One of the mysteries of governmental responses to the current financial crises in the US and Europe has been the call for more austerity and belt tightening, even at the risk of social turmoil. One would think that the natural tendency for policy makers fighting a depressed economy is for increased government spending to stimulate employment and growth. And yet we hear endless blathering about the importance of balancing budgets and closing deficits, by which is meant cutting social programs that benefit the majority rather than cutting spending on defense or raising taxes on the wealthy.
While one can blame this broadly on the nature of oligarchic power that does not really care that much about the unemployed or the misery of the 99%, Steve Waldman gets more specific in his diagnosis of what is driving this behavior. He says that it arises from the desire to protect the purchasing power of creditors by avoiding inflation at all costs.
But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.
This preference is not at all difficult to understand. The ailing developed economies are plutocratic democracies. “The people” do have power, but influence is weighted in a manner correlated with wealth. The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is panicked by the prospect of becoming poorer. For such a person, the depression status quo is unfortunate but tolerable. The risks associated with expansionary policy, on the other hand, are absolutely terrifying.
Implementing policies that benefit rich older people. That sounds like my rant from two years ago against greedy old people.
Sheila Bair was former chairman of the Federal Deposit Insurance Corporation. Surveying the current economic policies that favor the big banks and other moneyed interests, she unleashes perhaps the most sarcastic attack ever penned by a former high government official, suggesting that the government offer money to ordinary people on the same terms that they have given the big banks.
Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on.
[M]y proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough.
Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do.
This is America. Why should hedge funds and big financial institutions get all the goodies?
Her biting sarcasm lays bare the double standards at work. Matt Taibbi comments on her piece.
But it should be borne in mind that she is not saying that the Fed should stimulate the economy in ways that will benefit ordinary people rather than giving free money to big banks. Paul Krugman says that she is opposed to the Fed trying to stimulate the economy at all, for fear of creating a bond bubble.