How bailing out the rich created the Depression

The other day, Krugman wrote that we’re in the beginning of a new Long Depression.

Forgive me, but he’s wrong: this isn’t the beginning, it’s been going on for about two years now.

During a Depression there are periods where GDP grows. There are periods where jobs grow. It’s just that the periods of job growth don’t last.

There were opportunities to end the Depression before it really dug in its heels. The last one was at the beginning of Obama’s term. Kicking out of the Depression required two things.

The first was an adequate stimulus. This didn’t just mean a large enough stimulus, though the one offered was not large enough, it meant one properly constructed. Tax cuts for ordinary Americans are not stimulative, because folks like banks who have pricing power (you must have a credit card, loans, etc…) will simply take that money away by raising rates and fees. And it doesn’t mean short term shovel-projects, it means making commitments which will last for years so that businesses, when making plans know that hiring is worth it because those employees will be needed for more than a year or so.

Likewise the US has some serious problems with the structure of the American economy. The cornerstone of the stimulus had to be reducing US dependence on oil because as long as the US economy is so dependent on oil, full fledged growth is simply not possible. The days of $20/barrel oil aren’t coming back, and every time the price of oil gets too high, it puts great pressure on the US economy (and every other modern nation.)

The second thing which had to be done is to force the banks to actually eat their losses. Wipe out the shareholders and let the bondholders take their losses. All the money plunged into the banks (and it was much more than the TARP money, which was the smallest part of it) was wasted. Banks are not lending, and restoring lending is what the bailouts were sold as doing. Moreover they have raised borrowing rates and fees on those who need credit most, soaking up money which otherwise would be helping the economy rather than simply being sopped up to plug holes in bank balance sheets.

The trillions of dollars spent attempting to bail out the banks weren’t just wasted, by keeping zombie banks alive they made the situation worse. Further by not wiping out the wealth of banks and those rich folks who made foolish investments which wrecked the world economy, they created a political problem: to whit, as Durbin said—the banks still own Congress. (Along with the military industrial complex, pharma and various other monied interests). Because monied interests still own Congress, they have made it impossible to fix America’s structural problems.

Six percent of GDP could have been saved by doing health care reform properly, but that didn’t happen. The current “financial reform” bill under consideration is so week that I don’t know of one credible outside analyst who thinks it is sufficient to make sure there isn’t another financial crash, and on and on.

Historically speaking periods of high concentration of wealth only end when the rich lose it in a huge crash. They are never ended by, say, high marginal taxation—high marginal taxation only occurs after the losses have occurred as those who saw the run-up do their best to make sure it can’t happen again.

That lasts until the generations who saw the mania and crash start dying off and losing power. So you start seeing really serious decreases in marginal tax rates and slashing of financial regulations when the generations who lived through not just the Great Depression but the Roaring twenties were no longer around.

The cliche that a crisis is an opportunity is, sadly, true. But it is only an opportunity if you take it. What politicians, and this includes Obama and Geithner, as well as Bush, Paulson and Bernanke, did, was they protected the rich from their own folly, and made ordinary people pay for it. The wealth of the rich has mostly recovered, corporate profits have recovered, but for ordinary people the economy still sucks and there is no reason to believe it isn’t about to start sucking even more.

The financial elites think that what they can do is create an economy with a permanently high unemployment rate and that Americans (and Europeans, for that matter) will put up with it, because what choice do they have?

We are going to have another kick at this can, because the legislation being put in place is not sufficient to prevent another financial crisis. This is a Depression, and it is not going to go away.

Next time I hope we will consider doing the right thing. Make those who crash the system take their losses and break the power of the rich over government.

Be very clear, it’s you, or it’s them. You break their power, or they will continue to push your wages towards parity with China.

And they are very determined it’s not going to be them.

Are you determined it’s not going to be you?