Friday, March 20, 2009

Galbraith on the economic crisis

"Big banks should be run largely by men and women with the long-term perspective, outlook, and temperament of middle managers, and not by the transient, self-regarding plutocrats who run them now."

So says economist Jamie Galbraith in his article describing the seriousness of the current economic crisis and the difficulties economists and poliymakers who rely on them are having in comprehending it, No Return to Normal Washington Monthly, accessed 03/20/09.

The entire article is well worth reading. Galbraith keeps stressing how crazy it is for Democrats to be even considering cooperating with the Republican schemes to phase out Social Security, Medicare and Medicaid:

... the initial [stimullus] package was affected by the new team’s desire to get past this crisis and to return to the familiar problems of their past lives. For these protégés of Robert Rubin, veterans in several cases of Rubin’s Hamilton Project, a key preconception has always been the budget deficit and what they call the "entitlement problem." This is D.C.-speak for rolling back Social Security and Medicare, opening new markets for fund managers and private insurers, behind a wave of budget babble about "long-term deficits" and "unfunded liabilities." To this our new president is not immune. Even before the inauguration Obama was moved to commit to "entitlement reform," and on February 23 he convened what he called a "fiscal responsibility summit." The idea took hold that after two years or so of big spending, the return to normal would be under way, and the costs of fiscal relief and infrastructure improvement might be recouped, in part by taking a pound of flesh from the incomes and health care of the old. [my emphasis]
Obama and his team did manage at the last minute to steer the Fiscal Responsibility Summit away from shills who wanted to attack Social Security to more discussion about the need for health care reform. But with Pete Peterson's billion-dollar kitty at work out there to campaign against Social Security, this is an issue we're still going to have to fight even under a Democratic administration with large Democratic majorities in Congress.

He continues later in the article:

... we should offset the violent drop in the wealth of the elderly population as a whole. The squeeze on the elderly has been little noted so far, but it hits in three separate ways: through the fall in the stock market; through the collapse of home values; and through the drop in interest rates, which reduces interest income on accumulated cash. For an increasing number of the elderly, Social Security and Medicare wealth are all they have.

That means that the entitlement reformers have it backward: instead of cutting Social Security benefits, we should increase them, especially for those at the bottom of the benefit scale. Indeed, in this crisis, precisely because it is universal and efficient, Social Security is an economic recovery ace in the hole. Increasing benefits is a simple, direct, progressive, and highly efficient way to prevent poverty and sustain purchasing power for this vulnerable population. I would also argue for lowering the age of eligibility for Medicare to (say) fifty-five, to permit workers to retire earlier and to free firms from the burden of managing health plans for older workers.

This suggestion is meant, in part, to call attention to the madness of talk about Social Security and Medicare cuts. The prospect of future cuts in this modest but vital source of retirement security can only prompt worried prime-age workers to spend less and save more today. And that will make the present economic crisis deeper. In reality, there is no Social Security "financing problem" at all. There is a health care problem, but that can be dealt with only by deciding what health services to provide, and how to pay for them, for the whole population. It cannot be dealt with, responsibly or ethically, by cutting care for the old. [my emphasis]
Galbraith's articles deal with a number of others issues in the current crisis, issues which are often obscured by economists' jargon and pitchmen's hype, much of which our high-end press corps is unable to explain or too lazy to attempt to do so: the credit crunch, the "liquidity trap", the multiplier effect of stimulus, the significance of the failure of the finance system, why neither Democrats nor the general public should be worrying over budget deficits right now, and other matters, as well.

One of David Kurtz' readers at TPM also has some useful perspective on the scandal of bonuses in financial firms, a scandal which has in reality been around for many years and is not at all restricted to AIG and Bank of America/Merrill Lynch: The Bonuses Scam Ain't New 03/20/09. My understanding is that the current tax laws encourage the payout of some compensation in bonuses. But that reader makes the important point that it is a practice that has spread widely in the financial industry and the way it is done in reality has little legitimate justification even in a purely business sense.

Matthew Goldstein in AIG's Mean Business Business Week Online 03/19/09 looks at question relative to the current controversy over the bonuses. AIG has claimed that it is phasing out its AIG Financial Products unit, the grooup that came up with the exotic derivatives that were chiefly responsible for wrecking the firm's finances. This is yet another question about the bonuses. Many of them are not only being paid to the unit directly responsible for destroying the company's solvency. But they are also justifying the bonuses by the need to retain talent - for a unit they are supposedly phasing out. Goldstein writes that this claim of a planned phase-out is a dubious one:

First, there was the controversy over those lavish retention bonuses the company approved for dozens of employees at AIG Financial Products, which sold hundreds of billions of dollars in insurance-like products on now ailing securities. Now there’s an allegation that the troubled Connecticut-based operation is blocking at least one longtime customer from moving its business elsewhere. The allegation, made in a recently filed federal lawsuit, suggests that AIG may not be so eager to wind down all of its far-flung derivatives deals.

A large Los Angeles-based asset management firm claims AIG Financial Products is playing hardball and preventing it from terminating a series of derivatives contracts. TCW Asset Management claims the AIG division is “interfering" with the asset manager’s efforts to find another trading partner—even threatening to file “suit against the new counterparty for tortious interference with AIG-FP’s purported contractual rights."
He concludes that AIG's dispute with TCW could mean that "AIG Financial Products may be around a lot longer than many of us imagined. And, of course, the longer AIG Financial Products is around, the longer those bankers who got us in this mess will keep drawing paychecks."

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