You’re Living in a World Wrought by Central Banks. Notice Anything Wrong?

Yves here. In an interview with Lynn Parramore of the Institute for New Economic Thinking, Nomi Prins takes up and extends the argument that she has made over a series of books, that central bankers are ever-more administering policies that are good for the markets but very bad for the real economy and real people.

By Lynn Parramore, senior research analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

Ever wonder why it is that for most of the 21st century, no matter who is in the White House, no matter the state of the economy, and regardless of what ordinary people are suffering, money travels inexorably to the top?

If you find this baffling, you’re not alone. For many, it seems that the further we travel into this acutely challenging century, the political, economic, and social rules we thought we understood increasingly fail to apply.

Economist, journalist, and former Wall Street exec Nomi Prins is here to explain the inexplicable. Her latest book, Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever, is a highly readable and clear account of how the financial realm, with its central bank-fueled loose money and mega-wealthy financiers, has split off from the real economy, the place inhabited by regular working people who buy stuff and produce things.

The upshot: the people’s needs are increasingly ignored in favor of market demands.

Prins points to the 2008 financial crisis and the Federal Reserve’s response as the pivotal moment in which we jumped on a tiger that we can no longer seem to dismount. What was supposed to be an emergency response to a crisis ended up turning into an unstoppable addiction to cheap money which, Prins argues, initiated a vicious cycle of pumped-up financial markets, destabilizing inequality, a public left worse off, and a political system increasingly unable to make real progress on long-term priorities like climate change. She spoke to the Institute for New Economic Thinking about who is responsible, what the public needs to understand, and why this tiger will not take us anywhere we want to go.

Lynn Parramore: You’ve written several books about the U.S. economy and Wall Street. Why this new book, focusing on central banks and their influence? Why is this so important to understand now?

Nomi Prins: Since the financial crisis, one of the themes in my books is money and power. There’s a real thru-line from my 2009 book, It Takes a Pillage, which focuses on the financial crisis, to All the President’s Bankers (2014), where I go back into the history of American bankers and their political influence, on up through Collusion (2018), the global analysis of what happened from the financial crisis through the period before the pandemic.

That thru-line concerns this external body – the central banks – which can effectively manufacture money, and how this money, just by sheer mass momentum and the players involved, goes disproportionately to financial markets relative to the real economy. This activity, in fact, is detrimental to the relationship between markets and the real economy, and also to the real economy itself.

I wrote Permanent Distortion because to me, the distortion that money and power have created between markets and the real economy did in fact become permanent. It’s not just something we’re experiencing now, and then can we go back to a more glorious time when it wasn’t like this. It was around July 2020, when we were all locked down and not knowing what was going on with our lives, our personal economies, our health, and our families, when I realized that the Federal Reserve had doubled the size – or even more so — of its book of assets. It had created about $5 trillion worth of money in a very short period of time.

During that time, the markets went from being very afraid and down to being very, very high. A lot of people said, well, we’re all at home using Zoom, so therefore the market just rebounded by so much. But that was just a small part of it. The bigger part was that money became available at such an immense level and therefore the distortion between where money goes in the financial markets and where it doesn’t go in the real economy became permanent. At that moment I saw that this can happen in any amount, at any time. There’s no restriction, no transparency, no responsibility.

LP: You make a strong case that high finance has become unhinged from the economy, and you go so far as to say it has become disconnected from capitalism itself. What exactly does that mean?

NP: When I’m talking about capitalism in that sense, I’m connecting it to the idea of financial markets supposedly being created to aggregate money in order to then funnel it into companies, and therefore into projects, and on into the real economy.

So the idea, technically, from a capital market perspective, is that borrowing money in order to do something, or selling bonds in order to finance something, or selling shares in order to finance something, used to have a particular relationship to each other. If there was a transparent use for a company that had value to shareholders, they would be willing to effectively invest their money in order for that company to do what it does to grow whatever it’s growing. Part of that use could be profits, part could be wages, part could be cars. The point being that the relationship was more or less (though not always) transparent at a theoretical level.

