Auerback: The Real Reason Banks Aren’t Lending

By Marshall Auerback, a portfolio strategist and fund manager who writes at New Deal 2.0

Our Treasury Secretary has conceded that it is still a “tough economy” for most Americans, and warned it’s possible the unemployment rate will go up for a couple of months before it comes down. Given the constellation of recent economic data that has come out, Tim Geithner is probably correct.

The US economy is showing signs of slowing, as the fiscal stimulus is dissipating and spending contractions at the state and local government level increasingly undermine the injections from the federal sphere. Worse, it appears that much of the growth has resulted largely from a replenishment of inventories, a process which largely seems to have run its course. Excluding this inventory re-stocking, underlying growth was a very tepid 1.5% annualised. Fiscal drag from state spending contraction could well reduce overall consumption even further in the quarters ahead, an ominous trend for future growth and employment prospects. While we may not experience a “double dip” in purely technical terms, it will certainly feel like a return to recession for most Americans if Geithner’s assessment is anywhere close to being accurate.

At this stage, there is a widespread belief that government fiscal stimulus has run up against its “limits” on the grounds of “fiscal sustainability” and the need to retain “the confidence of the markets”. Consequently, goes this line of reasoning, as private credit conditions improve the private sector must pick up the baton of growth where the public sector leaves off. If this proves insufficient, there is room for an expansion of monetary policy via “quantitative easing“.

Recent speeches by the Fed suggest that they are indeed laying the groundwork for such a return to quantitative easing, or “QE2″ as the markets are now calling it. It’s not the name of a ship-liner: quantitative easing essentially means that the central bank buys up high yielding assets and exchanges them for lower yielding assets. The premise is that the central bank floods the banking system with excess reserves, which will then theoretically encourage the banks to lend more aggressively in order to chase a higher rate of return. Not only is the theory plain wrong, but the Fed’s fixation on credit growth is curiously perverse, given the high prevailing levels of private debt. More borrowing is the last thing the highly stressed and leveraged American household requires today.

As we have argued many times in the past, credit growth follows creditworthiness, which can only be achieved through sustaining job growth and incomes. That means embracing stimulatory fiscal policy, not “credit-enhancing” measures per se, such as quantitative easing, which will not work. QE is based on the erroneous belief that the banks need reserves before they can lend and that this process provides those reserves. But as Professor Scott Fullwiler has pointed out on numerous occasions, that is a major misrepresentation of the way the banking system actually operates:

In the U. S., when a bank makes a loan, this loan creates a deposit for the borrower. If the bank then ends up with a reserve requirement that it cannot meet by borrowing from other banks, it receives an overdraft at the Fed automatically (at the Fed’s stated penalty rate), which the bank then clears by borrowing from other banks or by posting collateral for an overnight loan from the Fed. Similarly, if the borrower withdraws the deposit to make a purchase and the bank does not have sufficient reserve balances to cover the withdrawal, the Fed provides an overdraft automatically, which again the bank then clears either by borrowing from other banks or by posting collateral for an overnight loan from the Fed.

The point of all this is that the bank clearly does not have to be holding prior reserve balances before it creates a loan. In fact, the bank’s ability to create a new loan and along with it a new deposit has NOTHING to do with how many or how few reserve balances it is holding.

What is required to drive lending is a creditworthy borrower on the other side of the bank lending officer’s desk, which means an employed borrower, whose income allows him to sustain regular repayments. Absent that, there will be no lending activity. It is pointless to blame the evil bankers for this of state affairs, since they don’t control fiscal policy, which is the remit of the Treasury.

For all the talk from policy makers about not repeating the mistakes of Great Depression, we seem to be perilously close to doing precisely that. This is largely based on a poor understanding of the economic dynamics of that period, even by that noted scholar of the Great Depression, Ben Bernanke.

Most people believe the economy crashed between 1929 and 1932 and then remained depressed until the Second World War, which finally mobilized the economy’s idle resources and brought about a full recovery. That’s complete bunk if you calculate the unemployment data correctly (see here for an explanation) . Even leaving aside the unemployment calculations, it is abundantly clear that, once the Great Depression hit bottom in early 1933, the US economy embarked on four years of expansion that constituted the biggest cyclical boom in U.S. economic history. For four years, real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. There was another shorter and shallower depression in 1937 largely caused by renewed fiscal tightening (and higher Federal Reserve margin requirements). This second depression has led to the misconception that the central bank was pushing on a string throughout all of the 1930s, until the giant fiscal stimulus of the wartime effort finally brought the economy out of depression.

