I know the American public is impatient and that any power held by my team right now will be very short-lived. Keynes is back in style, but only for about the next 30 to 60 days. After that, the right-wing will begin to climb out of the hole they have dug for themselves using the ideological bullshit and lies that always work for them. But my cynicism and pessimism is getting ahead of me. At this moment the liberals have the country by the balls.
I have hope that this amazing moment in US history yields some very large, socialist bills that President Obama will sign into law quickly and powerfully. It could be a great morning for America.
I read the following on Bloomberg AFTER I wrote the above:
James K. Galbraith Says Predator State Hit Wall: Year in Review
Commentary by James K. Galbraith
Dec. 31 (Bloomberg) -- This is the first full-fledged credit collapse and debt deflation since 1930, bringing with it a violent economic decline and a surge of unemployment.
How did it happen? For half a decade, a toxic stew of abusive and explosive mortgages, subprime securitization and complicit ratings companies was allowed to simmer, piling leverage on leverage, while credit default swaps spread risk until risk no longer could be traced.
This was market failure. But it happened because of a deep failure of the state. The government has the power to prevent such things. But the state abandoned its post. Marching under the banner of free markets, the government turned regulation over to agents of a predator class. Thus the unchecked growth of derivatives, tax havens, regulatory arbitrage and the carry trades. Thus Bernard Madoff, undetected by the Securities and Exchange Commission.
In August 2007, the banks peered into their books, where each saw the mirror of the others. None could know what they were worth. Trust and clarity and interbank lending broke down. It took a year, via Northern Rock Plc and Bear Stearns Cos., for the larger world to understand. When it did, panic ensued. And panic is deadly to finance.
Paulson’s Gambit
Government responded, but we discovered then how badly economic ideas now failed us. Action was needed. Ideology got in the way. The Treasury and Federal Reserve sought to minimize “intervention,” to preserve “market discipline.” Thus, the decision to let Lehman Brothers Holdings Inc. fail. The result was suspicions of cronyism and more panic.
Henry Paulson now demanded $700 billion from Congress to purchase “troubled assets.” This too was ideology: a price mechanism for assets whose core characteristic, from the beginning, was that they were too opaque and corrupt to be priced.
Congress ultimately took charge. It was necessary to create a zone of safety in banks and money-market funds, by extending deposit insurance and guaranteeing commercial paper. This was done. Banks were also stabilized by partial nationalization. The financial panic subsided -- but now the economic crisis deepened. With housing in collapse, industry, insurance, and state and local governments all threatened to follow.
Two-Part Challenge
The Great Crisis thus transcends market failure. It is system failure, failure at the heart of the mechanism that makes the economy run. We are witnessing the financial and the physical consequences of the end of a governing creed.
The challenge facing the American government now comes in two parts. The first is to maintain spending in an economy that cannot, for the duration, draw spending power from the poisoned wells of private finance. The second part must be to reconstruct the necessary economic functions of government -- beginning with effective global financial regulation -- for our own sake and as a model for the world.
The inauguration of President-elect Barack Obama offers hope that these matters have been understood. Yet it wouldn’t be wise to assume this. The American public, whose common sense and good judgment rejected the predator state in the elections of 2008, needs to remain engaged, informed and active on all fronts.
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