Guest Post: No Wonder the Economy Isn’t Improving

I’ve read countless news headlines recently about how economists are “surprised” over an “unexpectedly bad” economic indicator.

But it’s not surprising at all. It’s no mystery.

The government hasn’t taken the necessary actions, and has instead been doing all of the wrong things.

Let’s recap.

The leading monetary economist told the Wall Street Journal that this was not a liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach. Nobel economist Paul Krugman and leading economist James Galbraith agree. They say that the government’s attempts to prop up the price of toxic assets no one wants is not helpful.

The Bank for International Settlements – often described as a central bank for central banks (BIS) – slammed the easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.

BIS also cautioned that bailouts could harm the economy (as did the former head of the Fed’s open market operations).

And BIS warned that the Fed and other central banks were simply transferring risk from private banks to governments, which could lead to a sovereign debt crisis.

Virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won’t be able to recover (and see this). Instead, they have been allowed to get even bigger (and see this and this).

While modern economic theory shows that debts do matter (and see this), the U.S. is spending on guns and butter like debts are a good thing.

Nobel prize winning economist George Akerlof predicted in 1993 that credit default swaps would lead to a major crash, and that future crashes were guaranteed unless the government stopped letting big financial players loot by placing bets they could never pay off when things started to go wrong, and by continuing to bail out the gamblers. (Not only has the government rewarded the gamblers, bailed them out and let them engage in a new round of risky betting, but it hasn’t even reined in credit default swaps.)

And instead of trying to restore trust in our financial system – which is a prerequisite for any sustainable economic recovery – Summers, Geithner, Bernanke and the boys have tried to sweep the problems under the rug and con the public into believing that everything is okay and that no real reform is needed.

As I wrote in October:

William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – says that that the government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are (“the entire strategy is to keep people from getting the facts”).

Indeed, as I have previously documented, 7 out of the 8 giant, money center banks went bankrupt in the 1980’s during the “Latin American Crisis”, and the government’s response was to cover up their insolvency.

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.

PhD economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can:

The current craze in DC policy circles is to create a “systematic risk regulator” to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

Baker also says:

“Instead of striving to uncover the truth, [Congress] may seek to conceal it” and tell banksters they’re free to steal again.


Time Magazine called Tim Geithner a “con man” and the stress tests a “confidence game” because those tests were so inaccurate.

William Black said:

How do you think we did the stress tests? Like doing a stress test on an airplane wing, but you don’t actually have airplane wing. And don’t know what airplane wing is made out of. It’s a farce.

And see this.

And while stopping the rising tide of unemployment is key to reversing the financial crisis, the government hasn’t done much at all to staunch the loss of jobs.

For example, as I wrote last August:

The government has committed to give trillions to the financial industry. President Obama’s stimulus bill was $787 billion, which is less than a tenth of the money pledged to the banks and the financial system. [106]

Of the $787 billion, little more than perhaps 10% has been spent as of this writing. [107]

The Government Accountability Office says that the $787 billion stimulus package is not being used for stimulus. [108] Instead, the states are in such dire financial straights that the stimulus money is instead being used to “cushion” state budgets, prevent teacher layoffs, make more Medicaid payments and head off other fiscal problems. So even the money which is actually earmarked to help the states stimulate their economies is not being used for that purpose.

Indeed, much of the $787 billion was earmarked pork [109], not for anything which could actually stimulate the economy. [110]

Mark Zandi – chief economist for Moody’s – has calculated which stimulus programs give the most bang for the buck in terms of the economy:


But very little of the stimulus funds are actually going to high-value stimulus projects.

Indeed, as the Los Angeles Times points out:

Critics say the [stimulus money reaching California] is being used for projects that would have been built anyway, instead of on ways to change how Californians live. Case in point: Army latrines, not high-speed rail.

Critics say those aren’t the types of projects with lasting effects on the economy.

“Whether it’s talking about building a new [military] hospital or bachelor’s quarters, there isn’t that return on investment that you’d find on something that increases efficiency like a road or transit project,” said Ellis of Taxpayers for Common Sense.

Job creation is another question. A recent survey by the Associated General Contractors of America found that slightly more than one-third of the companies awarded stimulus projects planned to hire new employees. But about one-third of the companies that weren’t awarded stimulus projects also planned to hire new employees.

“While the construction portion of the stimulus is having an impact, it is far from delivering its full promise and potential,” said Stephen E. Sandherr, chief executive of the contractors group.