That’s incorrect. The financial dynamics of the huge economic recovery between 1933 and 1937 are extremely striking. Despite their insistence that changes in the stock of money were behind all the cyclical ups and downs in U.S. economic history, even economists Milton Freidman and Anna J. Schwartz in their “Monetary History of the United States” conceded that the money aggregates did not lead the U.S. economy out of the depression in 1932-1933.

More striking, private credit growth seemingly had nothing to do with the takeoff of the economy. Industrial production, off the 1932 low, doubled by 1935. By contrast, bank credit to the private sector fell until the middle of 1935. Because of the collapse in nominal income during the depression, the U.S. private sector was more indebted than ever in the Depression lows. Yet somehow it took off and sustained its takeoff with no growth in private credit whatsoever. The 14% average annual increase in nominal GDP from early 1932 to 1935 resulted in huge private deleveraging, largely as a consequence of aggressive fiscal stimulus.

Tim Geithner should be aware of this, but like his old colleagues at the Fed, his main obsession remains deficit reduction, which is why he is now expending considerable political capital on allowing the Bush tax cuts for the wealthy to expire. Ironically, one of the more amusing aspects of this particular issue is the sight of Republicans such as Mike Pence and Eric Cantor arguing that job creation is more important to Americans than deficit reduction (hence, we should extend the Bush tax cuts for the wealthy, even as their party fought vociferously against extending unemployment insurance benefits for the past several months).

The reasoning of Cantor and Pence is perverse, but on balance — however disingenuous and politically insincere — we support the GOP’s born again support for job creation over deficit reduction. We just wish they would refocus on something that would really help reduce unemployment, such as a Job Guarantee Program. A disproportionate amount of the stimulus program has been enjoyed by those who least need it. We would like to see the Obama Administration at least begin to make the case that fiscal stimulus, whether via tax cuts or direct public investment, is still required to generate more demand and employment. They should not concede anything in this area to the politically insincere GOP, which never met a tax break for the top 2% of the population that they didn’t like.

There might well be very good reasons, on grounds of social equity, to minimize the income gap between the rich and the poor, but Geithner and Obama are not making the case for the elimination of the tax breaks on these grounds. Rather, they continue to do so on the basis that this is the “fiscally responsible” thing to do. This is also consistent with the President’s odd championing of a “bipartisan commission” to study entitlement “reform”, where the focus appears to be on cutting Medicare and Social Security — in effect gutting the Democrats most substantial social legacy of 20th century.

The only concern about government deficit spending should be a whether it generates inflation, in which case it should of course be slowed down. None of those critique the ongoing fixation on fiscal sustainability, or “pork”, or “entitlement reform”, do so on the basis that there are “no limits” on government deficit spending, as has been alleged. What we do argue is that deficit cutting per se, devoid of any economic context, is not a legitimate goal of public policy for a sovereign nation. Deficits are (mostly) endogenously determined by the performance of the economy. They add to private sector income and to net financial wealth. They will come down as a matter of course when the economy begins to recover and as the automatic stabilizers work in reverse (i.e. tax receipts rise and social welfare expenditure comes down). When our policy makers begin to understand this, we can stop with the counsel of despair and actually do something that reduces unemployment today, not years from now — when it will be far too late.

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  1. Rob Elam

    The stimulus funding is hardly dissipating for any business other than the Big Banks and their kin. The distribution process has been so slow to meet up with smaller and innovative businesses that the job creation, while not huge, is just beginning. For instance, hardly any of the “Clean Energy” funds have actually been signed and deployed to business, and given the hard date of completion required by ARRA funds I’d expect these dollars flow freely and quickly as the Fed and local Govt agencies can allow. Maybe the traders and speculators don’t quite get this- per usual and why that aspect of our economy is a drag not a benefit.

