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This is No Bailout for Main Street America
In reality, a $25bn mortgage deal with banks is a drop in the ocean – given US homeowners' $700bn of negative equity
Big announcements of breakthrough legislative deals during election campaigns should be taken with huge grains of salt. Generally more rhetoric than reality, they sometimes contain real concessions made by politicians seeking votes. So it is with Thursday's Washington announcement of $25bn to help homeowners. Something significant is happening, but it lies below the surface of the headlines.
A home advertised for sale at a foreclosure auction in Pasadena, California. (Photograph: Reed Saxon/AP)
Typically, modern governments intervene in two ways when – as has been true since 2007 – free-enterprise capitalist economies produce particularly bad versions of their recurring economic "downturns". One economic policy is aptly called "trickle down" economics. It involves throwing heaps of money at the top of the economic pyramid – to mammoth banks, insurance companies, and other corporations at or near economic collapse. Policy-makers hope that such help for these institutions will revive their activity and thereby trickle down – as credit and orders for medium-sized and small businesses, and then, finally, to jobs and maybe wage increases for the majority of workers.
The alternative is "trickle up" economic policy. It involves government financial aid aimed chiefly at helping the mass of workers. That policy's goal is for the assisted workers to resume purchasing, which will, in turn, boost business revenues and so rebuild prosperity.
The historical record is quite clear: trickle down is no better or more effective a policy to end deep recessions and depressions than trickle up. In the last great capitalist downturn of the 1930s, the Roosevelt administration first tried trickle down. Its poor results, coupled with profound political pressures from below – the Congress of Industrial Organizations (CIO) membership drives that brought new millions into labor unions and the surging socialist and communist parties – forced Roosevelt to add major trickle up policies. They worked better, but not well enough to overcome the Great Depression.
Of course, large corporations, their shareholders and stock markets prefer trickle down. They get bailed out and they "recover", while the rest of us watch to see what may or may not trickle down. The US working class has been waiting for over four years. Precious little has yet trickled down. The majority of citizens prefer trickle up and for parallel reasons. Which kind of policy prevails depends on which side wields more power over the policy-makers.
Under Bush and Obama, trickle down has dominated overwhelmingly since the current crisis began in 2007. There were a few trickle-up measures: modest individual income tax cuts, repeated but very ineffective efforts to help those subjected to foreclosure, and extensions of unemployment compensation benefits. However, they were utterly dwarfed by what the Treasury and the Fed poured out in trickle-down bailouts. By 2011, it was clear that the Bush-Obama trickle-down policy had failed to end this second-worst economic downturn in a century.
The Obama team was beginning to learn what the Roosevelt team had learned sooner in their Great Depression. It turns out that bailouts for the top of the economic pyramid, which never trickle down, leave an economically depressed mass at the bottom. Governments that also try to pay for trickle-down policies by imposing "austerity programs" on the bottom only make matters worse. Sustained depression at the bottom eventually threatens the top: first economically and then also politically.
That happened sooner and more powerfully in the more depressed and more politically mobilized conditions of the 1930s. But the Tea Parties and the Occupy Wall Street movement, in their radically different ways, suggest something comparable unfolding now in the US. In Europe, the process is further along, as the Greek example shows.
The Obama team began in 2011 to supplement a wholly inadequate trickle-down approach with some limited trickle-up elements. The biggest of these have been the reductions in the social security deduction on paychecks. Another small step is this week's modest help for homeowners facing foreclosures. It will not help the majority of those in such danger – for example, the 50% of mortgages owned by Fannie Mae and Freddy Mac are ineligible. It will help the rest, but not much.
Consider simply that the negative equity of US homeowners is estimated now at $ 700bn. That is how much more they owe on their homes than those homes are worth. This new bill proposes $26bn in aid for that problem. No such timidity attended the trillions provided for the trickle-down bailouts since 2007. The banks are happy with this proposed settlement's low cost to them.
While the government's help to homeowners is far from adequate or just, it represents a partial and late recognition of trickle-down economics' inadequacy as policy. It further concedes the need for some trickle up. What happens next depends on the evolution of this crisis and of the political forces gathering strength.
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34 Comments so far
Show AllYes a real economist! Please include more from Prof. Wolff. I would love to see an economic dream team of Wolff, Baker, Hudson, Black, and Roberts calling the shots.
The neoclassical ideologues like Krugman, Reich, Bernanke and the vast majority of economists have proved that they are near worthless. They failed to predict this mess.
and Steve Keen (although he's an Aussie).
Yes! he's from U. Western Sydney. Debunking Economics is a must read for anyone even slightly interested in economics.
Debunking Economics ....
This says it best. "economics" is a psuedo science at best. Total BS is more apt.
Yes, BS or even worse...hidebound ideology or even propaganda.
