Local Bias: Conscience of A Liberal

Monday, March 29, 2010

Punks Vs Plutocrats Re Financial Reform

Published on Monday, March 29, 2010 by The New York Times
Punks and Plutocrats

by Paul Krugman

Health reform is the law of the land. Next up: financial reform. But will it happen? The White House is optimistic, because it believes that Republicans won't want to be cast as allies of Wall Street. I'm not so sure. The key question is how many senators believe that they can get away with claiming that war is peace, slavery is freedom, and regulating big banks is doing those big banks a favor.

Some background: we used to have a workable system for avoiding financial crises, resting on a combination of government guarantees and regulation. On one side, bank deposits were insured, preventing a recurrence of the immense bank runs that were a central cause of the Great Depression. On the other side, banks were tightly regulated, so that they didn't take advantage of government guarantees by running excessive risks.

From 1980 or so onward, however, that system gradually broke down, partly because of bank deregulation, but mainly because of the rise of "shadow banking": institutions and practices - like financing long-term investments with overnight borrowing - that recreated the risks of old-fashioned banking but weren't covered either by guarantees or by regulation. The result, by 2007, was a financial system as vulnerable to severe crisis as the system of 1930. And the crisis came.

Now what? We have already, in effect, recreated New Deal-type guarantees: as the financial system plunged into crisis, the government stepped in to rescue troubled financial companies, so as to avoid a complete collapse. And you should bear in mind that the biggest bailouts took place under a conservative Republican administration, which claimed to believe deeply in free markets. There's every reason to believe that this will be the rule from now on: when push comes to shove, no matter who is in power, the financial sector will be bailed out. In effect, debts of shadow banks, like deposits at conventional banks, now have a government guarantee.

The only question now is whether the financial industry will pay a price for this privilege, whether Wall Street will be obliged to behave responsibly in return for government backing. And who could be against that?

Well, how about John Boehner, the House minority leader? Recently Mr. Boehner gave a talk to bankers in which he encouraged them to balk efforts by Congress to impose stricter regulation. "Don't let those little punk staffers take advantage of you, and stand up for yourselves," he urged - where by "taking advantage" he meant imposing some conditions on the industry in return for government backing.

Barney Frank, the chairman of the House Financial Services Committee, promptly had "Little Punk Staffer" buttons made up and distributed to Congressional aides.

But Mr. Boehner isn't the problem: Mr. Frank has already shepherded fairly strong financial reform through the House. Instead, the question is what will happen in the Senate.

In the Senate, the legislation on the table was crafted by Senator Chris Dodd of Connecticut. It's significantly weaker than the Frank bill, and needs to be made stronger, a topic I'll discuss in future columns. But no bill will become law if Senate Republicans stand in the way of reform.

But won't opponents of reform fear being cast as allies of the bad guys (which they are)? Maybe not. Back in January, Frank Luntz, the G.O.P. strategist, circulated a memo on how to oppose financial reform. His key idea was that Republicans should claim that up is down - that reform legislation is a "big bank bailout bill," rather than a set of restrictions on the banks.

Sure enough, a few days ago Senator Richard Shelby of Alabama, in a letter attacking the Dodd bill, claimed that an essential part of reform - tougher oversight of large, systemically important financial companies - is actually a bailout, because "The market will view these firms as being ‘too big to fail' and implicitly backed by the government." Um, senator, the market already views those firms as having implicit government backing, because they do: whatever people like Mr. Shelby may say now, in any future crisis those firms will be rescued, whichever party is in power.

The only question is whether we're going to regulate bankers so that they don't abuse the privilege of government backing. And it's that regulation - not future bailouts - that reform opponents are trying to block.

So it's the punks versus the plutocrats - those who want to rein in runaway banks, and bankers who want the freedom to put the economy at risk, freedom enhanced by the knowledge that taxpayers will bail them out in a crisis. Whatever they say, the fact is that people like Mr. Shelby are on the side of the plutocrats; the American people should be on the side of the punks, who are trying to protect their interests.
© 2010 The New York Times

Paul Krugman is professor of Economics and International Affairs at Princeton University and a regular columnist for The New York Times. Krugman was the 2008 recipient of the Nobel Prize in Economics. He is the author of numerous books, including The Conscience of A Liberal, and his most recent, The Return of Depression Economics.