    1. beverageBubble beveridgeCurve

      on these grounds. Rather, they continue to do so on the basis that this is the “fiscally responsible” thing to do. This is also consistent

      People don’t mind that they are doing the right thing for the wrong reasons. Who gets the credit for thinking it through is immaterial. Reality remains that we get more stimulus for our dollar though tax cuts than through government pork, roughly twice as much. The cause for this reality is clearly the middle-man in government, the man who takes the money from under the table as he mis-allocates resources now rapidly dwindling. Greater lag-time? You bet.

      Can we justify the income gap? Perhaps, but we no longer have the time to support the enormous gap when we should instead focus priority on generating industrial activity. We need to stop taxing the poor. We need to have twice the personal exemption and double the standard deduction. Payroll taxes should be abolished forever. We should have the Mexican System of buying drugs without prescription for adults only. We need much more scrutiny on surgeons doing contraindicated procedures followed by re-operations which might have been prevented. Medical providers who accept Government Money should not be allowed to use collection agencies.

      Does our government need less of earmarks and more of national policy clearly stated and implemented in more coherent execution?

      U B Judge!

      U B Thurgood

  2. charles 2

    “This second depression has led to the misconception that the central bank was pushing on a string throughout all of the 1930s, until the giant fiscal stimulus of the wartime effort finally brought the economy out of depression.”

    You forget that there are TWO components necessary to get out of a Depression : the public infrastructure push is of course one (to lay the seeds for future productivity increases and avoid tearing the social fabric), but it is not the most important. The most important is the debt jubilee, I.e. the eradication of a good chunk of the existing debt/entitlements/financial asset. This latter process has been accomplished by WW2 through two mechanisms :
    – “patriotic” forced saving, with some element of supressed consumption (you didn’t need only dollars to consume during WW2, you needed coupons as well). After the war, the real value of these savings was shaved through a short period where real interest rate were deeply negative. People didn’t protest then : They were extatic enough to see their loved one come home, what is a loss of 20 or 30% of real value of investment in this context ?
    – destruction of “loser nations” financial assets (both Japan and German governments bonds ended up close to zero), and a good chunk of their real assets. “winner nations” in Europe also saw a strong devaluation of their financial assets. Thank to the strong haircut taken by these losers, the haircut for US was allowed not to be too high. And the Marshall Plan was just chump change compared with this difference.

    Who will take the biggest hit for the 21st Century’s Jubilee that we will have to go through ? I wish I knew the answer. Again, being of the winning side of global conflict(s) will help. Place your bets !

  3. attempter

    It’s absurd on its face that bona fide stimulus wouldn’t be “fiscally sustainable”, but the Bailout (QE2 representing a new offensive thereof) can be.

    So rationally the concept makes zero sense.

    It’s also another version of trickle-down, which has already been proven innumerable times to not work. That every system cadre (and die hard idiot supporters of both parties) continues to claim to believe in it simply comprises the most viciuos tenure any Big Lie has ever had. (That’s because it’s the most class war-handy Big Lie which was ever devised, the most profitable.)

    Trickle-down would also be morally unacceptable to any freedom-loving self-respecting human being even if it did work. No one would ever accept having the wealth we the producers create stolen from us on the promise that a few crumbs of it will trickle back down.

    Yet the ideologies of conservatism and liberalism have this robbery cycle as the core of their concept of how the economy and “civilization” itself should work. The only difference is that evidently many liberals, i.e. the “true progressives”, seem to still be stupid enough to actually believe it. Conservatives and corporate liberal hacks largely know it’s a lie.

    Finally, any trickle down, in this case QE2, is redolent of 30s style appeasement. By now we all know the banks aren’t willing to lend, even after all the trillions they stole pre-Bailout, and all the trillions they’ve stolen since the Bailout commenced (all on the explicit propaganda premise that it’s to “get them lending again”).

    So anyone who still says “we need to give the banks more, appease them, so that they’ll behave better going forward”, is an obvious criminal. It’s nothing but the appeasement of the aggression of larceny at the level of Nuremburg capital crime.

    So in QE2 (just like QE1) we have the morally vile trickle-down policy which is also proven not to work, being sold now by a 30s-style appeasement propaganda. Needless to say, any and all talk of how anything needs to be done to “instill confidence” in the terrorist markets is also such crime, such advocacy of the appeasement of what is clearly a fascist aggressor.

