by Jerome a Paris
Wed Aug 22nd, 2007 at 04:10:55 AM EST
Martin Wolf has really become the spokesperson for the moneyed elites against the rest of us. After pretending that the bubble had been obvious all along despite mocking the critics along the way, he is now trying to shift the blame for the current crisis away from the neoliberal ideology he has been defending towards ... well, anybody but him.
And he he is unapologetic about is, as his title suggests: The Federal Reserve must prolong the party
The Fed can indeed be accused of being a serial bubble-blower. But this is not because it has been managed by incompetents. It is because it has been managed by competent people responding to exceptional circumstances.
Below is my deconstruction of his self-serving argumentation.
The savings glut is a palpable reality. But it is important to be precise about what it means. What one means by a global savings glut is an excess of savings over investment (or income over spending) in much of the world, largely offset by an excess of investment over savings (or spending over income) in a limited number of countries among which the US is predominant. In 2006, the current account surpluses – or excess of savings over investment – in the countries with surpluses was about $1,300bn, or a sixth of the gross savings of the world, excluding the US. The US current account deficit absorbed close to two-thirds of this surplus. The US has been the world’s spender and borrower of last resort.
Since global long-term real interest rates have been modest, the argument that profligate US spending has been crowding out spending elsewhere is not credible. It is more plausible that excess savings elsewhere have been “crowding in” US spending.
This argument is worth explaining in detail. The claim, made by Alan Greenspan and Ben Bernanke, and given credence by Martin Wolf, is that they should not be blamed for the asset price bubble, because it is not caused by them providing cheap debt and liquidity, but by the rest of the world not spending enough and needing somewhere to park that money - and given that the US is the best place to park money (the safest, or the most profitable, take your pick at the most flattering argument), the Fed simply had to provide the liquidity to do so. It was doing a public service, really, helping these silly foreigners out.
If foreigners are net providers of funds, some groups in the US must be net users: they must be spending more than their incomes and financing the difference by selling financial claims to others. The challenge for US policymakers is to ensure that these groups also spend enough to absorb the economy’s potential output. This required spending is in excess of potential gross domestic product by the size of the current account deficit.
Poor Americans, forced to spend more money than they have. Really, it's so unfair to criticize them when they are really doing us all a favor - a painful one too. (More on who's actually bearing the pain below)
Who did the offsetting spending since the stock market bubble burst in 2000? The short-term answer was “the US government”. The longer-term one was “US households”.
The US government moved massively from financial surplus into deficit, the total swing being 7 per cent of GDP, between the first quarter of 2000 and the third quarter of 2003. It is right to criticise the structure of the Bush tax cuts. Yet once the stock market bubble burst, how could a deep recession have been avoided without a fiscal boost?
See - he's a "neutral", moderate journalist, saying that "it is right to criticize" the structure of the tax cuts - not that he will do it himself. And no mention how that fiscal boost was spent, either. One million dead Iraqis is a statistic, anyway. Plus, they're brown people, who cares about them? But, hey, terrorism is a serious threat. And, again, the Bush administration was doing the world a service - by avoiding the appearance of a recession in the US.
Now look at US households. They moved ever further into financial deficit (defined as household savings, less residential investment). Household spending grew considerably faster than incomes from the early 1990s to 2006. By then they ran an aggregate financial deficit of close to 4 per cent of GDP. Nothing comparable had happened since the second world war, if ever.
And Americans did their part too. Shopping to save the planet! Kindly taking Chinese or Russian money to do so. How nice of them. An unprecedented effort!
For a period of six years – the longest since the second world war – US business invested less than its retained earnings. Businesses had become net sources, not users, of finance. One way of thinking of the private equity boom is as a tax-efficient way of extracting cash no longer needed by US (and other countries’) businesses.
And US business! Forced, again, by these damn foreigners to not invest and to "extract cash" it no longer needs and return it to shareholders in the form of extra profits and share buybacks. Really, they would have invested more if those damn foreigners hadn't forced them not to.
What has all this meant for policy? The answer is simple: the Fed has, willy nilly, pursued a monetary policy capable of inducing a huge and unprecedented financial deficit among US households.