It’s unclear how many jobs will be created through the Defense Department projects. Most of the construction jobs are awarded through multiple award contracts, in which the department guarantees a minimum amount of business to certain contractors, and lets only those contractors bid on projects.

That means many of the contractors working on stimulus projects already have been busy at work on government projects.even the stimulus money which is being spent [112]

David Rosenberg writes:

Our advice to the Obama team would be to create and nurture a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts. The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.[113]

Donald W. Riegle Jr. – former chair of the Senate Banking Committee from 1989 to 1994 – wrote (along with the former CEO of AT&T Broadband and the international president of the United Steelworkers union):

It’s almost as if the administration is opting for a rose-colored-glasses PR strategy rather than taking a hard-nose look at actual consumer and employment figures and their trends, and modifying its economic policies accordingly.[114]

As yesterday’s front-page story on ABC notes


Even as many Americans still struggle to recover from the country’s worst economic downturn since the Great Depression, another crisis – one that will be even worse than the current one – is looming, according to a new report from a group of leading economists, financiers, and former federal regulators.

In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.

The report warns that the country is now immersed in a “doomsday cycle” wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.

“Risk-taking at banks,” the report cautions, “will soon be larger than ever.”

Without more stringent reforms, “another crisis – a bigger crisis that weakens both our financial sector and our larger economy – is more than predictable, it is inevitable,” Johnson says in the report, commissioned by the nonpartisan Roosevelt Institute.

The institute’s chief economist, Nobel Prize-winner Joseph Stiglitz, calls the report “an important point of departure for a debate on where we are on the road to regulatory reform.”

The report blasts some of Washington’s key players. Johnson writes, “Our government leaders have shown little capacity to fix the flaws in our market system.” Two other panelists, Simon Johnson, a professor at MIT, and Peter Boone of the Centre for Economic Performance, voiced similar criticisms.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner “oversaw policy as the bubble was inflating,” write Johnson and Boone, and “these same men are now designing our ‘rescue.'”

The study says that “In 2008-09, we came remarkably close to another Great Depression. Next time we may not be so ‘lucky.’ The threat of the doomsday cycle remains strong and growing,” they say. “What will happen when the next shock hits? We may be nearing the stage where the answer will be – just as it was in the Great Depression – a calamitous global collapse.”


Frank Partnoy, a panelist from the University of San Diego, claims that “the balance sheets of most Wall Street banks are fiction.” Another panelist, Raj Date of the Cambridge Winter Center for Financial Institutions Policy, argues that government-backed mortgage giants Fannie Mae and Freddie Mac have become “needlessly complex and irretrievably flawed” and should be eliminated. The report also calls for greater competition among credit rating agencies and increased regulation of the derivatives market, including requiring that credit-default swaps be traded on regulated exchanges.

With the Senate Banking Committee, led by Chris Dodd, D-Conn., poised to unveil its financial regulatory reform proposal sometime in the next week, the report calls on Congress to enact reforms strong enough to prevent another meltdown.

“Sen. Dick Durbin once said the banks ‘owned’ the Senate,” says Johnson. “The next few weeks will determine whether or not that statement is true.”

(Here is the Roosevelt Institute report.)

Heck of a job, guys.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. nowhereman

    And the band plays on with all the usual suspects, what to do? what to do? None of these criticisms mean anything to the boys in charge.

  2. Namazu

    Wonderful recap. Thanks for the effort. One quibble: the multiplier effects presented in the table should be referred to as ‘estimated,’ not ‘calculated.’ With no disrespect to Mark Zandi, let’s not oversell what economics can tell us.

  3. Uncle Billy Cunctator

    ” …the government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are (”the entire strategy is to keep people from getting the facts”).”

    Ah our old friend the limited hangout. No, it is more that they are simultaneously covering things up *and* exposing them, or letting the press/blogs expose them. This creates fear and chaos. Outrageous claim? Why would they want to do this?

    1. Cynthia

      Failing to put the brakes on banking deregulations following the S&L debacle set the stage for future debacles to take place in the market. Back in the mid-80s, the Keating Five pioneered this push for further regulatory cuts in our banking system. They did this so that Keating and banksters in cahoots with the Michael Milkens of the World could be free to milk the S&Ls dry for themselves at the expense of many American retirees. So those who were at or near retirement bore most of the brunt from this debacle, leaving the rest of us relatively unscathed.

