It Won't be Enough

Ian Walsh looks at what the bailout will bring:

The reason this happens is that all the money that could be used to increase output and productivity or to decrease input problems (by, say, reducing the amount of oil and other commodities used) will be all be being used to prop up the current financial structure. 750 billion dollars, and this is key, is not going to be enough. Folks on Wall Street are already saying so. More money is going to keep flying into the structure to keep it from deleveraging in an uncontrolled fashion, and thus wiping out lots of rich people. I figure they'll be back for more money in 6 months, 9 max. 3 months wouldn't surprise me, since Paulson has a lot of incentive to use up his full allowance while he's still Secretary. After he does so the problem will still exist and the next Treasury Secretary will be back looking for more.

(...)

Because the US does not run a balance of payments surplus this is a game that can't go on forever, as it has in Japan. The US still needs outside money and that money will get more and more expensive and will eventually be turned off entirely. How long? Two to four years is my guess. At that point the US will be forced to go to the IMF (which, arguably, it should be doing right now, when it can use special drawing rights with no catch except a prestige loss.) At first the IMF will lend with no conditions. Then it will lend with conditions. You will not like those conditions. At all. Since Obama will be in office and will be associated with this mess (fairly enough, since he whipped for the bill) the right will run populist right wing and odds are very good that they will win. 2013 will likely see a populist right wing government in the US.

Judging from the market's response to today's big giveaway, Walsh is right about the $700B not being nearly enough.  The conveyor belt has started pulling money from the real economy (and from thin air) and dumping it into the financial sector.  You don't have to be an economist to recognize that as unsustainable. 

Ezra wants us to resurrect Keynes and stop allowing people to get away with suggesting that a big deficit must mean cuts in government (non-defense discretionary, I'm assuming) spending.  He admits that the idea is counter-intuitive but it's even more difficult than that, it's counter-cultural.  We've spent the last forty years choosing between guns and butter and we have come to internalize two beliefs: 1. we must always pick guns and 2. people who need help from the government don't deserve it and are expendable. Poke around some of the comments to posts that suggest spending money on Unemployment Insurance benefits or food stamps.  People think that's just feel-good spending that doesn't do anything but reward unfortunates (or deadbeats).  And as for the government funding infrastructure projects, it'd just screw that up like the government screws up everything - we'd never see the benefit.   It's that mindset, which is nearly universal and inveterate, that allowed the Senate to filibuster successfully (and silently thanks to the Dem leadership) an economic recovery package designed to boost demand in those ways, which are proven to be the most efficient ways possible.   We're playing way past the point where reminding people that Keynes existed is going to win the day. After Reagan, a thousand points of light, Clinton's funeral for the "era of big government," and the empowerment of the miserable all-guns-no-butter Blue Dogs, we're basically living in pre-Keynesian times. 

That said, I'm all for reminding people that Keynes was right.  But I know that the people opposed to Keynes are single-minded.  They never sleep and they are richer than god.  They own the country and its government as we've seen the last two days.   Fighting them will require unimagined organization and money and leadership and probably decades.  Getting people to unlearn what they know in their souls to be true and to instead believe the truth, that investing in each other and ourselves will get them the best return on their tax dollar, is not for the faint of heart.   So, by all means, spread the Keynesian word among your friends.  They'll hate you for it, but who needs'em?   Believe me, you're going to be too busy being active on the ground with groups like Health Care for America Now and True Majority and Working Families and whatever issues advocacy group you can find (I work for this one) to worry about who isn't talking to you anymore. 

Comments

[mick arran]

The conveyor belt has started pulling money from the real economy (and from thin air) and dumping it into the financial sector. You don't have to be an economist to recognize that as unsustainable.

Nicely put and, I'm afraid, accurate. We've just lost our last chance to stop this beast. The bail-out will make it worse, not better. This is the beginning of the end.

[eRobin]

Walsh thinks that Obama will be able to do something if he wants to. Of course, it's a big if. The something will mean beating back the balanced budget crowd. It's going to be difficult. I'm not sure Obama does difficult.

[Carna]

Hello everyone. In America, they want you to accomplish these great feats, to pull off these David Copperfield-type stunts. You want me to be great, but you don't ever want me to say I'm great?
I am from Zealand and know bad English, tell me right I wrote the following sentence: "Cheap flights to boston, chicago, new york, miami."

Thank you so much for your future answers :-(. Carna.