Around late September 2008, I rode out to the edge of New York City, to eastern Queens to one of the few "feed stores" in the city -- actually a pet food store that also carries some livestock feed. I was seriously considering buying about 100 pounds of chicken feed. I also wanted to order a dozen or so baby chicks, and because I live in an immigrant neighborhood, where there are little live chicken markets, I was trying to figure out if I could get some almost grown chickens that might also lay eggs.
Many liberals and progressives -- heck even many teabaggers -- complain that the various financial rescue packages, like TARP or the Fed's massive commercial paper program didn't work, or only bailed out the banks and not "Main Street."
Frankly, they're wrong. This is the first diary in an intended series to explain why, even though these programs did not avoid 10% unemployment (and probably 20% including structural unemployment), these programs did avoid us having to grow chickens in our backyards, or scrounge through our landfills for leftovers from the "pre-collapse" era.
The reason I was trying to buy chickens and chicken feed is that I was closely watching the unfolding economic catastrophe and understood what might happen -- what was in fact happening. I had worked in the financial sector in the early to late 1990s -- I've worked in non-profit education since then -- and understood banking and the role it plays in the "real" economy, and what I was seeing was really, really terrifying.
I had also worked quite a bit in developing countries, especially in Africa. I had lived through a short food shortage in a southern county of Liberia in 1981, where, briefly, no matter how much money you had, there was no food to be bought. The food was there, but panic had taken it off the shelves. I also closely followed the economic collapse of Argentina between 1999 and 2002, which turned that country's middle class into "the new poor," and followed the economic implosion of Russia after the collapse of the Soviet Union. I knew that countries economically ranked as upper middle developing economies -- even highly developed countries -- could be reduced to poverty in weeks, and it seemed like it was about to happen here. In fact it was happening here. I'm not talking about the suffering we are experiencing; I'm talking about complete and total economic collapse.
I'm writing this because I think, based on evidence and analysis, that TARP and the Fed bailouts worked at very little cost -- and in many instances at a profit -- to avoid a catastrophe.
I don't think that progressives and liberals who are heirs to the economics of John Maynard Keynes and the democratic socialists of Europe, should buy into the anti-Keynesian propaganda that the financial rescue was some how a giveaway and that it didn't work. Too much of what passes on the left as rhetoric against the bailouts can be traced to libertarian, anti-government, anti-economic management ideological sources like Ron Paul.
I've read the debates here and aside from a few comments have refrained from participating by writing diaries. It's difficult stuff to explain. One of the big problems with writing about economics and banking (and the relationship between them) is that to explain anything, you almost have to explain everything. I couldn't figure out how to do that without writing something confusing, incomplete, or long and boring.
Also, people have really strong beliefs about economic systems -- not just mental sets of facts, but entire belief systems. Facts don't necessarily penetrate belief systems. In fact, recent psychological research shows that if you provide a person with facts that contradict his beliefs, you only make those beliefs stronger. That doesn't really matter but the abuse you get trying to explain unpopular facts online is discouraging. (I hope Bonddad is reading this and will come back to comment.)
So what I've decided to do is write about the scope of the 2008 collapse in small chunks. These chunks will be mostly factual. In other words, I don't want to debate about how corrupt the "banksters" are (even if they are); I want to talk about how things like the withdrawal of letters of credit in fall 2008 meant that no wheat could be shipped. I especially want to explain how the financial crisis almost destroyed the "real economy" of growing wheat, building things, shipping, trains, electricity generation, and so on. I don't mean depressed that economy, which happened; I mean almost ended it. I haven't read some of the recent books about the financial crisis precisely because few of them seem to be able to link the financial crisis to the real economy, and if this series of diaries has anything novel to offer it will be just that: I want to show how the real economy was almost utterly destroyed, and despite the recession, saved, by TARP and the Fed.
The political and economic actors who, in my opinion, saved the real economy are, in order of importance, former Prime Minister Gordon Brown, Fed Chairman Ben Bernanke, and Rep. Barney Frank (chair of the House Financial Services Committee). Hank Paulson gets some credit for accepting Rep. Frank's massive overhaul of the original TARP proposal, forcing it on the banks, and switching from an asset purchase model to a preferred stock purchase model; but that is almost entirely overshadowed by his role in the development of the crisis in the first place. I'm sure many will disagree. One thing I think we'll agree on is that Tim Geithner was a disaster, although many of you will probably disagree with why. The one positive thing that Tim Geithner did was that he failed to get most of his most ridiculous proposals implemented.
So that's my long winded introduction to the series. In the first two pieces of this series I'd like to explain how the financial crisis came very close to preventing you and I from being able to deposit a paycheck (for those of you who were still employed), withdraw money or use an ATM. That might seem like an inconvenience, but multiply that by millions of consumers and businesses, and you get the picture of an economy that has ground to a halt.