Sorry, Socialist. I think this article is tepid at best. Talk of trickle up or trickle down does NOTHING to alter the basic current. The whole system needs to be flushed. $5 billion within the spectrum of $700 billion "under water" mortgages is like pennies to the poor... this is NOT a viable path to remuneration. It's just more of same, a lukewarm version of the game of "Hot Potato."
I see your point SR, but Wolff's other lectures and writings outlines this as well. I may not agree with all of what Wolff says, but I welcome his discourse. IMO Prof. Steve Keen and Michael Hudson were most accurate in predicting this mess and have the best solutions.
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"Marx brings to light the immanent instability of this society, in the sense that the reproduction of its economic system never tends towards the realization of any sort of general equilibrium, but is displaced from disequilibrium to diseauilibrium in an unforseeable manner. One can account fo this after the fact, but never define it in advance."
Samir Amin, page 14, The Liberal Virus, Monthly Review Press
And not one bankster in prison. During the savings and loan crisis a few people went to prison, but only for an average of 22 months. But at least they went to prison.
But Eric Holder and Obama the Baby Killer spend tons of resources busting medical marijuana suppliers.
True True. Not only no banksters in prison, they were rewarded for their crime with 100s of billions of taxpayer monies and not just via TARP. This is the largest financial crime in history.
Dr. WK Black was the special investigator who was insturmental in putting the banksters behind bars.
Motto: "Bring Back Bill Black! Banksters Behind Bars!"
"But Eric Holder and Obama the Baby Killer spend tons of resources busting medical marijuana suppliers."
Obama and Holder do so for the best of reasons. The Pharma industry now makes a product called Marinol, which is a pill containing THC. Why would Obama want people suffering from cancer to grow weed for free in their backyard, when they can pay a corporation $10 a pill for something that does the same thing? Marijuana, medical or otherwise, will never be legal.
Something really stinks here, what with the evident cave-in of the New York and California (and other) State AGs here. Was there a secret quid pro quo? But that's not all. On last night's local news came a brief story of Ohio's supposed share of the $25 billion: under $100 million, of which about one-third would be used to help distressed home-"owners" and two-thirds would be used to tear down and remove abandoned houses. In other words, contractors getting paid to reduce the housing stock, which might have the effect of marginally increasing the value of the remaining housing stock by increasing scarcity---showing up as an increase in the GDP! This isn't "trickle-up" or "tickle-down." It's pork cronyism: the contractors are Organized; the homeowners are not. ..... -30-
Yes, just a coincidence it is an election year, aplogists say
Here's Wolff, http://www.rdwolff.com/
And here's Hudson, http://michael-hudson.com/
And here's Henry Liu, http://www.henryckliu.com/
super links, thanks karlof
I also like Dr. Paul Craig Roberts http://www.paulcraigroberts.org/
and here's Keen's site http://www.debtdeflation.com/blogs/
Nice to see others interested in this as well
Back when I taught/tutored college intro econ101, I used the standard text and additional realworld material so students would be able to see through some of the manipulations of standard economic dogma. For awhile, I pestered economists with blogs like Brad DeLong and Krugman but got tired after seeing my comments refuting their dogmas just deleted without any attempt at debate. By keeping close tabs on the politicaleconomy, I was able to avoid most of 2008's contrived economic collapse as what occured was anticipated--it was an election year afterall and it ensured Obama's election, whereas with McCain as president and congress controlled by Dems the Banksters wouldn't have gotten away with as much as they did. Yes, therein lies an important inference.
Mr. Wolff is a clear thinker on this and many economic subjects. His website has some excellent articles and videos. However, a post on CD yesterday, http://www.commondreams.org/headline/2012/02/09-5, was much more hard hitting and revealing about the nature of this "mortgage deal". Really, the whole "deal" is a nightmare for the American people. Criminals get off with a wrist slap (at most!), and everyone else is stuck with a fiasco.
I was fortunate enough to purchase an 1800 sq. foot house in Brooklyn in 1999. I was shocked at the time as it seemed house prices were rising $10,000 a week & I jumped in (into what turned out to be a house needing gut renovation) as soon as I could (@ $252,000). While NYC claims that my house value has diminished since it's 2007 peak ($715,000), the value is still way over what I paid just a few years ago. WTF?! ... Unless you really make some pretty big bucks, you're priced out of the market now. All the shenanigans that the bankers, mortgage brokers, real estate shysters, & politicians pulled in the past ten years to turn property ownership into a ponzi scheme (because they had NO other way to make a quick buck, or deal with an underlying depression which has been on-going for middle class people since the 70's & 80's), essentially created a schism in US society where if you were in the game, you could own property. If you missed out, you're stuck with an overpriced property & mortgage or, you'll never be able to get in the game. How many jobs are there out there that allow people to borrow say $400,000-$2,000,000 to buy an average house in Brooklyn? Yeah. Not that many. NYC does have loads of wealthy people & some high paying jobs, but that's still not the norm for most people. This has been an insidious and heinous crime and the saddest part is, is that most Americans don't connect all of the dots...... ("Americans! How many dots am I holding up?!!!)
