The Response to the Economic Crisis

The crisis in the economy's financial markets has now cascaded into a severe economic downturn. In response, policy-makers have been forced to give up the fiction that markets are self-regulating and that there is no need for the government to intervene in their functioning. It has provided resources to financial institutions, engineered the take-over of some financial houses by others and become a part-owner of the large insurance company, A.I.G.

But as welcome as is the end of laissez-faire ideology, the government interventions that have occurred have been distinctly one-sided. To date, virtually all of the money expended by the government has been provided to financial institutions. That these expenditures have not reversed the economic slide downward points to the fact that their adoption has less to do with their effectiveness than with the fact that financial sector is the single most important source of political campaign funds. The government policies that have been adopted reflect the political influence that campaign contributors provide to big donors.

As a result, in both the short-run and the long-run, our society suffers. In the near term, we have failed to adopt the policies that have the greatest likelihood of successfully stimulating the economy. Over the long-term, the policies that have been implemented make it less likely that we will successfully address our long-term needs. The vast amounts of money that are being inefficiently spent today mean that it will be difficult to find the funds to use on the urgent needs of tomorrow.

The clearest example of the short-run misallocation of resources concerns our failure to provide adequate assistance to mortgage holders. Mortgage foreclosures mean that banks take over houses and then try to sell them. The resulting increase in supply depresses home prices, worsening the already fragile financial foundation of the banks. The financial system would be far better served if the government stabilized housing prices by providing relief to hard-hit home owners. But in a political setting where political contributions influence policy and where most mortgage-holders cannot make big political contributions, they lack the clout necessary to save both themselves and the banks.

A similar pattern exists with regard to the question of financial regulation. Virtually all observers agree that the financial meltdown was triggered by government's failure adequately to regulate the markets that emerged for "products" such as derivates and credit default swaps. These markets developed outside of the purview of existing regulations, and the participants in these markets used their wealth and lobbying power to ensure that regulations were not extended to them. Even today, a year and a half after two hedge funds owned by Bear Stearns collapsed, nothing has been done to bring these and other exotic financial assets under regulatory control. The irony of their financial clout is that it is self-defeating. Probably nothing would do more to instill enhanced investor confidence in financial markets than the knowledge that there is a policeman on the beat responsible for making sure that the information that is provided is clear and accurate and that insider trading is under control.

The government's response to the economic crisis has similarly perverse consequences for the long-run. Two of the biggest challenges facing the country have been neglected. In order to mitigate damaging climate change, we urgently need to develop non-fossil fuel technologies to generate electricity. And in order to reverse the trend towards increased income inequality, we will have to upgrade the quality of education in our public schools and ensure that more people can afford to attend college. Neither can be done cheaply, but increased expenditures on each could be part of a strategy to stimulate the economy in the short-run. However, since the people affected by public education are not among the largest political donors, and since environmentalists rank near the bottom of contributors, cut-backs are occurring in these areas rather than increased spending.

In a crisis, fault lines become clear. Free market principles clearly have been found wanting, and thankfully we are quickly moving beyond that ideology. But because our political system too much reflects the power of wealth, we have failed to develop a political response that can speak to the society's urgent short and long-term needs.

Comments

[Rule Of Law]

Jobs and Energy! Give the middle class enough of both and we will save this country from the predators that rule it yet again!

[Rule Of Law]

This response was to Kassandra who has been washed---

America is now governed by the banks. how'd you like THEM apples?
Posted 11:16 AM on 11/25/2008

American War of Independence--Bank of England demands that the colonies be punished for printing their own currency.

War of 1812--England attacks again on the threat that we will allow the charter on our Central Bank to sundown, ending the foreign control of our economy. War suddenly ends when the President has a change of heart re Central Bank.

Term of President Jackson--He balances the budget, ends the Federal debt (for the 1st and last time) and shuts down the Central Bank. 3 assassination attempts, all failed, by the international banking powers.

Lincoln and the Civil War--House of Rothschild foments Secession in the South to create a new client state for their bank, while funding both sides during the ensuing war. Lincoln prints "Greenback" dollars which drives the heads of European banking into a frenzy. Lincoln assassinated.

1913--Creation of the Federal Reserve--a private bank charging us interest on our own money, followed by passage of the Income Tax, entry into WW1, the creation of enormous war debt paid for, coincidentally, by the new income tax, and then the Great Depression which allowed for the first consolidation of Wealth by the banks and the Oligarchy.

JFK--prints Silver Certificates--NOT Federal Reserve dollars, and plans to end the Federal Reserve. Assassinated 61 days later.

[DuganS1]

The idea that mitigating climate change and trying to reverse income inequality by increasing funding for education are our two most pressing needs, or even that either would help stimulate the economy more so than aiding the financial system, is simply laughable. If we can't reverse the collapse in the US financial system, millions will lose their jobs and the economy will sink into a depression. Climate change is a feel good policy, but there is little the US govt can do about the overall worldwide problem to make it a priority over many more pressing matters. About increasing funding for education, government on all levels has been pumping increasing larger amounts of money into our education system for decades. Pumping in a lot more will not solve the underlying problems and have only a small benefit in my opinion. Right now we need to fix the financial system first and the housing problem second. Third, the government needs to help the economy create jobs.

[joebaggadonuts]

You have it exactly backwards. It's Jobs number one, Housing number two, and then finance will take care of itself because the assets killing it won't be toxic any longer. It''s called building a foundation instead of expecting that continually pissing on the little people will make them grow solvent.

[DuganS1]

"That these expenditures have not reversed the economic slide downward points to the fact that their adoption has less to do with their effectiveness than with the fact that financial sector is the single most important source of political campaign funds."

Is the author actually serious about the above comment?

Second, the private sector and the government have already been working to help home owners. The problem is that it is too slow a process to help the bond and credit markets, which is by far our most pressing problem right now.

[Thermodynamics]

The link below provides an actual list of banks receiving infusion money from Treasury.
Yep, mine, Regions, is on the list for $3.5B

My complaint is that my bank has a TV dominating the lobby and it is always tuned to Fox News. I find it absurd that my bank provides a pulpit for the propaganda that gave us this mess but is now a "socialized bank". I plan to discuss this matter with the manager - my little contribution to the long term project of getting more funding to projects that can help us in the future. He should at least sometimes show other TV news, or maybe C-span.

Climate change issues, education, solar electricity all are long term projects that will need funding. We also need financial regulation and transparency. Fox News slants its commentary against such progressive initiatives. We need to do all we can on a grassroots level to promote positive change.

http://bailoutsleuth.com/2008/11/nearing-the-century-mark/#more

[joebaggadonuts]

good luck with your bank.