We Almost Needed Gold to Buy Groceries
One of the most prominent skeptics about the depth of the crisis in 2008 was the host of DemocracyNow, Amy Goodman. She seems to have been convinced by Naomi Klein's theory that the crisis and bailout were an example of the "shock doctrine" in action -- the use of a crisis by the private sector and its public official enablers to appropriate massive amounts of public funds and ram through unpopular neo-liberal policies. During the crisis, she generally took a skeptical view and invited guests who reflected that view.
But at one point, she interviewed the progressive economist, Dean Baker, of the progressive Center for Economic and Policy Research, and he explained how dire the situation was; note how below she compares the rush to enact TARP as similar to the rush to the Iraq War -- that is, implicitly, she is saying the crisis is based on a lie:
AMY GOODMAN: Dean Baker, you’re the head of Center for Economic and Policy Research. It’s based in Washington, D.C. The climate right now? I mean, watching the Sunday talk shows, there was this clear sense that if this is not accomplished in the next few days, that—you know, it’s like before the invasion of Iraq. We can be hit by a weapon of mass destruction, is basically the idea. And this is about not saving Wall Street, but saving the American people. That was the message that was put out immediately yesterday.
DEAN BAKER: Well, I’m going to walk a line here. I mean, there is a point. The system of payments stopped working last week. If that happened, we would have to, like, go to buy our groceries with gold. We had a serious situation. Now, on the other hand, the Fed and Treasury were able to deal with it. They are able to deal with it; they have the resources to deal with that. But that is a very serious situation. So they aren’t talking about total nonsense in that. Now, they’re trying to scare Congress to death, because it’s not as though we have to do it today or tomorrow. And, you know, what I would say is we do have to keep the system operating, but it should be punitive.
AMY GOODMAN: But they’re saying by Thursday or Friday.
DEAN BAKER: I keep emphasizing punitive.
AMY GOODMAN: They’re saying by Thursday or Friday.
DEAN BAKER: Thursday—we could probably wait a week. We could probably wait two weeks.
I want everyone reading this to take a deep breath and think about this, before I go on to explain what Mr. Baker meant by the "system of payments" that stopped working; he is referring to the system by which banks pay each other through over-night inter-bank loans. He thought we had maybe two weeks to avoid this situation of buying groceries with gold -- if you happened to have gold coins. You might think he is exaggerating. Actually he is understating what almost happened. I would rephrase it as:
If that happened, we would have to, like, go to buy our groceries with gold, on the black market because the supermarkets would be empty, if there was any food to be had in the cities at all, because the entire global and national food delivery system had ceased to function because trade financing had ended.
So in the next diary, I would like to explain how and why the "system of payments stopped working," and if that circumstance had continued, you would not have been able to deposit a check or draw money out of your account, particularly if your bank and your employer's bank were different banks, because indeed, inter-bank lending had ground to a halt. When pundits were saying in the fall of 2008 that "officials say we have to get the banks lending again," most of the public and most of the pundits didn't realize that the officials saying this meant "we have to get banks lending to each other," not necessarily to the consumers and businesses; they had to do that too, but all that would be irrelevant if the banks continued to refuse to lend to each other.
After that, I intend to write a diary about how, even if you were lucky enough to have a job, and a bank account with your employer's bank, it wouldn't have mattered, because America was about to be unable to meet payroll. That's because the commercial paper market collapsed. That may sound arcane to most people, but it's how many thousands of employers make payroll and buy inventories.
Then, I'd like to explain how, even if you had a functioning bank, an employer who made payroll, and money (or gold), there wouldn't have been anything to buy because the banking systems that enable shipping and rail and trucking had collapsed. We were approaching zero volume of shipping of food, iron, coal, oil, and other commodities. The price of shipping had collapsed 98%, as a result of lack of importers and exporters able to get letters of credit and because even if they were lucky enough to get them, banks weren't accepting them. The so-called "ghost fleet" of Singapore of idle ships began building up around this time.
I suppose the collapse of shipping didn't really matter, because the trains that take stuff from harbors across the country were becoming idled, and the train yards were full of empty box cars. And it didn't matter that the trains weren't running because the system that finances truckers had collapsed and truck drivers were about to pull over to the sides of our highways.
As these systems teetered on the edge of the cliff, so to speak, the hedge funds and issuers of credit default swaps were standing by to give them a shove. I'd also like to explain why credit default swaps were much, much worse than almost anyone has explained in print.
And one last thing -- it was time to plant the winter wheat crop (which is planted in the fall, not the spring), which constitutes about 75% of the nation's wheat supply, and credit for winter wheat farmers had seized up. So by spring harvest, there wouldn't have been that much food to ship by sea, rail or truck anyway.
That's why in the fall of 2008, as I was watching this situation unfold, I realized it was very prudent to buy 100 pounds of chicken feed and a bunch of chickens, as well as a few sacks of rice and lots of firewood.