      Then in the late 90s to early 00s, further deregulations were enacted, unleashing derivatives into the marketplace. Enron was one of the first to make money hand over fist, not by producing more and better energy products and services, but by betting the farm on derivatives. At first, gambling on energy derivatives did pay off for Enron investors, enabling them to make a killing in the energy futures market. Then all of a sudden, they lost big time because the master minds behind Enron could no longer hide the fact that their company was awash in debt, sending this once high-flier on Wall Street swirling down the drain. Enron was a leading player in first inflating the bubble and then deflating it. This caused a load of nest eggs and college funds to crash and burn without causing much damage to well-diversified portfolios.

      Fast forward to the present, what the crooks are now doing in the credit market is what the crooks did to the S&Ls and Enron all rolled up into one. They manufactured a lot of Milken-like junk bonds and bet the farm on a whole slew of derivatives. But this time around, they are not just causing huge losses to those at or near retirement and college age, they are causing huge losses to people of all ages and from all walks of life.

    2. Cynthia

      Let me also add that a lot of the crimes being committed in the financial world today can be traced back to the crimes committed by Michael Milken. I truly believe that if all of Milken’s ill-gotten gains had been taken away from him, forcing him to live a life as a pauper, there wouldn’t be nearly as many criminals working in the financials today. But because such a light sentence was handed down to Milken by the courts, enabling him to still live a life as a king to this very day (Forbes in 2007 ranked him as the 165th richest man in America), many of our financial elites today know damn well that the odds are so heavily skewed in their favor of receiving little, if any, punishment for robbing investors blind that they don’t think twice about not conducting themselves as white-collar criminals.

      1. David

        I have the impression that the recent guys got away with much worse than Milken. Milken basically created the junk bond market, which may have exploited an existing hole in regulations at most. More recently, we have extensive regulatory capture of the government, synthetic CDO’s, etc. It’s like comparing someone who blocks traffic by jaywalking with someone who blocks traffic by burying landmines in the highway.

  4. Rick Caird

    Calculating multipliers seems to be not just be an art rather than a science, it is also an art determined by the special form of mathematics known as “political calculus”.

    I see no reason to accept the Zandi calculations as superior to any other. For example, Romer calculated tax cuts as about a 3x multiplier (that, of course, was before she joined the administration). Didn’t Moody tell us the MBS tranch was actually AAA and they never saw a problem coming?

    1. ndk

      The Keynesian multiplier estimations based on modeling may or may not be reasonable. I happen to think they’re ridiculous.

      But the missing, broader point may be that empirical testing of these models is almost impossible. GDP is very difficult to measure (and the dissonance of more directly quantifiable figures such as sales and income tax with the rest of reported economic data is screeching louder and louder by the day), but even if you could measure it properly, how do you apply the other ten thousand factors that may or may not have been involved?

      I think your statement is true not only of Keynesian multipliers, but of a significant portion of macroeconomic theory. We just don’t know, and until our data becomes a whole lot better, we can’t know. That is a perfect environment for political preferences to thrive under cloak of science, whether for tax cuts and libertarianism or government services and socialism.

      I lost a lot of interest in economics when I came to this belief. Rationalization of foregone conclusions is one of the most meaningless exercises in the world — unless you hold power, which we, the unwashed masses, most certainly do not. Oh well.

  5. MrMoney

    In my view banking insolvency has been the problem for some time. Now governments have taken on the debt and are facing their own insolvency. According to John Williams, using GAAP, the Net Present Value of Federal spending is now $9 Trillion, which is more than personal earnings even if we had a 100% tax rate!
    It is only a matter of time that the US dollar ship sinks, not a matter of if.
    A small comfort to Americans is that it is likely the British currency ship will sink first.

  6. psychohistorian

    The two observations that I have are that there are a lot more folks understanding the criminality in our midst than there were two years ago and the time to ultimate crash is closer than any other time in the 40 years I have been watching empire America.

    As hard as the coming change will be for the folks at the bottom, people need to understand that growth comes from change and without growth we are dead or worse wage slaves than currently.

    Thanks for the posting George!

  7. Advocatus Diaboli

    I think the real issue is far deeper. Our system is built on scarcity, while the last 60 (especially the last 30 years) have created an abundance of stuff and services, but no means to help people consume them without working useless jobs and going into debt.

    1. David

      I agree. There’s a lot of surplus and it’s not getting distributed properly.

      The mechanism for ensuring that the few don’t skim all the cream for themselves hasn’t quite been worked out. Communism is actually great in theory. It just isn’t known to work for human beings. Maybe it works for ants or angels. For humans, the problem is somewhat harder.

