What stops us from acting more boldly on economic and environmental policy
[Note: Since comments are turned off, if you have thoughts, email me at glipow AT gmail.com. ]
A lot of energy is expended on Grist showing that good environmental policy is good economic policy — to show that green pays. But it is just as important to show the same thing from the other direction. Economic policy will only pay if includes strong environmental features. Let’s look at the current responses to our economic crisis from that perspective. We’ll start by comparing what we are doing as compared to what we should be doing, and then move on to explaining the difference.
Let’s start with the economic stimulus package that was just passed. It is not nearly big enough. It was structured on fighting a smaller unemployment rate than we already face, let alone the rate at which unemployment will peak. Those radical leftists in the World Bank are noticing that the recession is worldwide, which would indicate a deeper recession than Obama’s stimulus was intended to fight. Though you would not know it from the corporate media, quite a number of respected economists predicted from the beginning that this was too small a stimulus. Even intelligent conservatives are starting to say we need a second, bigger stimulus.
Where to put the money from a second stimulus? Keeping public transit going, which otherwise loses subsidy revenue during downturns, gives a double return in not only saving jobs and demand that would otherwise collapse, but also reducing oil use, greenhouse gas emissions, and traffic congestion. In general, making up for losses in state and local revenues reduces pro-cyclical job losses that otherwise make a recession worse.
But we have good reason to consider long-term investment in infrastructure as well. Much necessary infrastructure spending is “shovel-ready.” For example, suppose we decide to put $450 billion into upgrading our freight rail system to move 85 percent of long-haul trucking miles to rail? We can invest immediately into the planning this will entail. And we can stockpile parts and materials we know this upgrade will require. And we can implement already proposed unfunded short-term projects that will be needed components of such an upgrade: new switch yards, new freight yards, and various other log-jam breaking proposals.
The key is that we have a tremendous opportunity to borrow money at close to zero interest rate for infrastructure investment. Right now 10-year bonds yield 3 percent and still attract capital. It is not so much that U.S. government bonds are a great investment as that every other opportunity is worse. But if we keep borrowing money and giving it away to bankers and hedge funds, not only will the 3 percent borrowing opportunity end, but we may also end up with interest rates much higher than the normal 4 to 5 percent yield expected from 10-year bonds. If we want to maintain credit worthiness, putting that money into purposes that are widely recognized as both sensible for business and socially worthy will reassure lenders than money lent to the U.S. government is not being poured down a rathole. I’ve pointed in the past to trillions in sensible green investment that could be financed for $265 billion a year, even when treasury yields reach 5 percent, though it makes sense to do as much as possible at the lower rates that would cost a great deal less than that. And even though such green spending is only part of where we should put our stimulus money, it is an important part.
A lot of stimulus that is not formally “green” still has green side effects. For example, putting in place single-payer — or comparable — health care reform will enable more labor market flexibility, including the ability to create more small businesses, and more willingness to work for small businesses. Lack of affordable health care is one of the big obstacles to entrepreneurship, from innovative solar power to small organic farms.
But if we are not being bold enough on the stimulus side, we are being downright timid when it comes to taking on the banks and hedge funds. Here is the nickel version of how we got into the financial mess: Banks and other lenders could not fulfill the demand for good loans. So they made a bunch of bad loans, mixed them with the good loans, and called the mixture as good as the original. Then other investors borrowed against these funds, and other investors borrowed against the funds that borrowed against the funds, and so on, until the these original mixture of good and bad paper served as security for investments of 20 to 35 times their value.
So where do hedge funds and insurance schemes come into this? Well, people do foolish things during a bubble, but they don’t buy paper that bad without some reason to believe in it. Traditionally, if you want to convince investors that an investment is better than it seems, you offer an insured version. Insured bonds have been available for years. If a big insurance company will guarantee the value of a bond they probably consider it fairly safe. After all, insurance companies are regulated. They have to have reserves against risk, the ability to make payouts.