    1. reslez

      Marginal productive theory is another Big Lie of capitalism. People continue believe it despite all evidence because it gratifies either their egos or their bank accounts. Mitchell did a great skewering of it recently:

      Marginal productivity theory emerged in the second-half of the C19th as the conservatives became scared of the growing popularity of Marxism. Industrialists hired economists to develop theories that made capitalism appear to be fair. […]

      Marginal productivity theory both explained but also justified the outcomes that the capitalist system produced. All was fair. If you wanted higher wages you had to invest in skills to generate higher marginal products. Someone who had invested more in skill development would get a higher return.

      But then it was observed that persistent differentials in wage outcomes remained that could not be explained in terms of productivity differentials….

    2. NOTaREALmerican

      Re: The only difference is that evidently many liberals, i.e. the “true progressives”, seem to still be stupid enough to actually believe it.

      It’s a fundamental part of their “ism” story (created by their brain’s bullshit machine).

      “The progressives” are (basically) socialists (to various degrees), meaning they believe that a big smothering mommy government – run by the very very very very very smart “progressive” people of society (bullshit) – exists primarily to direct the wealth of the country to “the deserving” people or projects (more bullshit).

      Like all “ism” true-believers, “the progressives” brain cannot comprehend that the very very very very very smart people running their Mommy Party will ALWAYS be the sociopaths of society (meaning, the sociopaths will always run organization with large amounts of loot).

      Centralization allow the sociopaths to concentrate their own brain power on capturing all the loot. “The progressives” desire for centralization is why fascism always win (the kick-ass Daddy Party). Only decentralization would force the sociopaths to compete with each other giving “the nice people” some chance (however small) against them; but, of course, decentralization is incompatible with “true” socialism (the brain’s bullshit).

      1. attempter

        “The progressives” desire for centralization is why fascism always win (the kick-ass Daddy Party). Only decentralization would force the sociopaths to compete with each other giving “the nice people” some chance (however small) against them; but, of course, decentralization is incompatible with “true” socialism (the brain’s bullshit).

        As we saw in Spain, liberals and communists would rather see fascism win than see anarchism work, which it did until it was violently destroyed from without.

  4. Defennder

    I’m puzzled by the explanation that monetary aggregates did not lead the US out of the Great Depression. Wasn’t FDR’s devaluation of the US dollar against gold the single greatest monetary stimulus the US received post 1932?

  5. Conscience of a Conservative

    Consumers are not spending because they feel poorer from seeing the rate of return on their savings shrink due to ZIRP.
    If the Fed were to eliminate paying interest on Bank reserves and raise the Fed funds rate banks would indeed pay more to attract deposits, money would again have value and consumers might be inclined to spend more from the increased wealth. This would be especially true for that segment of the population on a fixed income and would have the additional benefit of not pushing investors into risky products in the search for yield and return.

  6. reslez

    The idea of a Job Guarantee is quite interesting and I look forward to reading more about it on Prof Mitchell’s blog and elsewhere. However my enthusiasm is tempered by three things: 1) It can never happen in the current U.S. political climate, 2) It can probably never happen ever because it would benefit blacks and other minorities and thus would be instantly slated for defunding and destruction, and 3) Were a JG somehow enacted, it would be twisted from its very conception into a vile mockery of itself: a Ring-Wraith Job Guarantee designed to suck billions of dollars from the government into the bulging pockets of private slave contractors.

    And is that really the sort of thing we want to encourage?

    All the US government does is designed to shovel cash to the wealthy and their pet banks. No large scale government intervention will ever benefit anyone but the wealthy. That is the reality in which we live. Until I see any evidence to the contrary the JG will remain an interesting idea for some other, less obscenely bought and paid for, country to investigate.

  7. joebhed

    I’m not sure Marshall’s characterization of QE as carried out here(US) is quite accurate.
    One of Bernanke’s “exigent-driven” powers-nouveau is the direct purchase of corporate “stuff”. This has at most a very indirect effect on bank reserves. Corporate gets that money first.

