Tuesday, October 14, 2008

The Economic Crisis Continues and the Lunatics Continue to Control the Asylum Called Economics

by Norman Markowitz

A few points from the the continuing economic crisis. The Bush administration, tailing the major European governments injection of hundreds of billions of Euros into their banking systems, has a plan to inject 250 billion dollars into the U.S. system. The U.S. Secretary of the Treasury, Paulson, has called upon the banks "not to take this capital to hoard, but to deploy it."

Oversaving or "hoarding" of capital is an important part of John Maynard Keynes fiscal theory. Progressive taxation and redistribution of investment so as to increase consumer purchasing power is the way to prevent oversaving or "hoarding" (of course such policies help to create greater income equality which also plays a role in preventing oversaving).

But how, given the present system with "deregulation" still in effect, can the Treasury really make the banks use this capital to revive credit instead of doing what they want with it. Isn't Paulson's comment a little bit like Herbert Hoover's policy in the early 1930s, who held "White House Conferences" on the economic crisis with big business and labor, had them issue statements that they (meaning business) would work together to maintain production and employment, and then see business both reduce production and employment to maintain their profit margins. The only difference that I can see was that Hoover at the time wasn't throwing in large sums of capital to save the system. He began to do that at the end with the establishment of the Reconstruction Finance Corporation and his secretary of the Treasury, Andrew Mellon, who had earlier advised Hoover to let the crisis run its course, promptly resigned so that his Pittsburgh based financial empire could take RFC loans.

But there are other reports in the press which citizens should find disturbing. One think tank economist is quoted as asking the question "is this a recasting of capitalism? I think that what we will see is that the government acts as a silent partner and gets out as fast as it can." Richard Sylla, an economist and financial historian at NYU is quoted as saying "I think it is a good thing that there is a sunset provision that limits the length of the government's investment."

Most Americans don't really know that there is a "sunset provision" after the bailout, or for that matter have any basis for comparison with what European countries are doing in this matter. Instead, the economists and historians who are being interviewed by the press are saying that Europe is "different" than the U.S., that it has a history of nationalizing industries and credit (no mention of course of the Socialist and Communist parties and labor movements that played a central role in carrying out or influencing these policies) that Americans would not accept Robert Bruner of the University of Virginia summed it up nicely when he said "In Europe the concept of a social contract is much more social--that is socialist than we have been comfortable with in America."

But who is we? Nobody asked the American people to deregulate the economy, to reduce the real value of minimum wages, to create economic stagnation and greater income inequality in support of the economic holy trinity of deregulation, detaxation and privatization over the last thirty years. What is being advocated today, as historians and economists understand, is essentially a revival of the Reconstruction Finance Corporation with much more capital (the RFC was the most pro business agency of the New Deal government, which expanded it) But there was also the TVA and during WWII the building of thousands of plants, new productive capacity, which many in the CIO and the left labor movement saw as the basis for a productive public sector after WWII (of course it didn't work out that way).

The social contract in the U.S. as everywhere else is about social protections for the people. Public control of the credit and currency system should be part of that social contract. The government shouldn't be a silent partner but an active participant with the banks representing that social contract. Having a mixed public private banking system, with of course reregulation, would be a way to guard against the disaster which is still rolling through the U.S. and global economy and finally get rid of the lunatics in the asylum of economics who continue to expect government to bail them out and then let them get back to their deregulated business as usual.