Friday, February 20, 2009

A Kinsleyan Gaffe

Opposition to the present policy of ad hoc bailouts and "stimulus" has collapsed the normal left-right divide. Roughly speaking, if you are a banker, a large manufacturer, a fiscally imprudent state government, a regulator, a union member, or simply poor, then current policy is working in your favor. If you are not a member of these select groups, you are little more than the account from which others are drawing funds.
Plenty of conservatives and libertarians are in the latter group. But there are increasing numbers of progressives and liberals who are beginning to wonder what the end game will look like. Today, Michael Kinsley becomes the latest to wonder how do we repay the stimulus spree?

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it's not the actual, secret plan, it will be an overwhelming temptation: Don't pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt -- public and private, U.S. bonds and jumbo mortgages -- in half.

Kinsley is as much of an elitist liberal as you can imagine, but even he has enough knowledge of history, and a sense of the essentially tragic course of human events, to know that the US could easily slip into an Argentine-style default or a Weimar-esque hyperinflation.
Everyone who counts has been frantically running around the last 18 months trying to "save the banks" and "help the poor struggling with their mortgages." All of these efforts have failed. They spent much too long trying to "prevent a recession." That has failed (if it ever could have succeeded). Now, they are trying to "prevent a depression." I think we know how that will end.

The truth is that a lot of the regulatory and financial apparatus in the US is no longer working. And, why shouldn't it? Our current system with the Fed regulating interest rate and the Feds maintaining a heavy regultory presence in the banks and securities markets, was set up in the Wilson administration and perfected in FDR's. The financial sector built a business model upon that which reached its apogee in the Eighties.
These twinned elements worked well for decades. But, they are no longer working, mostly because there is no longer an daylight between the regulator and the regulated, and the regulators have no contact with the s0-called "shadow banking system" that threatens to overwhelm the real one. The frantic activity of the last 18 months is not the sign of a dramatic "rescue," but the death throes of a system that was born nearly 100 years ago. But, those who would reform it or rebuild are locked out of the room when it comes time to answer the question, "What is to be done?"

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