Fixing the Economy

You could call it the Summer of Reality. Liberal opinion leaders are confronting the reality that their response to the Crash of 2008 has failed. But, of course that doesn't mean that they are ready to ditch their Keynesian-Entitlement-Regulation policy brew. That will come later, and not before the end of the annus horribilis of 2012. Take James K. Galbraith, economist and son of famed liberal-socialist John Kenneth Galbraith. He's ready to admit that the Obamis shot the wrong arrow:

In fact, stimulus alone was never going to bring recovery. This crisis was caused by financial collapse, rooted in massive banking fraud. The financial system is our economic motor and when it fails it cannot be revived simply by pouring money on it, any more than a wrecked reactor can be restarted just by adding fuel. Team Obama faced a situation not seen since the 1930s — a worldwide banking meltdown. The financial system needed to be rebuilt — and it still does. But Team Obama chose to overlook this.

But he's not ready to admit the reason for the "massive banking fraud." It was government sponsored enterprises like Fannie and Freddie fire-hosing dodgy sub-prime assets into the credit system. The role of the bankers was in dressing up as much of the dreck as possible to look like investment-grade debt so that the banks and the insurance companies and the pension plans could buy it. The investment banks are middle men; their business is selling bonds to institutions. One way or another, they will sell it. The government's No. 1 job is to make sure that its own debt is investment grade. That's because, ever since modern finance was invented by the Dutch and adopted by the Brits, the foundation of a healthy credit system has been rock-solid government funded debt. The worst bubbles have occurred when government-sponsored enterprises have floated dreck, as in the Mississippi Bubble, the South Sea Bubble, and the Fannie Freddie Bubble.

Here's an article by Alex J. Pollock on the real story of the 2000s financial meltdown. The problem is "agency debt."

The huge debt of Fannie Mae, Freddie Mac, other government-sponsored enterprises, and other off-budget government agencies (“agency debt”) fully relies on the credit of the United States. This means it by definition exposes the taxpayers to losses, but it is not accounted for as government debt.

How much is it? Well, in 1998 agency debt was $4 trillion, the same as the Treasury debt held by the public. In 2009, it was again the same as the Treasury debt--at $8 trillion. Between those dates, during the credit binge of the 2000s, the agency debt was larger than the Treasury debt. In 2002 agency debt was $6 trillion, 50 percent more than Treasury debt held by the public. So the real debt that the full faith and credit of the United States was committed to honoring was about twice the published amount.

We can holler all we like about "massive banking fraud" and "greedy bankers." But until liberals acknowledge that the central player in the late great 2000s credit bubble was government, we really can't start healing the economy.

And to suggest, as the president and Professor Galbraith do, that an "infrastructure bank" is just the ticket is to demonstrate nothing more than an alcoholic's morning-after craving for a pick-me-up.