However, AIG found a way to provide a guarantee that legally was not insurance, and thus did not fall under insurance regulation. They sold credit default swaps, essentially a promise to buy the asset at a guaranteed price if it stopped meeting certain specified conditions. (Actually, that is oversimplified; but it is accurate enough and avoids making the post book-length.) To make it even simpler, those creating all this bad paper found an alternative to buying insurance. They simply found another bookie to lay off their bets to, which after all is what insurance really is. The problem was the bookies they laid their bets off to accepted far more bets than they had the assets to cover — especially AIG. Both the investors laying off their bets and the really big bookies accepting those bets assumed they would never need to pay off.
The result is that there are at least $40 trillion worth of credit default swaps out there, half of which are against AIG.
Since AIG alone has contingent liabilities of more than the annual GDP of the U.S. and assets nowhere near that, let’s focus on that company for a moment. Back in September, the U.S. took 80 percent equity in AIG in return for an initial bailout. Since then the U.S. has handed it additional money, without taking actual control of the board of directors and without zeroing out stock and bondholders. This is a huge mistake.
Leaving existing stock and bond-holders anything is the minor mistake. There is no way the future value of AIG will ever exceed the combined cost of what the government invests and what has to be written off by people who relied on its guarantee. Any net future value will be totally at the expense of some combination of AIG not paying its debts and the government paying AIG’s debts for it. There is no reason the taxpayers who are paying out for AIG should not receive 100 percent of any value they create, on the off chance there is some value. And by holding a majority interest, while leaving existing stockholders and bondholders in place, even with a highly diluted interest, the government may have assumed a fiduciary duty not to act against the interests of those other equity and debt holders. (I say “may” because there are ways this could have been structured to avoid such a fiduciary duty.)
However, the really big mistake is that by leaving existing management in charge, we are punting on thos
e credit default swaps — those 20 trillion dollars worth of contingent debts AIG holds. We know there is no way to pay all of it if all of it is called. We don’t know how much of it is held by entities who can survive a default on these insurance policies. We either need to come up with a plan to avoid most of this debt ever being called in, or (since that seems unlikely) a plan to avoid a default on this debt pulling our financial system deeper into a hole.
Fundamentally the only thing that has saved us so far is that not enough debt has been called to cause a default and make it worthless, though enough was called that a default would have happened without the bailout. We have avoided a “run on the bank” because apparently there are few enough “depositors” that debt-holders have coordinated enough to avoid calls that would make their assets worthless. That implies that some combination of nationalizing the debt-holders in the worst shape, the ones who ultimately will fail without a bigger payout than is possible to make to them, and making deals with the ones who can survive a payout of cents on the dollar might be a possible solution.
Or perhaps a second crash is inevitable, and the best we can do is use some strategic nationalizations to be in a position to pick up some of the pieces from it. Even the Washington Post is giving op-ed space to someone who has noticed that we have to take bolder action than we have in the banking and financial sector, action that worries more about the economy as a whole and less about saving bankers. Even the Washington Post is apparently at least willing to consider that the longer we take half measures, the worse the situation we need to deal with will get.
And now we come to $40 trillion question. Why are Obama, Summers, and Geithner, who are all used to being the smartest guys in the room, dithering? And I observed an incident in a supermarket recently that I think illustrates this.
Last weekend, in my local supermarket, I saw a child grab a piece of candy at the checkout counter, and try to hide it in her little purse. Her Daddy immediately took it from her and put it back on the shelf. She burst into tears. Daddy said, “I guess it wouldn’t hurt anything to buy it for her.” Mommy replied: “you really want to teach her that stealing is OK?”. Daddy admitted Mommy was right, and left the candy bar. As they unloaded the groceries the little girl pointed at the clerks and wailed: “Nooo! Take away their candy! You are spoiling them.”
To start with, this is a good illustration of the falsity of the usual clichÃ© about conservatives being stern parents and liberals being indulgent ones. In this case, only if you accept the little girl’s assumption that the parents were raising the supermarket clerks was leaving the candy bar indulgence and handing it to her good parenting. Given that Mommy and Daddy were most concerned with properly raising a little girl, buying the candy for her would have been indulgent, and leaving it was exercising at least some discipline. Similarly, only if we assume that politicians are more concerned with the interests of ordinary people than the very rich are they “parenting” the vast majority of us. If you make the common-sense assumption that most politicians act in the interests of the rich and powerful, then conservatives are indulgent parents who give in to all of their child’s whims, and liberals are the ones who make their kids defer immediate gratification in their long-term interest, who don’t let their kids wheedle their way into skipping homework. It is liberals who, as Roosevelt did, save capitalism from its own excesses by insisting on throwing some crumbs to ordinary people.