But now there is more money being thrown into the markets from an outside source. It’s not money from the actual profits of a company or its long-term strategy, or the productivity of workers, or the creation of long-term things. You end up getting an unmooring between what markets are theoretically there to do in a capitalist society and from a capital-raising standpoint. There’s this other source that comes in and kind of turbo-boosts and distorts all of those relationships.

LP: You place the roots of this trouble in 2008, a year which, you point out, increased the power of central banks. Yet, Ben Bernanke, the very economist in charge of the Fed at that time, just won the Nobel Prize. As some have pointed out, we are living in the world he created, and many hail him as the guy who prevented the second Great Depression.How did he contribute to the alarming picture you paint of an economic system gone off the rails?

NP: I thought the Nobel Prize for Bernanke was a bizarre choice, although it made sense if you believed the narrative that attributed to him the power to save the economy. And he also happened to have written a lot of things historically about depressions. But if you actually dig into both what he did and what he wrote to win that Nobel Prize, you find a concerning story. To understand it, you have to go back to before the crisis was apparent to everyone — both during the Great Depression and during the 2008 financial crisis.

Back before it became apparent that a financial crisis was happening, there was an immense amount of leverage in the banking system over which Bernanke had a responsibility to regulate. There was also an immense amount of assets being created off the back of a very small amount of interest coming in from subprime loans. Those subprime loans themselves had issues, and Bernanke knew it because the banks knew about the interest payments, and their rising delinquencies, and defaults. A small amount of subprime loans were structured to feed into a large amount of other assets by said banks. As this was happening, either he didn’t want to pay attention or he thought looming problems would just go away as many banks did. But Bernanke had information from the banking system in his position at the top of the Fed and certainly through his connection to the New York Fed. He was deeply connected to those banks and their liquidity and rising delinquency and default problems and he just chose to say that everything was effectively fine.

He did that even before the crisis became apparent. Then, in 2007, when things were absolutely crumbling and even the shares of real estate developers were plummeting, when there was so much information all over the place and reports from the FBI were going into the Fed telling them there were issues, what did Bernanke do? He did nothing.

So when the crisis did occur, Bernanke ultimately used the tool of quantitative easing, which is basically creating electronic money in return for taking out that debt from the market and putting it on the Fed’s books for safekeeping. He put it there and most of it stayed there. Later it manifested a larger crisis, or a looming crisis, by injecting all that money into the market on the auspices of saving the real economy.

What actually happened was the markets rose precipitously over all of the ensuing years. There’s one or two years where they wobbled a bit, but, in all the period of time during Bernanke’s chairmanship of the Fed, the real economy stumbled. To me, the narrative that he saved things from being worse is a false one. Yet that narrative was perpetuated and is still believed today by the majority of people who care to think about it, like the Nobel Committee, apparently.

And what about Bernanke’s writing on the Great Depression that he had done back in the day – as supposedly the main reason he got this prize? Well, he’s had an aura of having such great knowledge of the Great Depression. He was the man who wasn’t going to let it happen again. Yet he forgot, or didn’t recognize, that one of the reasons the central bank did what it did from 1929 to 1931, a time when many banks collapsed, is that there was a housing bubble. There was also overleverage and a situation where Wall Street banks had been doing nefarious things with money. So one of the reasons that the crash happened and so many banks went under afterward was because of what happened before. The banks had become over-extended, over-leveraged and Fed wasn’t paying attention at the time.

Bernanke didn’t write about this. He wrote about what happened when the Fed tightened too much too quickly and caused another leg of the Great Depression. That strategy was something he wasn’t going to have happen on his watch, but he forgot or didn’t pay attention to anything that had actually caused the crisis, to what led to Great Depression. He showed the same blind spot in his approach to the financial crisis. To me, that’s like two negatives, two false narratives. The consistency in those two false narratives is that they are both related to over-leverage in the housing market, to Wall Street taking advantage of it, and to the Fed not doing anything.

LP: Let’s talk for a moment about economists and economic advisers that influence our political system. What can you tell us about their relationship to power? Does it cause them to have these blind spots?