Nothing that has happened has been a product of Fed folly alone. Its monetary policy may have been loose too long. The regulators may also have been asleep. But neither point is the heart of the matter. Assume that the US remains a huge net importer of capital. Assume, too, that US business sees no reason to invest more than its retained profits. Assume, finally, that the government pursues a modestly prudent fiscal policy. Then US households must spend more than their incomes. If they fail to do so, the economy will plunge into recession unless something else changes elsewhere.
Now, that's what I call a nice bit of revisionist history. Now let's look at things the other way round:
- policy is focused on increasing income for the rich. That means lower taxes for the rich (the Bush tax cuts) and corporate welfare (deregulation and pork, especially associated with the invasion and occupation of Iraq);
- monetary policy explicitly encourages asset bubbles (no regulation of the financial world and itsrisk taking; the "Greenspan put" tells markets that they will be bailed out if they lose money, and asset price inflation is not seen as inflation)
- meanwhile, to help increase profits, wages are squeezed. Moving factories to China (or simply threatening to do so) keeps wages down everywhere and workers in line;
As noted in the NYT yesterday, average incomes have been flat since 2000:
And as I added in yesterday's diary by TeamsterPower, the situation is even worse for most Americans: the increase in "average" income (or in GDP) has not benefitted the average American AT ALL: while these have grown since 2002, median wages, i.e. the actual ones for middle America, have not:
- to make this palatable to American citizens, and help them buy all the made in China junk, and avoid the otherwise inevitable recession that lower incomes would trigger, they are encouraged to keep on spending via debt - borrowing against their houses, or just consumer debt. Rates are low! Prices will go up! Thus, Americans spend money they don't have;
- Of course, that money has to be borrowed from somewhere. China is flush with dollars generated by multinational companies investing there to provide stretched US consumers with cheap stuff. That money barely stays with the Chinese (duh - if they were paid too much, China would no longer be "competitive") - it is repatriated as profits by the multinationals, or kept by Chinese authorities as reserves, and re-invested in US treasuries to avoid inflation inside China or exchange rate appreciation. So it's not China financing its exports, but the other way round: America kindly allowing China to provide it goods for monkey money. Enough of it stays in China for it to be worth it for them, I guess. Same with Russia, Saudi Arabia and other oil producers whose exports have recently skyrocketed: they are paid in IOUs.
So the reality is that an aggressive policy to transfer money to the rich, by an all-our combination of tax cuts, irresponsible (but well targetted) spending, and lax monetary policies is at the source of all this.
The asset bubble has been doubly useful - once to enrich the minority that actually owns most assets, and twice to allow the rest of Americans to appear somewhat richer despite their crumbling incomes (caused by the very same policies) and keep on spending.
The bubble was thus a way to extent the day of reckoning (i.e. the recession that, in normal times, punishes such reckless policies) beyond its due date, and to make it, when it will actually happen, a lot worse.
Suggesting, today, that yet another bubble should be inflated to hide the mess made by the previous ones is the height of irresponsibility: it will only make things worse for the real economy under the thin veneer of asset price inflation, and make the inevitable pain even worse.
But of course, that discourse has a simple goal - to try to hide what's really been happening, and shift the blame away from the culprits - the greedy, selfish, bloated ultra minority that has been gorging while the rest have barely stayed afloat.
Let's stop blaming the Chinese, or the Europeans or anyone else for not consuming enough, and let's say it clearly: there has been an explicit policy attempt to re-establish economic feudalism, to capture wealth away from the middle class and towards the very rich, mostly via financial engineering - whereby the very rich materialize tomorrow's expected wealth, using vastly inflated hypotheses, via the complicit (and heavily bribed) financial system, and grab it for themselves, leaving us with the future liabilities.
And let's make sure that the policy lessons from the inevitable economic crunch are the right ones:
- it's time to make bankers personally liable for the deals they get their banks into and that go wrong whether financially, legally, or at the very least reputationally;
- it's high time to restore punitive marginal rates of taxation, to dissuade short termist wealh capture and profiteering
- it's high time to create a separate funding mechanism for the military, based exclusively on fuel taxation - because frankly, that's all it's used for: access to energy - and restore government, shorn of that function, to concentrate on its real tasks - ensuring safety and security for its citizens, which starts by economic safety, and includes environmental safety, and essentially means regulation of corporations, not pork, and focus on long term investment in infrastructure and education.
The corporatist, classist agenda of our current elites is empoverishing us all. So yeah, it's not just the Fed's fault. It's also the administration's - and that of their enablers amongst the oh-so-reasonable punditry.