Thursday, July 02, 2009

Fix the economy to fix the banks

A great post by Mosler that encapsulates exactly what is wrong with the Obama administration's approach to the crises, and by extension, academic economics. To paraphrase:
The problem with the banks is all the bad loans on their books. But why are those loans bad? What makes any loans bad? Just one thing makes good loans go bad, and that’s people who can’t make their loan payments. Bad loans are loans where people aren't making their payments. If you can make your payments, the loans are good loans, and banks have no problems.

It’s that simple.

So what’s the Obama administration doing about all this? They are keeping the banks alive with trillions of dollars of funding. Yes, throwing trillions at the banks keeps them alive, but it doesn't help anyone make their payments. So the loans are still bad, and the economy is still terrible
Now you know why this crises seems to complicated. When put simply, it makes a mockery of academic economics, and by extension White House policy. Mosler continues:
the States have their own crisis going on.

You’ve all heard about California about to go bankrupt, and lots of other States in big trouble as well. In fact, when the Federal Government let the economy fall apart last year, all the States saw their incomes collapse. And now they are all cutting their essential public services, including police, motor vehicle services, health care services, and even university classes. So what does the Obama administration do? They tell the States to submit lists of thousands of what’s called 'shovel ready projects' to Congress. And then Congress decides what to fund. The States need money to keep the hospitals and the highway patrol open, but Congress will only give them money for new public works projects.
As the private sector increases net savings, aggregate demand falls, and the deficit increases to fund that savings only through unemployment. But Obama funnels money to banks, as the US is now about three months away from double digit national unemployment.

The solution? A payroll tax holiday will fund private savings, and make loans good as workers will remain employed, and have extra take home income to pay their mortgage. A per capita grant to States will keep hospitals open, and let roadworks be postponed for another day. The private sector needs jobs, as the gap between potential output, and actual output, continues to grow. The States need money to continue providing services their constituents actually need. The Federal deficit must grow, by accounting, for the private sector to save. The worst way to grow that deficit is through unemployment.


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