The two major legislative initiatives to address the economic downturn, so far, have been the TARP, originally passed last year, and the Stimulus, passed in the last few days.
Both are intuitively important, and one could make strong critiques of both, but it's hard to see how the one effort really relates at all with the other.
Well, I thought a piece I read over the weekend called The Baseline Scenario, by Peter Boone, Simon Johnson, and James Kwak frames it well from a 50,000 foot level. (Please join below the fold.)
There seems to be a consensus (except among the flat-earthers) that public stimulus is necessary to pull us out of the current nosedive.
But, moreover, we need stimulus that actually drives the growth of productive activity.
As the financial sector has conquered the world over the last decade - and ultimately pillaged it - the predilections of financiers have grossly distorted our economy and the way managers, boards and investors look at investment opportunities.
Consider the Boone/Johnson/Kwak framing:
Ideally, global economic growth requires a rebalancing away from the financial sector and toward non-financial industries such as manufacturing, retail, and health care (for an expansion of this argument, see this op-ed). Especially in advanced economies such as the US and the UK, the financial sector has accounted for an unsustainable share of corporate profits and profit growth. The only solution is to invest in the basic ingredients of productivity growth - education, infrastructure, research and development, sound regulatory policy, and so on - so that our economy can develop new engines of growth.
This started with the stimulus package. They continue:
But this change in the allocation of resources is greatly complicated by the increased political power of the financial lobby. During the boom years, large banks and their fellow travelers accumulated ever greater political power. This power is now being used to channel government subsidies into the now outmoded (and actually dangerous) financial structure, and in essence to prevent resources from moving out of finance into technology and manufacturing across the industrialized world.
Yes, Republicans, there is a danger of "crowding out" in the efforts to fix the mess ("bipartisan" framing opportunity!) - there is a danger that so much capital will be sucked into a botched finance fix that productive stimulus efforts in the real economy will get starved and/or deflated.
Here's how (emphasis mine):
We have done considerable damage to our economies through a debt-fueled bubble. But it could get worse. If the financial sector can use its political power to generate a higher level of subsidies from the government, we will convert even more of our banking industry into pure rent-seeking activities (i.e., all the bankers will do is lobby, successfully, for more support in various forms). If public policy is captured by banks in the US, Europe and elsewhere, then we face much slower productivity and overall growth rates for the next 20 years.
Which is to say that bankers would happily get fat off public subsidies, and miss nary a flight to the Bahamas. They add shockingly little value to the economy, to begin with, and never lost any sleep over that.
As the authors of the Baseline Scenario and others point out - rightly - there is cause for concern that the Obama administration may yet be cowed, or snookered, by the financial sector into botching the financial fix.
The writhing over limits on executive compensation were a worrying sign that the Administration isn't where we need them to be in their regard for the cretins who triggered this mess.
But make no mistake: if the financial fix is botched, it will undermine the stimulus just passed - as well as any future stimulus.
So, in a lot of ways, the legislative battle just concluded was a sideshow. The financial sector restructuring is the beginning of the real battle to avert catastrophe.
So what to do?
From the policy discussion in the Baseline Scenario:
...a long laundry list of measures ("try everything"), each of which is insufficient, does not add up to a comprehensive approach unless and until it fully recapitalizes the banking system. In fact, a relatively complex and opaque approach to what is really a simple problem - the chronic lack of capital in the banking system - could well generate the (accurate) impression that the bankers are availing themselves of a nontransparent approach and in effect stealing resources from the state.
They have more, but what I take from all this is there will be two key indicators to monitor:
- A successful fix will be relatively straight-forward and transparent (hint: it will start with the clear option of nationalization for every troubled institution, even if the Administration chooses to call it something else)
- The bankers will be squirming
Oh - and a special request for Republican lawmakers: please go golfing with your lobbyists and plutocrat friends for a few months - the adults really need to focus on cleaning up the mess you created, and it will be very, very bad for everyone if you trip them up. Thanks!