    Perhaps more important is the fact that he is correct regarding the ineffectiveness of relying on ill-defined and very poorly understood pump-priming at the central-bank level under the QE label.

    Quantitative Monetary Easing, being more specific.
    What exactly is that? Who really knows?
    What are the QE options?

    This paper shows how little we really understand about Quantitative Monetary Easing as a matter of monetary policy support for the national economy.

  8. Gary Anderson

    You can still blame the evil bankers for pushing up the housing prices with easy money, thereby causing a crash that resulted in uncredit worthy borrowers. You can sure as can be blame the banksters for the initial bubble.

    Without the bubble, fewer people would have been upside down. Millions fewer.

  9. lambert strether

    The purpose of our current governmental arrangement is to redistribute wealth upwards. Auerback seems not to understand this.

    It was not always this way, but it is now.

    1. Marshall Auerback


      Believe me, I understand! I laugh when people describe President Obama as some sort of Robin Hood style socialist, when in fact his administration is presiding over one of the most regressive transfers of wealth in our nation’s history. I think I’ve made that point abundantly clear both here and in the past, and I don’t see the basis on which you could draw the conclusion that I think differently to you. The fact that we’ve discussed this several times in the past means that I find your comments even more confusing.

      1. dave

        If you believe this then why believe in more stimulus, if stimulus is just a cover for looting (either intentional corruption or through simple government incompetence).

        1. attempter

          This I agree with (if this is the same Dave I’m arguing with elsewhere).

          It’s incoherent to promiscuously advocate something like MMT (or e.g. a VAT) which would be good policy under a totally different system but would only be hijacked and perverted under this kleptocracy.

          That’s why I say MMT or other stimulus advocacy could be a good prescription as part of a completely transformative prescriptive package, but is pointless as a stand-alone prescription under these criminal circumstances.

          1. greg b

            I agree that more than just stimulus needs to change. Real transformation of policy needs to accompany the spending to minimize the kleptocracy…..but the alternative of not doing any stimulus is worse than doing poorly targeted stimulus. Austerity is the WORST possible option.

            A JG program would be a very effective stimulus and outside of scamming some of the administrative costs virtually all the spoils would go to the workers.

  10. Dan Myers

    The argument for ‘stimulus only limited by the threat of inflation’ is debunked by the now-watered-down measure of inflation that we adopted last time we had this issue. You can ignore food and energy prices for your ‘mathematical calculations and intellectual debate’, but I suspect 90% of americans that are hurting will feel no impact from a ‘low inflation’. They do, however, feel the impact of ‘real’ inflation every day when they buy groceries and fill their tanks. So stop wasting our time talking about low inflation. The americans that are in pain are not buying it, and neither should politicians when they are being lobbied to open the spingots further. Maybe a nice big dose of reality, objectivity, and truthfulness will get us back on the right path in this country.

  11. John S.

    Yves, why do you publish this guy’s stuff? Just to demonstrate a counterpoint argument to all we believe? Marshall would have loved the Soviet system, even up to the day it imploded.

  12. ep3

    everything that Obama/geithner/the right wing are doing is with the intent of cutting demand. We as a planet are growing too big for what the earth can provide for us. We are already running out of oil. Word is that water will be the next scarce resource. The world cannot sustain 7 billion people living like the American middle class of the 50s and 60s. We are slowly being weened away from that lifestyle. The American middle class was created because the baby boom generation was a politically dangerous threat to the establishment. So by providing them with health care, pensions, good jobs, and low debt costs, they became politically lethargic. But this created false optimism. These people looked at the world thinking their offspring would have an even better life than before them. All the while those offspring were being put at financial disadvantages; escalating cost of an education, offshoring of even basic employment, increased costs of health care, loss of defined benefit pensions, use of debt/equity to maintain their standard of living. All the while elected officials continued to say these were just blips in an otherwise rising tide that lifts all boats. So they piled on more debt thinking that “i will always have a job” and “I will always get a raise”.
    I don’t think we are at the tipping point yet. but the pieces of the puzzle are being put in place to return to pre-entitlement separation of classes. I suspect when most of the baby boomers start dying off a few years after their inheritances run out, thats when we will see things hit the fan.

    1. NOTaREALmerican

      Re: thats when we will see things hit the fan.