But there is another analogy to be found here. You will note that in the supermarket the argument between indulgent Daddy and disciplining Mommy was over whether to buy the candy bar or put it back. Letting little Princess get away with slipping it into her purse was not an option. Since the parents are not politicians, probably this would be true even if they thought Precious could get away with it. But if either of them happens not to feel that way, supermarkets have fairly tough anti-shoplifting policies, and the little girl grabbed the candy bar right in front of the clerks. If the parents had actually let the candy bar get all the way into the purse and stay there, the clerks would have called security. Security in turn would have had a number of options, none of which would have been pleasant for the family. In this case not just the two parents and the little girl were involved. There was a third party, the supermarket and its employees. That third party had its own interests and the ability to look after them.
In the case of the bank bailout, there is a third party with interests — ordinary people. But our self-proclaimed representatives are very weak compared to corporate interests. So far I’ve used a weasel term “ordinary people.” That is because the real phrase is controversial and I wanted to lead up to it. That phrase is “working class.” It is one of the great triumphs of the far right that “working class” is a controversial phrase, considered sectarian or perhaps Martian. Except that it is OK when millionaire Sarah Palin described herself as “working class,” because everyone knows Republicans represent heartland American values, so it is OK for them to use that term. But anyone else who uses it is engaging in class warfare. Goddess forbid that anyone engage in class warfare, except for the capitalist class. As Warren Buffet said back in 2006: “There’s class warfare, all right but it’s my class, the rich class, that’s making war, and we’re winning.”
Yeah, I know that, Warren Buffet to the contrary, it is bad manners to notice the existence of class in the U.S. We Americans are middle class, all 300 million of us. Maybe the people who are actually sleeping in their cars are poor. And OK, Bill Gates, Warren Buffet, George Soros and a few others are rich. But everyone else is middle class. Well I’ve got news for you. Odds are that most the of people reading this post are working class. If most of your income comes from wages rather than investments, odds are you are working class. If you are retired and living on Social Security or on a pension you received as part of your compensation for work, or on the proceeds of an IRA or 401K that was funded by either deductions from your paycheck or by contributions from an employers, you are still working class. A good indication: if your household income is less than $100,000 a year the odds are that you are working class.
And the problem right now is while we have working class organizations, unions and various interest groups, we don’t have a working class movement. And that is why politicians can argue over whether to be an indulgent or a stern parent to the rich, without worrying too much about the effect of their actions on us. They do not have to worry that if they screw up too much there will be a bonus march or a general strike or any of the possibilities Roosevelt had to fear if he failed to make serious concessions to U.S. working people.
So in situations requiring financial experience, why were people with a history of being wrong chosen over equally qualified people with a history of being right? I wouldn’t expect lefties, but why Geithner and Summers? Why not Stiglitz and Soros? Why not Buffet? He said he wasn’t interested, but I bet he’d have been interested if asked. Or Nouriel Roubini? The answer is that Wall Street was terrified of any of these people, and in the absence of a working class movement, there is no force out there strong enough to counter the impulse of politicians to cater to Wall Street. American Unions are beginning to try to fight b
ack with things like the Employee Free Choice act. But they are also very late to the game, barely beginning to recover from decades of losing and wracked by internal divisions.
In the absence of a working class movement, we are unlikely to see the financial crisis stemmed in time. In the absence of a working class movement, we are unlikely to see green investment on a scale that can save the economy or save the natural environment our economy needs in order to continue to exist. That Van Jones has been put in charge of green jobs is a hopeful sign. But in the absence of a strong movement backing him, I’m skeptical that he will accomplish as much as his views might lead us to hope. Maybe we will make the changes we need on the basis of sweet reason, and recognition by centrist Obama of the need for radical change. But I’d feel a lot better about our chances if there was a working class movement with real power, one that had to be catered to and indulged a bit even when it was not in the long-term best interests of the very rich.