Monday, February 22, 2010

The Bankruptcy Boys

Cover of The Conscience of a Liberal

Published on Monday, February 22, 2010 by The New York Times
The Bankruptcy Boys

by Paul Krugman

O.K., the beast is starving. Now what? That’s the question confronting Republicans. But they’re refusing to answer, or even to engage in any serious discussion about what to do.

For readers who don’t know what I’m talking about: ever since Reagan, the G.O.P. has been run by people who want a much smaller government. In the famous words of the activist Grover Norquist, conservatives want to get the government “down to the size where we can drown it in the bathtub.”

But there has always been a political problem with this agenda. Voters may say that they oppose big government, but the programs that actually dominate federal spending — Medicare, Medicaid and Social Security — are very popular. So how can the public be persuaded to accept large spending cuts?

The conservative answer, which evolved in the late 1970s, would be dubbed “starving the beast” during the Reagan years. The idea — propounded by many members of the conservative intelligentsia, from Alan Greenspan to Irving Kristol — was basically that sympathetic politicians should engage in a game of bait and switch. Rather than proposing unpopular spending cuts, Republicans would push through popular tax cuts, with the deliberate intention of worsening the government’s fiscal position. Spending cuts could then be sold as a necessity rather than a choice, the only way to eliminate an unsustainable budget deficit.

And the deficit came. True, more than half of this year’s budget deficit is the result of the Great Recession, which has both depressed revenues and required a temporary surge in spending to contain the damage. But even when the crisis is over, the budget will remain deeply in the red, largely as a result of Bush-era tax cuts (and Bush-era unfunded wars). And the combination of an aging population and rising medical costs will, unless something is done, lead to explosive debt growth after 2020.

So the beast is starving, as planned. It should be time, then, for conservatives to explain which parts of the beast they want to cut. And President Obama has, in effect, invited them to do just that, by calling for a bipartisan deficit commission.

Many progressives were deeply worried by this proposal, fearing that it would turn into a kind of Trojan horse — in particular, that the commission would end up reviving the long-standing Republican goal of gutting Social Security. But they needn’t have worried: Senate Republicans overwhelmingly voted against legislation that would have created a commission with some actual power, and it is unlikely that anything meaningful will come from the much weaker commission Mr. Obama established by executive order.

Why are Republicans reluctant to sit down and talk? Because they would then be forced to put up or shut up. Since they’re adamantly opposed to reducing the deficit with tax increases, they would have to explain what spending they want to cut. And guess what? After three decades of preparing the ground for this moment, they’re still not willing to do that.

In fact, conservatives have backed away from spending cuts they themselves proposed in the past. In the 1990s, for example, Republicans in Congress tried to force through sharp cuts in Medicare. But now they have made opposition to any effort to spend Medicare funds more wisely the core of their campaign against health care reform (death panels!). And presidential hopefuls say things like this, from Gov. Tim Pawlenty of Minnesota: “I don’t think anybody’s gonna go back now and say, Let’s abolish, or reduce, Medicare and Medicaid.”

What about Social Security? Five years ago the Bush administration proposed limiting future payments to upper- and middle-income workers, in effect means-testing retirement benefits. But in December, The Wall Street Journal’s editorial page denounced any such means-testing, because “middle- and upper-middle-class (i.e., G.O.P.) voters would get less than they were promised in return for a lifetime of payroll taxes.” (Hmm. Since when do conservatives openly admit that the G.O.P. is the party of the affluent?)

At this point, then, Republicans insist that the deficit must be eliminated, but they’re not willing either to raise taxes or to support cuts in any major government programs. And they’re not willing to participate in serious bipartisan discussions, either, because that might force them to explain their plan — and there isn’t any plan, except to regain power.

But there is a kind of logic to the current Republican position: in effect, the party is doubling down on starve-the-beast. Depriving the government of revenue, it turns out, wasn’t enough to push politicians into dismantling the welfare state. So now the de facto strategy is to oppose any responsible action until we are in the midst of a fiscal catastrophe. You read it here first.
Copyright 2010 The New York Times Company

Paul Krugman is professor of Economics and International Affairs at Princeton University and a regular columnist for The New York Times. Krugman was the 2008 recipient of the Nobel Prize in Economics. He is the author of numerous books, including The Conscience of A Liberal, and his most recent, The Return of Depression Economics.

Monday, March 29, 2010

Punks Vs Plutocrats Re Financial Reform

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Monday, February 22, 2010

The Bankruptcy Boys