      Agree. We’ve all (probably) been following this financial “thing” for 3 years now. ALL the solutions proposed by the insiders, all the ups-n-downs of the various “markets”, and all commentary from MSM, is ALL based on a vague measurement of peasants optimism. Nothing else. The “markets” won’t collapse until the gamblers have used up all their optimism. The peasants will continue to spend every dime they get their hands on until their optimism is gone (all this talk about the peasant’s new savings paradigm is nonsense).

      What you say of: “I suspect when most of the baby boomers start dying off a few years after their inheritances run out, thats when we will see things hit the fan.” will happen slowly over the next generation. When the peasants are completely broke (and there’s no optimism left) then change happens (of course, it will be a change for the worse – the US that exists in the fantasy of “the progressives” was killed long long ago, there’s NO going back. The bad people have won).

  13. Costard

    Yes, Auerback, bravo. I look forward to your world of government jobs. I won’t get fired, I’ll barely have to work, and as you so cleverly point out, this paid social uselessness will have NO effect whatsoever; in fact it will be a benefit, precisely because I’m paid! More money chasing fewer real services and goods — sounds like paradise.

    And also, if I flap my arms very fast, clearly I shall fly. Particularly if I jump off of a high precipice, so that I get more flaps in.

    On a side note, I always get a laugh when folks talk about the Republican party’s deference to the top X%, an allegation that seems curiously immune to numbers. So who, in your theory, is more stupid: the Republicans, for spending all of their energies on a tiny minority that votes overwhelmingly Democratic, or the american public that continually votes Republicans into office? Perhaps the American people, too, are “insincere and politically disingenuous”.

    1. Anonymous Jones

      You can laugh all you want, but it probably impedes your ability to actually understand the argument that is being made, and I can assure you, despite your laughter and your mangled recitation of the argument, that the real underlying argument is strong. The policies, regardless of who is voting for them, overwhelming benefit that top X%. If there are *any* facts that dispute this, I will gladly change my mind.

  14. Jim the Skeptic

    “What is required to drive lending is a creditworthy borrower on the other side of the bank lending officer’s desk,…”

    We should concentrate on the simple truths of our predicament and this is a good one even if incomplete.

    Our economy is a very complex system with multiple feedback controls. In an ideal system the feedback controls would be neutral, neither stimulating or retarding the stable system.

    Beginning in the mid 1980s our economy began to sicken. Instead of addressing the underlying problems we increased the positive feedback by decreasing interest rates. Borrowing increased and saving decreased, both acting to stimulate consumption. As the economy worsened we reduced the negative feedback by eliminating regulatory controls. This acted to soften credit underwriting standards. Why be concerned about the creditworthiness of the borrower if you could sell the debt to some unsuspecting investor? This acted to stimulate consumption since you could get cash if you could ‘fog a mirror’. Interest rates were lowered after every recession, stimulating consumption was the order of the decades! Eventually all the feedback controls were in position for maximum consumption.

    The hyperdrive was maxed out, the boiler pressure was redlined, the accelerator was to the floor, the… well you get my point. Consumers were in hock up to their eyeballs and those who were creditworthy had less and less desire to borrow even at low interest rates.

    Switching metaphors, the music slowed and there was a rush for the chairs by the financial institutions, it was the beginning of the end. The result was that investors became concerned about creditworthiness and some of the negative feedback was restored.

    Oops, recession by about December 2007. Normally you would increase the positive feedback, consumption would be increased, and the economy would pick up. But most of the positive feedback was already being used and what was left would not compensate for the negative feedback being applied. (Creditworthiness) Reducing interest rates could not increase consumption enough with consumers already deeply indebted.

    The only solution is to repair the underlying problem which caused our economy to sicken. Anything else is just cosmetics.

