How Economists (and Pundits and Politicians) Helped Steer America Off a Cliff

By Joshua Holland, AlterNet. Posted February 12, 2009.

We used to produce cars, steel, whatever it might be. All these goods we used to produce domestically, creating jobs domestically. Now we're no longer doing that. We're buying the goods from abroad. So we end up with much more unemployment, much more slack in the economy, and that's a scenario in which you end up lowering interest rates to try and fill that gap.

And that's exactly what the Federal Reserve Board did, certainly in the late '90s, and again in this decade. They kept interest rates very low, with the idea of letting the economy expand. Low interest rates encourage housing, of course, encourage other forms of consumption.

So, to a very large extent, you could say that the bubble economy ... or I should say, the conditions for the bubble economy ... were created, were an outgrowth of the trade deficit, which was in turn the direct result of the high-dollar policy. If we had had a lower dollar, we wouldn't have had so much excess labor, so much unemployment. And, there wouldn't have been an environment in which Greenspan and the Fed would have looked to lower interest rates to try to boost the economy in the same way.

JH: What should be done with the banking system going forward?

DB: I'm very concerned right now that there's a lot of talk about creating a ... a bad bank that would buy up all these bad loans.

People should understand what's going on there, because what that would almost certainly mean is we'd be paying too much money for bad assets, taking them off the bank's books. But it's just misleading the public about what's at issue.

Because when we're buying bad assets at an inflated price, we're handing money to the banks. If you have a car that's worth $5,000, and we give you $10,000, well, that's a way of handing you $5,000. And that's, in effect, what these proposals are doing. We'd be talking about paying too much money for the bank's bad assets.

And, people have used the analogy ... they've been comparing this to the savings and loan [collapse] in the '80s. The key point in savings and loans is we put them out of business. We put them into bankruptcy. We took over their assets, and we sold them off in a separate pool to recover money for the taxpayers, and we then took the banks themselves, stripped of their bad assets, and sold them back off to the private sector.

And that makes perfect sense, but that's not what they're talking about right now. What they're talking about right now is, you leave the banks operating. You leave Citibank there. You leave Bank of America, Wells Fargo, all the others who have hundreds of billions of dollars of bad assets, perhaps trillions of dollars between them, and we just take their bad assets, pay them more than they're worth, and then we let them keep operating as though nothing had happened.

And that's just a huge handout to the shareholders of these companies, as well as to executives, because they're able to keep their high-paying jobs.

So, people should be aware of that and they should be screaming bloody murder if anyone tries to go through with those plans.

JH: Should we be thinking about nationalizing these banks?

DB: Well, in effect, that's right. I mean, and again, understand what's going on. They would be going into bankruptcy. This isn't a communist takeover. They would be in bankruptcy. That would be the market outcome. But we don't want the market outcome, because these [institutions] are too big to fail. We don't want Citigroup going into bankruptcy and having a judge have to sort through, you know, trillions of dollars of loans and assets. I mean, it would just be a nightmare.

Now, at least to my mind, I really don't want the government to own the banks. But they put themselves in that situation, where they're effectively bankrupt. So, for a period of time, yeah. I think we do have to nationalize them until we could get them reorganized and sold off again to the private sector.

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Joshua Holland is an editor and senior writer at AlterNet.

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