Is that boat to Mars ready yet?
FDR's stimulus simply wasn't big enough. If he had been able to double or triple it, the US would not have needed WWII to get us out of the 30's depression. Obama's 'tax cut' for working Americans is in reality a major blow to the future solvency of Social Security, the last of FDR's monumentally successful trickle up measures. Trickle up works when it is adequate enough to make up the difference for the loss of people's 'demand' for goods and services lost through Wall Street criminality. Wolff is seriously misleading when he says that 'trickle up' doesn't work a whole lot better than 'trickle down'.
Meanwhile, the Fed has announced it will work to devalue the dollar by 1/3 over the next 20 years. Just this week when Iran devalued its currency, pundits and other assorted wackjobs opined that Iran's act was a sure sign that sanctions were working to weaken Iran's economy. I wonder what those same idiots would say about the Fed's decision, but that's silly as we all know they'd say it's a wise move meant to bolster the US economy. What isn't said by the Fed or other financial writers is the Fed's move will mirror the slow demise of Dollar Hegemony and it confirms what many thought would happen: The USA would attempt to inflate away its massive debt load.
So now we have a different scenario for Wolff, Hudson and their ilk to consider. And as they do so, I implore them to take into consideration the certain decline of what's called Cumulative Available Net [Oil] Exports: "If we extrapolate the Chindia [China and India combined] region’s rate of increase in their combined net oil imports, as a percentage of Global Net Exports of oil (GNE), in 19 years just two of these oil importing countries--China & India--would consume 100% of GNE." http://www.theoildrum.com/node/8930#comment-871783
Clearly, the Fed risks instigating hyperinflation given its policies and the realities of the finite world of fossil energy supplies.
I agree, we are going to see some even worse financial events in the coming several years.
"Peak Oil", ZIRP (zero inerest rate policy), QE to the nth degree, more wars, and the decline in the "petrodollar" might spell disaster for a dying empire and its citizens. (hopefully not the destruction of much of the rest of the world in the process),
Not sure what you mean by "world's own making". No disaster for Americans? That's a pretty callous thing to say. Depending on how you define poverty, roughly 100 million people or more live in poverty in the US already. Millions have lost their homes to criminal banksters. Americans have been ripped off to the tune of trillions if you count bailouts, bankster thefts, illegal wars etc.
And they will be ripped off even more in future.
karlof1:
You might be interested in this website: http://deanhenderson.wordpress.com/big-oil-their-bankers/. I've found Henderson's work to be interesting reading.
Wendell Berry makes more economic sense than anyone I can think of. Next in line would be Herman Daly.
Both refer to the present system as an anti-economy, which it truly is.
We tend to forget, so easily and often, that the natural world is our only supporting system, that this neglect is more like a mental illness than mere forgetfullness.
Capitalism itself, industialism itself, finance itself - these must all be re-evaluated in terms of what is now known about the "Limits to Growth" and "Planetary Boundaries".
The rest is tinkering - and given the situation geo-politically and of course in the USA - even tinkering is just delusional thinking.
No fundamental political change - then smoke and mirrors will be the only things we see - and smell.
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No need to understand that the term bailout has nothing to do with saving anyone or thing under the top 5% who have stolen all the money such to the degree that money is worthless, be it cash or coins. The only money is invisible in the form of credit which serves the .001% whom all that ostensible money belongs. Only thing that possesses a value are those things that shine and sparkle and have some vague sense of priority in commodities. Hoarding these things or preventing any equitable dispersement is the only thing giving them a value and that equates with how many sociopaths are willing to protect those things for the top 5%.
"The Obama team began in 2011 to supplement a wholly inadequate trickle-down approach with some limited trickle-up elements. The biggest of these have been the reductions in the social security deduction on paychecks."
That was never intended to help working people. Obama provided it as a poison pill to starve social security to help kill it.
Yep, those fucking republicans made him do it,... again! (GAG, COUGH, CHOKE)
No magic wand? I'm stunned. On television, they have bigger problems than this improving before the second commercial break, (about three minutes I think).
Iceland took a bigger hit, sooner. They took radical steps, like a new constitution and a reorganization of their banking systems (although their banking system is perhaps showing signs of regressing, constant vigilance is the price of freedom) and they are healing. They are not "back in the bubble" (not to imply that that would be a positive thing) but things are improving slowly and steadily. Our Constitution would work just fine, if restored. The conservative policy of starving until you get fat might not be the way to go. These processes take time, and cutting education, infrastructure and the ability of workers to produce will not help or accelerate the process in the slightest degree. It would probably help if the rich were to become somewhat less rich faster than the not rich became destitute, but that's just a guess.
Now, somebody tell me just why Bernie Madoff didn't get a bailout?