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Is “Major Social Upheaval” Coming if Obama Continues to Favor Banks over People?

Marshall Auerback

Marshall Auerback

I just came across a new (to me) blog this morning: New Deal 2.0: A Project of the Franklin and Eleanor Roosevelt Institute. The latest post is by Marshall Auerback, an investment manager and consultant.  Auerback suggests that the administration’s current economic policies are going to lead to disaster.

State and local governments have been forced into draconian budget cuts, firing workers who are among the most reliable in making their mortgage payments–when they have jobs: firemen, policemen, teachers, civil servants.

Yet the Obama administration won’t spend even a small fraction of what it has wasted on the banks to cover state shortfalls. The guarantee of $5.5bn in short term notes for California was deemed to be fiscally irresponsible, yet hundreds of billions have already been allocated to the likes of Citigroup, AIG, and Goldman Sachs, all of whom have already beefed up salaries and bonuses as they emerge from the embrace of the federal government.

In addition, he points out that special government policies toward banks is doing nothing to force banks to start lending to consumers again.

Banks are also benefiting from lending programs that effectively allow them to borrow at zero and reinvest in Treasuries at around 3%. A bank doesn’t have to do anything to make money. The banks’ return on equity is going to be very good. They are going to be able to restore their finances.

While this is good for banks, is it good for anyone else? The problem is the government’s “free money” program means banks have little or no incentive to do any actual lending. Combined with rising unemployment and the ongoing housing crisis, this means any recovery is likely to be muted, at best, especially given the ongoing weakness in the real estate market. Growing income inequality will likely be perpetuated and exacerbated with all of the resultant social strains. And in the meantime, the siren songs will grow that we are a nation addicted to debt, deficit spending our way to economic disaster.

According to Auerback, what we need now is “robust stimulus.” The government must create money and spend it in order to increase demand. The only other choice he says it to allow “debt deflation rip,” meaning basically that whatever consumers are using to secure loans (e.g., their homes) will continue to decrease in value so that they own much more than the property is worth.

Statements by President Obama that “we are out of money” do not help, because they imply that there is an operational constraint on fiscal policy, beyond which the government dare not go. They feed the prevailing paradigm about “debt sustainability” and “national solvency” and thereby work at cross purposes. What President Obama, Fed Chairman Bernanke, and Treasury Secretary Geithner must say is that until the government deficit spending and the improvement in the trade balance exceeds desired net private sector saving, we can create all the money we want – it simply will not be enough to driver final product prices higher unless and until we succeed in restoring aggregate demand to sufficiently high credible levels where a self-sustaining economic recovery can take place….

I have to wonder why TARP, which is essentially a purchase of financial assets (and, hence, better left in the hands of the Fed, as Treasury is supposed to buy ‘real things’) was placed in the hands of Treasury. It’s almost as if this was planned deliberately so as to provide the anti-government folks with a cudgel with which to beat back supporters of activist government.


No kidding. That’s what we at The Confluence have been saying for quite awhile now. So what does Auerback think is coming if the Obama administration doesn’t shift course soon?

[T]he Obama administration[‘s]….actions…suggest that everything is ad hoc and that they are operating out of their depth, in effect continuing the same policies of the Bush/Paulson period, but on a much greater scale.

Ironically, this ultimately will also prove highly inimical to the interests of finance itself. When most of the home owning voters cannot pay their major debt or have no incentive to pay their mortgage debt, there will either be a debtors revolt that society will sanction or there will be a bailout of such a magnitude that mega moral hazard will affect private lending forever. Once these things happen, you will no longer have the social rules for private risk based lending. In other words, financial markets will be unlike anything ever seen before in private economies. Is this really what Wall Street wants, let alone American society as a whole?

This is a long article, but it’s well worth reading. And I’ve bookmarked New Deal 2.0 for future reference as well. Will the streets of U.S. cities start looking like Iran in coming years?

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23 Responses

  1. No pony for you!

  2. Great catch BB. I especially loved this one because it’s been what I’ve been saying recently.

    The New Keynesians like Bernanke should have recognized this through their “financial accelerator” channels approach, but the near-ZIRP (zero interest rate policy) QE (quantitative easing) approaches have so far proven to be too little, too late. Moreover, there is now a wing of investors feeding fears that “monetization” and significant fiscal expansion may constrain the Treasury’s room to manoeuvre further. The upshot is that we have missed a golden opportunity to deal with the growing problem of income inequality. Instead, we have the paradoxical spectacle of an ostensibly progressive Democrat administration, and a Democratically controlled Congress, presiding over one of the most regressive wealth transfers in history.

    • The Fed’s hamstrung at the moment and there’s so much debt, that the folks that have being buying it for the most part the Chinese, are worried we’re going to further dilute their investments and are divesting of dollars and tbills in a systematic way.

      What we’re seeing is a massive continuation of a regressive wealth transfer as witnessed by yet again, those Goldman Sachs bonuses.

      California is laying off teachers and investment bankers are making arbitrage profits off of cheap money siphoned through AIG’s government financed fire sale.

      I can’t understand why more people aren’t seeing this.

      And I joined the chorus on monday about the health plan, what we’re seeing now is a way of funneling more tax payer dollars to financial institutes: this time insurance companies.

