L. Randall Wray, professor of economics at the University of Missouri-Kansas City and Research Director with the Center for Full Employment and Price Stability, is a leader of the so-called "Kansas City School" of economics, which builds on the work of Abba P. Lerner, John Maynard Keynes and Hyman P. Minsky.
Wray, who has written in favor of a permanent federal jobs program and argued that insurance is a terrible way to provide health care coverage, presents another highly controversial point of view in his latest essay, Wall Street Doesn't Get It. What follows is just an excerpt. It's always advisable to read all of such pieces before deciding whether the the author has hit the bullseye or has gone wildly astray. So I urge you to click on the link:
And that is what this whole Wall Street house of cards boils down to: risky bets, private profits, socialized losses. Worse, yet, it misaligns interests so that Wall Street profits are higher if there is economic and social instability — and Wall Street is powerful enough to generate exactly those conditions. Until Wall Street is constrained and downsized, it will continue on its path of death and destruction.
In spite of all the happy talk about the end of the recession and the successful resolution of the financial crisis, things are much worse today than they were two years ago. Commercial real estate is toast. Option ARMs (the toxic mortgages with low teaser rates) are resetting ahead of schedule because of clauses that allow mortgage holders to jack up rates as homeowners go underwater. Every class of consumer debt — much of it securitized — looks a lot like subprime mortgages. Euroland and Japan are cratering, the UK is going to try to reduce its budget deficit, and even China has decided to slow its growth to reduce inflation pressures.
Note that all of these markets are linked, and for every debtor that goes delinquent there are numerous linked financial products that go bad. There are well over $500 trillion of those products still floating around. While it is true that every derivative has both a buyer and a seller — so that every "event" should be a zero-sum game, with the seller paying the buyer — that works only if bad bets can be covered. But we know that Wall Street institutions are not good counter-parties. So what happens instead is that there is a rush to liquidity as everyone tries to sell out positions in assets to cover their commitments, causing asset values to plummet. Be prepared for another global crisis by summer. And also get ready for another Washington bail-out of Wall Street, because the $23 trillion promised so far will not be enough.
So here’s the best policy. Unwind the $23 trillion committed by the Treasury and the Fed. Let the market operate. It wants to close down all the "too big to fail" institutions. The market is right—these institutions are not necessary, indeed, they represent the biggest problem facing the financial sector. Their CEOs instinctively recognize that these institutions serve no useful purpose—which is why their efforts are directed to creation of ever more dangerous and socially destructive financial products. As I have said before, Washington needs to get on the right side of the leverage ratio: for every dollar of real productive activity and income generated, there can be $30 or more of leveraged financial bets. Rather than trying to make all of those good, it makes far more sense to allow default to wipe out the bets, and then work to save the productive activity, jobs, and income.
I know that Wall Street’s protectorate, led by Geithner, Rubin, and Summers, will claim that failure of the behemoths will create an economic disaster. But that is not true. All real economic fall-out can be contained and the economy will emerge much healthier. Replace Wall Street’s life support with support for mainstreet. Start with a payroll tax holiday (don’t collect any payroll taxes from employers or employees for the next two years); add $500 billion for direct job creation to immediately get to full employment; add another $500 billion for relief of state and local governments distributed on a per capita basis; and give all mortgaged homeowners the option of immediate default with a "rent to own" plan. True recovery would begin immediately, and we’d be out of the mess by summer.
I guess I understated with "highly controversial." Wray, of course, does not have to worry about getting his proposal past the sentinels of oligarchy in the Congress. Let's face it, given its current make-up, nobody could do so. That, however, doesn't mean the professor's proposed solution is wrong.