth; little surprise then that those states have inventories of thousands of new houses now stand empty for lack of buyers, which suppresses sales of other homes.  

So, in the prosperous decades when the nation should have been operating under more-or-less balanced budget or accumulating a modest surplus, we were instead cut taxes and accumulated massive debt, and deregulated to the point of allowing the system to line itself up for the disaster that is all too familiar to us now. 

Now that we have a Great Recession on our hands, it would be the moment to consider some Keynesian temporary deficit spending. But the nation is already operating in deficit. Raising taxes now to pay the bill would restrict the money supply, making recovery harder.  A war to quicken the economy … well, we’re already prosecuting two wars, and military conscription (an effective job-creation program) is a third-rail that no politician of either party wants to touch. So Obama has inherited a situation that can’t be resolved by deficit spending. And yet he (or rather congress) must. And so the bailouts of banks and industries.

No one (but economists) likes to admit it, but the massive bank bailouts were very much the right thing at the right time. They stabilized the banking industry on which the economy depends, and probably should have been even bigger. It is curious that most complaints about the bailouts come from Republicans, as the bailouts were proposed by Geitner and Bernanke (both Republicans appointed by a Republican) to a Republican president, Bush II, and approved by him and a then still heavily Republican congress. I doubt Bush understood the situation, but he authorized it. Neglecting to include a repayment requirement seems irresponsible, equivalent to a bank making a business loan to someone without a repayment plan. Funny, how a bank would never issue such a loan. One is left to wonder if it was an omission made in haste or a deliberate act, as it simultaneously stabilized the system while transferring risk of money loss from bank shareholders to the general public. Obama was right to continue bank bailouts for the stabilization reason, woeful, as it is to increase national debt. At least he has roughed into place something of a repayment plan; though public humiliation is an incentive, it seems to be working. Loans to Detroit were irrelevant, as the rest of the US auto industry was (at the time) still fairly healthy if shaky. Recall that most of the nation’s autos are made in the US but not in Detroit.  Expensive and — as it looks like vote buying, and just might be — very bad form.   

Just as Wall Street is a “leading indicator” (the front edge of good news or bad), jobs are a “lagging indicator” (following Wall Street many weeks or months behind, whether job losses or gains). So all recoveries tend to start out as “jobless recoveries.” The long term will tell what kind and speed of recovery we get. But as Keynes said, “in the long run we’re all dead.”

Meanwhile, those depression-era programs that survived (and let us not forget Cold War military hardware programs) became more and more distorted from their original intent. Assistance to farms and various industries takes more forms than most of us are aware of: tariffs to protect such marginal US crops as sugar; massive underwriting of the cotton industry; payments to leave fields fallow are the tip of the iceberg. Most of the nation’s family farms have long since been scooped up into massive corporate agribusinesses that really know how to game the system for massive subsidies. Many other industries enjoy massive subsidies too. 

Although certain parties like to talk about the virtues of “free markets” (which means perfectly competitive markets) they are in fact talking about hating the expense of safety regulations. Privately, they love controls that diminish competition and protect their pet interests. Subsidies are one such control. The beneficiaries of these will fight tooth and nail (and pocketbook) to preserve their protections. They do not believe in truly competitive markets. When anyone stops to think about it — no one ever does — it gives the genuine small family farm a bad name. 

Meanwhile, American agricultural science took a huge leap forward in the 1950s, 60s, 70s — the “Green Revolution” that made food production efficient and abundant beyond our wildest dreams. To stabilize the market, the government buys surpluses, and gives it away to 3rd-world countries in crisis (inadvertently destabilizing their local farming economies by undermining the incentives to local farming, setting the scene for repeat cycles of famine). Tap an agribusiness farmer who gets subsidies and you’ll be tapping a die-hard who won’t let go of his grip on the special favoritism he enjoys. In other words, they’ve perverted to their massive profit the temporary social relief programs invented during the Great Depression.