  15. mannfm11

    Marshall makes some good points, but I think the biggest point is that FDR neutralized the gold drain when he closed the banks and replaced gold reserves with Federal IOU’s at the Fed, then seized the gold from the public. That can’t be done again. The US was more like China in the depression era, a rapidly expanding capital economy that ran into a credit limit. That economy invested itself broke. This one has spent itself broke. The comparison to war time debt is entirely out of question, as war debt took care of itself when the war stopped. Japan has already shown the cards that this kind of economics doesn’t work. Plus, they are calling this a consumer problem, but the entire economy is deep in debt and the assets are still in a bubble. Currious they always miss the fact that the stock market bottomed nearly a year before FDR took office, so capital to use capital was already mobilizing. What we face today is the rich elite are going to go broke if they don’t inflate and let them, in the words of Richard Prior, Keep riding their horsey.

  16. Larry

    There is plenty of liquidity in the market, the Fed has pumped over a $1 billion.

    What is missing are 14 million manufacturing and administrative jobs (and 4.6 million small busineses) – that were the stepping stone to the middle class for 20 years – that now reside in China and Asia.

    1. Dave

      And THAT is the essence of the problem. The difference between “then” and “now” is that “then” the US had a strong real-world manufacturing economy to drive the engine of production, export and wealth creation. “Now” the US has nothing but cushy “finance” jobs and “knowledge work”, with the hard tangible production having been shifted to China by the greedy mercantilists at the top in order to squeeze a few more points of EBIT to pad their stock schemes.

      What served the short term interests of the few certainly does not serve the long term interests of the many. US corporations, acting in rational self-interest have in concert “sacked” their customer, the American worker. Can we be surprised that there is nothing to now lead the US “out”?

      I hate to say it, but for once … “this time, it’s different”!

  17. Jim

    Wow! I just read a suggestion for structural change made by NotaRealAmerican. There is hope for the future!

    “…only decentralization would force the sociopaths to compete with each other giving “the nice people” some chance (however small) against them:…”

    Couldn’t agree with you more–also been admiring the comments of Attempter in trying to get us out of the conceptual straitjackets of the last 200 years of U.S.

    As I have said on many occassions the “progressive” community needs a theory of the state as a part of a new guiding vision.

    And if the libertarians could come up with a critique of of Big Capital we might be on the way to forming an exciting new political coalition which would make Big Bank, Big Government and Big Capital extremely nervous.

    My question for both camps is the following: Is cultural disintegration logically prior to to the apparent manipulation of human desires ascribed to the powers of Big Capital and Big Advertising?

    Or stated another way: did the evolution of the United from a decentralized colonial structure to a traditional nation-state contribute to a cultural and social disintegration that is,on the left, only attributed to Big Capital?

    Or stated still another way: Was the nation-building business primarily a political project which cannot be reduced exclusively to its economic component?

  18. mike

    I was born during WWII and, looking back on the post-war period now, I see one overwhelming thing which made it inevitable that our economy would grow into prosperity after the war: the US and Canada had the only functioning manufacturing capability in the world. Even Marshall plan money which we gave to Europe simply came back to us as the European countries bought the things which were needed to rebuild their infrastructure.
    My father was an engineer who traveled extensively to Europe and even Japan at a time when such travel was pretty difficult and expensive. He and his coworkers were doing site visits necessary for reconstruction.
    We couldn’t lose until we had successfully “brought our way of life” to the rest of the world. After that, the consequences were inevitable, given that we had to increase the quality of own way of life vs the rest of the world until until we had no productive way of doing that any more.

  19. Lord Karth

    Could it be that we’re looking at the wrong side of the ledgers here ?

    Given what I have seen about the state of the various large banks, could it not be that it is the BANKS that are hurting, and not necessarily the lenders ? We know that mark-to-market rules have been just about cleaned off the books; banks can now value their assets at pretty much whatever level they choose to. We also know that the larger corporations have been squirreling cash aside like nobody’s business, which reduces their need for borrowing. We further know that the Fed has been giving the banks a major gift in the form of a guaranteed-income carry trade.

    Conclusion: the big banks are more than technically insolvent. They’re broke, every last one of them. The so-called “Toxic Asset Relief Program” did not get toxic assets off the books; it was a payoff to the counterparties of various derivatives brokers.

    The carry trade is designed to give the larger banks the illusion of solvency. In reality, what we have is a dead-broke government ($ 130 trillion in unfunded liabilities, you know !) is giving illusionary money to dead-broke banks.
    Zero plus zero equals zero. They CAN’T start raising interest rates, because then the major banks will not be able to continue attempting to restore their balance sheets.

