Saturday, March 6, 2010

The Need To Hit Bottom

It is said of people who live with addictions of various sorts that they cannot start to recover from the ravages of their problem until they have hit bottom. Hitting bottom is generally a state of affairs that does not look good to an outsider, hitting bottom means that the addict has lost all self respect, has no friends, no money and no way to look after themselves. Then and only then are they ready to start up the slow, painful path to recovery. Unfortunately there are some economic observers who draw the same analogy for American consumers.



I am not, as a rule, fond of the term "consumer" for Americans who live and work and spend money but it is the term preferred by our leaders to describe us at the bottom of the ant heap and to some extent in this case it is an accurate enough term. Rolfe Winkler writing for Reuters on a discussion of how to extricate ourselves from this mess discusses proposals to corral bank lending backed by the public purse, and yet Winkler's commentary is centered on just how much pain we the workers will have to go through to get things re-organized, as though the banksters are blameless.



Interestingly the Institute does not blame the great unwashed for the lack of action on serious financial reforms. But they do argue (they being Elizabeth Warren, George Soros and Eliot Spitzer among many others) that lack of visible protest in the US, unlike in Europe, is a big reason why politicians have not yet felt obliged to fight back against the corporate lobbyists. Winkler says, in the March 4th article in Reuters, that too many people have too much to lose. There are still lots of people who are afraid of losing their jobs and in the current free fall job losses are of greater concern than reforming the failed and STILL thieving banking system.



In terms of addiction then, we could say that American workers still need their credit fix, and to sort out the banking system the thinkers at the Roosevelt Institute argue that credit will have to be squeezed so tight nothing will move. Without a shut down of the credit system they say we will continue to see a stagnating economic system, until the bad assets on the banks books are cleared up. However if we shut down the credit flow, such as it is, even more jobs will be lost.

It may be that we the people are not yet ready to face the ultimate pain of a true Depression, but it seems odd to me to blame the people who have been given the least information to work with, the people who have been lied to the most, and who are not expected, by those in power, to have the fortitude to take what's coming. I wonder of the bankers, the people who landed us in this mess have the guts to take their medicine, because so far they have shown no sign of being able or willing to do so. And curiously, Rolfe Winkler doesn't seem to think they should be punished. He is far more keen to see how much we can be made to writhe:

Yet the most vocal supporters of financial reform, which should properly be called “lending reform,” also whine that banks and the government aren’t lending enough! But we can’t have it both ways.

Real reform means cutting lending, it means more jobs will be lost. And Americans aren’t yet willing to make that trade, no matter how mad they are about bailouts.

A reason we got substantive financial reform in the mid ’30s is that folks had nothing left to lose. Real output fell 30% peak to trough during the Great Depression.

During last year’s recession, output fell just 3%. We’ve still plenty to lose if you compare debt levels today with those leading up to the Depression.

That’s not to suggest that reform isn’t absolutely necessary. But the speakers at Roosevelt Institute’s conference did a disservice to their audience by not discussing the costs. Some even suggested the credit engine can magically be made to run at close to full speed even as it’s in the shop for repairs.

Luckily, Roosevelt is led by the very capable Johnson, who has no illusions about the costs of bank reform. He acknowledges that financial fixes will reduce lending and output, but speaks about the need to control the velocity of that decline. The test of his leadership, and of Roosevelt’s relevance, will be whether they can convince America to sacrifice for reform.

I say let's hang the banksters by their goolies, then reform the banking laws under the terms of the Volcker rule, and then lets start up lending again, on a rational basis. That should spread the pain around more fairly.

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