The same manipulative transformation has been going on in every industry, each seeking its own protections and exemptions. One of the prime reasons for health-care cost increases is that such manipulation of the system has removed most competition (competition typically drives prices down). Additionally, we’ve seen costs increase due to the steady transfer of health insurance from the old non-profit for-health model to a share-held model that exists not for health care but for profit. (the third reason for increased health costs — the expense of developing a new therapy — is legitimate).  The outcry among some against healthcare reform is not solely because the idea of government control or participation looks like socialism, but because they are shareholders and stakeholders in this favoritism, and they don’t want competition re-introduced to the system. You can find this sort of thinking all over the place. As the saying goes, “He who robs Peter to pay Paul … is sure to get Paul’s vote.”

A political economic system that functions primarily to favor a select few merchants is called a Mercantilist Economy. That’s what Britain had in the 18th century. The Founding Fathers tried to write into the Constitution preventatives of this (much of the Bill of Rights is about economics as well as individuals). But mercantilism is what American big business now favors - government regulation of the economy only if in the service of the chosen few, and today accompanied by massive redistribution of wealth (tax revenue), mostly to corporate interests, as well as significant but lesser amounts to the much-publicized social programs (like Medicaid).

Like Command Economies (Communism), Mercantilism is one of several alternatives to a Free-Market economy. Free-market economics is the name for an economy that maximally levels the playing field to promote competition (free from government favoritism, free from excessive government interference, free from government competition within the public market).  Free market economics was a liberal invention of the 18th century enlightenment in reaction to the then-traditional conservative mercantilism. It was articulated by the liberal Adam Smith in his book “An Inquiry Into the Nature and Causes of the Wealth of Nations.” That book is oft cited but scarcely read today, and his great masterwork “On the Theory of Moral Sentiments” is never read. Parties who are fond of citing the former would do well to read the latter, as he made some discomfiting distinctions between rational self-interest and outright greed.

While the system is so labyrinthine as to be impenetrable to most laymen, economists have a lot of it figured out. They talk about it; they lecture about it; they write books about it; they went to the collapsed soviet states to teach it to a bewildered public, they even testify before congress about it. While it is fashionable in some circles to say that economists disagree, that is a line preferred only by those who are irked that common sense economics fly in the face of their personal opinions. Economists in fact disagree very little. All believe that a free-market economy (maximally competitive) will do the greatest well for the greatest number of people, whatever its flaws. All economists agree that government has some a role in the economy: creating uniform and just law, applied equally it to all; assuring security of private property (such as patents and copyright) as necessary incentives to work and invention; the production of universally-accepted money; and a few other points that allow the system to operate. (It’s demonstrably the absence of these in Third World democracies that prevent those countries from attaining economic stability).  Most economists agree that thoughtful and light-handed management of the money supply is allowable to smooth out inflation/recession cycles. Most agree that market regulation is allowable in instances where such regulation will protect vast numbers of people from injury (safety regulations, food-safety laws, banking regulation), and they agree that the there is a point at which the cost of such regulation yields less and less results (not an argument against regulation, just a need to know how much is generally worth the cost). 

Most congressmen of both parties never took so much as a high school economics class. They don’t understand economics any more than the general public does. And, as the Congressman’s main occupation these days appears to be preserving his seat in office so he can send favors home to his buddies (who in return support his campaigns for office) the economy is generally outside the congressman’s sphere of interest. Sorry to be so cynical, but it accounts for the rapid rise in independent voters who have lost faith in both major parties. in these circumstances. Mercantilism is likely to increase. The recent Supreme Court decision allowing corporate funding of election campaigns as protected free speech will push us ever further into a mercantilist system. One of the main problems with a mercantilist system is its tendency to extinguish the middle class (an invitation to radical political instability), and mercantilism’s its vulnerability to turning into a cleptocracy, which inevitably relies on brutality to keep itself in power. Not attractive futures. 

So here we are, with well-intended but ill-informed Democrats trying to be socially responsible in their attempts to dig us out of the recession, while stuck with tools that will increase a colossal national debt, faced off against Republicans who caused most of the current debt and had the primary role in creating the recession itself, while clamoring against increase in debt as a smoke-screen to hide their motive of preventing reform that will cut the vast corporate welfare programs that drive debt and redistribute wealth. Not a pretty picture.