      1. Toby

        Communism, as Marx seems to have envisaged it, has never been tried. I haven’t read his work but understand he failed to describe how to bring it about. Lenin and co. seem to have been a bunch of lying political opportunists who replaced one hierarchy with another. I’m not for communism, but see in it a bugbear of the West’s making which isn’t really there. The whole “free markets = freedom = democracy” meme of the last 30 or so years has really muddied the debate, and will take a lot of unpicking.

        I don’t think the problem is human nature though, I think it’s human beliefs and expectations as shaped by culture. If human nature is anything, it’s social, flexible and malleable. By my reckoning, communism, which is a class-based solution which assumes hard work and labour, rather like Adam Smith does, is the Good Rock on which all Good Things can be built. Culturally a great majority of us believe in this holy sweat-of-the-brow ideal, but that’s exactly where times are really changing way faster than we can keep up with. Labour is becoming redundant. We are in the very first stages of AI, and if we went for it, could automate the vast majority of work still done by human hand. But of course, the current system could not cope with that, and most of us would say, “but what would we all do?” This failure of imagination, coupled with the status quo’s total investment in the current model, is our impasse.

        And then there’s oil, and how to replace it as the good cheap stuff disappears, burnt to smoke by our miraculous growth. Interesting times indeed…

  8. j. willis

    “Of the $787 billion, little more than perhaps 10% has been spent as of this writing. [107]”

    Okay, I have to take issue with the sloppy citation to a cruddy FoxNews article from June or July of last year and attributing a figure to this month. Never cite a google search either. That is a leading inquiry in that, in this era of referential databases, you can find any theory you want to support your conclusion. It is just a bad idea to be so blatant in your reverse engineered logic.

    But that’s not even my gripe.I read so deeply thoughtful comments here and interesting critiques but where are the solutions? Where is the problem solving? Not in the sense of prognosticating but of a plan to rectify the situation. I love gazing into my belly-button as much as the next person but sheese. How’s about a little less passive aggressive glee over the hot poo of a situation this economy is in, roll up a sleeve and get your hands dirty in repairing the problem.

  9. bluffraise

    Lots of Bankster bashing going on here. Banking system looks fine for now ( TED spread is healthy). So aggressive lending backed by the blank check of fre/fnm is then sold off to investors who lose money(A complex issue but …) The real problem is that the fundamental dynamics of world trade are changing creating some issues for the FED. Rates have been lowered a few times to try and prevent a 10 lost years Japan type situation. Japan is closest to China and the first economy to be impacted by the monster manufacturing base. No hiding from this no matter which side of the pond you are on.

  10. M.G. in Progress

    Excellent. The same is happening in Europe within the European Union. Elite of bureaucrats and bankers are too interconnected to regulate (and to tax): governments sell bonds of their Ponzi schemes and banks buy and trade them, sometimes also on their direct behalf. How can we change that?
    Think about a simple financial transaction tax to raise some revenues to be imposed on an industry, finance, whose contribution to economic growth and social development are being questioned. It’s just a matter of public choice and somebody has no interets to change the system as they live on it and with it.

  11. fresno dan

    Wonderful post. I wish there was a way to print this out with the links highlighted for future reference.

  12. fresno dan

    Actually, after fooling around with it, it was easy to print with the links in color.

  13. Andrew

    The United States economy will never improve. Bottom line, straight simple! The consumer is at fault for not saving and investing enough. They need to hit rock bottom before the problem is ever solved.

  14. sharonsj

    You ask where the solutions are. Unfortunately they lie with state and federal legislatures, which have to either pass new laws or enforce the ones we have. But as we’ve seen, both are corrupted by big business money. That chart was terrific, and it shows how little attention has been paid to real people. Most bang for the buck comes from social services but the government favors the rich instead. It’s gotten so bad, though, that perhaps the sheeple are finally noticing they’ve been screwed.

  15. brianr

    “Sen. Dick Durbin once said the banks ‘owned’ the Senate,” says Johnson. “The next few weeks will determine whether or not that statement is true.”

    We don’t need to wait until the next few weeks to learn what we already know is true.

  16. scraping_by

    “Critics say the [stimulus money reaching California] is being used for projects that would have been built anyway, instead of on ways to change how Californians live. Case in point: Army latrines, not high-speed rail.”

    What the stimulus money has done is replace the state tax revenue, which has disappeared with the American worker and the American job. The Rockefeller Institute did a good summary of that one.

    One can argue that by avoiding mass layoffs for state government workers, mass cancellation of state projects, and mass default of state bonds, the stimulus advanced the economy. However, government is productive in an indirect fashion. Without real value-added work, with tax cut gifts to the connected, without working capital in the workplace, with pointless speculation counted as GDP, the economy stays where it is and starts to slide back

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