      We’re not getting universal health care, nothing even close, they’re selling out the public option, yet, those of us that have insurance are now going to be taxed, for what? Inefficient, cost bloated, lobbyist paying middle men!

      We have a Goldman Sachs president.

      • “We have a Goldman Sachs president.”

        That is a great line. I’m going to use it whenever I have to refer to PBO. (giving appropriate credit, of course)

    • Yes, there are so many great quotes in that piece. And he discusses what Roosevelt did to get us out of the Depression too.

  3. I have a great example here. Bobby Jindal basically gutted the health and higher education parts of our budget so he could force through unnecessary tax cuts and balance the budget. He refused to delay the tax cuts to maintain the budgets.

    So here I am with my summer off when I usually teach. The ringer? I’m now technically unemployed for the summer and collecting unemployment benefits. They’re now paying me more to stay home and do my research than they would have if they’d let me teach.

    Am I complaining? Not as part of the unemployment statistic, but as an advocate for higher ed and tax payer … I’m beyond livid at the moment.

    This typifies ideaological,short-sighted pols decision-making.

    He’ll say he brought in tax cuts and lowered spending, but did he save money?

    Not in my case, and I’ll bet there’s more of me around here too.

    Meanwhile, students are not able to take the classes they need and the unemployment rate just went up, unnecessarily.

    • It’s all so horrible and so pointless.

    • http://seattletimes.nwsource.com/html/localnews/2009316386_basichealth09m0.html

      Democratic Governor for State of Washington is hitting the poor in her state pretty hard. She was, though, an early supporter of Obama over Hillary.

      • yes, and this after she ran on a platform including the idea that we must elect women to higher office if we’re going to succeed in getting a woman elected President. I was so angry when she came out for Obama. ugh. Screwing over the Basic Health Plan now doesn’t seem like a great idea.

        • Well, on the federal level, they’ll screw the Medicare crowd, too….

      • I refused to vote for this misogynistic female Governor — she is THE one who killed equal pay for equal work back when she worked in the Attorney General’s office.

        She is NOT a nice person.

  4. Warren Buffett was a feature article on MSN.com yesterday saying the worst was yet to come, as well.

    People need to regain control of the gov’t or the corporations/bankers are going to continue their dreadful hold on us.

  5. I wish I had any confidence in it, but pre-revolutionary France and Russia tell me things must get far, far, far worse — and we’ve got a ways to go on that — before anyone stops and thinks of changing stuff in a big way. And when they do, they don’t usually do it properly, because they’ve waited too long and things are too bad.


    And I no longer imagine that there is a large contingent of people on the left who understand or even give a flying fuck for information like this. It’s like Reagan — he lost their jobs, but he Made America Stand Tall. Nowdays, it’s Barky accelerated the destruction of the economy, but Lookie He Has An Organic Garden.

    Economic hoodoo like this is like electroweak interactions in particle physics. Maybe a hundred people understand it, and in a democracy, that simply doesn’t matter.

    And don’t get me started on the educational system in California. I work with it, and it’s the engine that’s driven our economy forward in magnificent fashion. It used to be that no matter how much money your family made, if you were smart enough, you could go to the greatest research university on Earth. Not so much anymore.

    And the rest of the country is loving it — even though we pay shedloads more in federal taxes than we get back. I wonder if the rest of the country will love it quite so much when they have to pay for their own fucking stop lights?

  6. On one hand, I disagree with the author about needing more QE and more borrowing/spending… the Chinese are already making noise about a new reserve currency. And, recent reports have shown that China has been on a massive gold shopping spree for the past 5 years (hedging their bets on the $ collapsing). If we try to inflate our way out of this, we might set off a dollar run (I think over 50% of US currency is foreign held).

    IMO, the debt deflation spiral is beyond our control now. Nothing the gov’t or anyone else can do to stop it.

    Buy canned food, guns, and ammo.

    • I’m afraid you are right. But it doesn’t even have to be a Somalian type meltdown for such activities to bear fruit. Here in Philly, the city government , the buses and a local food store could all go on strike at once in the coming weeks. You bet my stock of canned chili looks even better to me now

    • If you don’t want to mess with guns (and I heard a discussion today at the doctor’s office how hard it was to buy ammo lately)…I’m told that China is flooding the US with stun guns.

      Stun guns may be the alternative for non-gun lovers!

  7. I also wonder if the current administration’s willingness to let California dangle in the wind isn’t due to our going for Clinton in 08?

    • don’t forget Hill won West Virgina by 40%…and now 42 of their mountain tops are being blown up….but I find even if you do vote for Obama, you get the shaft

  8. This is definitely related….

    Musings on the Recession and the Effect on Police Departments–With Chicago as a Prime Example


    The premise is that even though cops can be bad news, cutting back on personnel and programs aimed at preventing the cause of crime are resulting in higher crime rates. Who steps in to stop the “disquiet” when it comes?

    Obot Army? A perfect chance to clamp down further and give Obama et al even more control as chaos grows…

  9. We are on a collision course with disaster. I don’t no nothing about mathematics or economics but even I can see that. When are the obots and the rest of the nation going to wake up and start electing real leaders?

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