    Once reality hits, the banks’ bankruptcy will be revealed. When that happens, wave goodbye to the financial system. On that day, we really WILL see “Depression 2.0”, and it’s going to make Depression 1.0 look like a teddy bears’ picnic.

    You Have Been Warned.

    Your servant,

    Lord Karth

  20. Lord Karth

    Small correction: instead of “not necessarily the lenders” should read “not necessarily the potential borrowers”

    Sorry !

    Your servant,

    Lord Karth

    1. Deus-DJ

      Oh excuse him, he meant tax cuts for the top X%; I guess you don’t like referring to them as the rich?

  21. Progressive Ed

    A wonderful tongue in cheek essay:
    —“Job Guarantee” program
    —“Gov. deficits create net financial wealth”
    Hilarious!!! Plus, the neo-Marxist claptrap in the comments is a great frosting on the cake.

  22. Richard Kline

    So Marshall, I’m sympathetic to most of your main points, but I differ to a degree with the way you frame the central point of your argument in this particular post. Yes, there was a great rebound in GDP in the 1933-35 range—in per centage terms. But that is because GDP had had a pulmonary embolism in the 31-33 range after the banking system had widespread failures. The ‘rebound’ didn’t bring the absolute level of GDP back to anything like a long-term normal trend and nothing like the pre-Crash levels. So presenting the GDP change as something in the nature of a recovery trend is misleading. I think you understand the details here well enough to know that, though at the same time I don’t think you’re trying to mislead anyone here, I’m not saying that. (I’ll also say in passing that Depression economic history isn’t something at which I profess expertise.)

    Now, as you say, this corrective bounce in GDP in the 33-36 range was not driven by any huge increase in domestic credit, nor even less by fusting about with the money supply. The best argument for recovery as I read the record is that, first, a large amount of debt was written off, taking a boot off the throat of demand. Second, there was some attempt to at least backstop further employment losses through government intervention, not that this led to substantial employment _gains_ that early. Direct government employement throught the WPA and support for unionization only came after 36, and its record of net demand creation is debatable though likely positive.

    In short, GDP correction from the Great Depression depth was not necessarily a self-organized process per se; it had help. But per you larger point in the post, that help was _not_ in the form of credit provision to the domestic economy. Through analogy from the historical record, then, by far the best thing we could be doing in this country to promote _actual_ recovery in 2010 is first, to write off debt debts/close bankrupt concerns, and secondarily t directly support employment (not indirectly through hope-and-a-prayer private hiring). Of course we are in no way doing either such thing.

    Why then are Ben, Tim, Larry, and BO riding the credit provision horse up and down crying alarums if this isn’t going to help consumer demand and has no record of actually working in deflationary Depression-like circumstances? Because that credit to the banks isn’t intended to go to actual consumer lending but rather be siphoned off into speculative profiteering. That’s right, credit isn’t about the real economy, it’s intended as a booster shot to support inflated asset prices. This wasn’t the point of your post, but perhaps you’d consider it: the present credit provision strategy is entirely political in nature, and a bailout of the speculative sectors, secondarily a prop to asset prices. This is the Japan Strategy, entirely and down to the punctuation, not anything from US Depression economic intervantion, another set of interventions entirely. Thus present credit provison isn’t intended to EVER reach consumer demand directly, regardless of what is said for public consumption. That’s how I read it. A con job as far as the presentation, in short.

  23. Rob

    With the recent weakness in the economy, we can now expect the Federal Reserve to reinstate their quantitative easing (money printing) program. Most pundits now expect the Fed to print another $2-3 trillion to prevent deflation at all cost. With this level of money printing, we are likely to enter hyperinflation some time in the future (3-5 years). The deflationists will disagree, but let’s face it: History tells us that large amounts of money printing will eventually lead to hyperinflation (defined as more than 50% a year). But the deflationists will deny this with Japan as an example and claim that money printing does not lead to lation. My answer to them is pretty simple: Look at all of the countries throughout history that have printed money and see what occurred. Every such country except Japan has experienced high inflation, if not hyperinflation. So knowing that the US will suffer this fate, what can you do to protect yourself?
    The complete article is at:

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