NP: The National Economic Council is generally made up of senior business leaders and bankers with current jobs, so a lot of them tend to lobby for certain policies that benefit them. In this last go-round, there’s been an oddly exorbitant amount of lobbying to the Fed directly. There are about 120 different lobby groups that lobby the Fed directly, even beyond lobbying respective politicians and on behalf of respective companies or sectors! So “the economy” is really convenient as a funnel for any policy that has to do with money going in and out of anywhere. If policies are being formulated or explained by self-interested people or people that work for self-interested companies or parties, then they’re going to be skewed toward those people or companies. You don’t have Joe the Plumber hanging out in the middle of the Economic Council saying well, here’s what’s going on with my building and my house, now what are you going to do about those? That’s not how it’s structured. It ensures a very top-heavy approach to economics.

Take, for example, how the Fed views statistics, such as employment numbers, when it’s thinking about inflation or raising rates so quickly, which is really constraining to people on an actual budget facing other inflationary pressures, and, by the way, not actually doing anything about inflation. They’ve got the Executive Survey and the Household Survey. The Executive Survey counts every single job somebody has as a job in the economy, even if it’s the same person, whereas the Household Survey only counts one job per human. So those numbers are disparate. There’s a lot that can be interpreted in different ways and the framework has been formulated, generally, by economists who accept certain narratives, who tend to confirm or to say what needs to be confirmed or said to keep the status quo. They’re the ones that remain in those advisory positions. You do get people who might try to push the envelope a bit in terms of definitions and policies, but they don’t tend to stay around.

LP: You note in your book that our whole society has become alarmingly top-heavy due to these top-heavy approaches. I was struck by the statistic that in a single year of the pandemic, 2020, there were 500 new billionaires created, just as regular people were losing their jobs, losing their health, and many were losing their lives.

NP: Yes, that statistic gets people’s attention. My other favorite is from the 2022 Oxfam report, which says that the top 10 billionaires were making $15,000 per second. When I do talks on the book, I make everybody imagine that, to think about the speed of what’s going on here. It’s because those billionaires are invested in markets that their wealth is propelling up so much. All the speculation, though, is driven by this excess amount of available money, by what the Fed has done.

LP: You refer to this as wealth accumulation without accountability. In what sense?

NP: If you’re participating in a market that’s going up, obviously the more you’re participating, whether as the head of a company that has options for stocks, or as an investor, or as the retail person who is placing just the little bit they have on it, then you’re going to benefit from that proportion of upside because you’re in it. If you’re not in it, you’re not going to benefit from the upside. That’s just the math.

What we’ve seen is actually more money created than what was sensibly needed to save the economy, and it’s obviously not going into the real economy. I’ve gone through the stats of the Fed’s books related to the $600 stimulus payments, the extra unemployment insurance, and even the PPP loans. The remaining money was leveraged into the financial system. What was on offer to the markets from the Fed dwarfs what actually went into the pockets of real people in the real economy.

As a result, the money just tsunamied upward in a very short period of time. That money unmoored from the real economy and did nothing for it. There were a lot of narratives flying around and guesswork on why the markets ballooned so quickly. What you didn’t have to guess was that trillions of dollars were created, not just by the US central bank, but by central banks around the world. And this was accumulated into the financial system and financial markets.

LP: How does this distortion impact our ability to confront long-term challenges, such as climate change?

NP: This goes back to the question of accountability. If money is being drawn into one place or one set of financial assets, the financial markets, it doesn’t go into preserving the social contracts or the Main Street economy or the fractures in Main Street economics. I think that as a result, government leaders of both parties get lazy about pushing through longer-term strategies. Because there is this external force of money, it distorts all of the decisions. Parties argue back and forth about where money should go where and so forth, but it distorts all that just that much further because of the ease with which money can be created and multiply and go elsewhere. The idea of long-term strategies, like fighting climate change, suffer.

Yes, we recently had a bipartisan infrastructure act passed, and that was positive (though it’s taking quite some time to actually agree on where that money’s going to go). But going back to what capitalism could be, what if that money that went to financial markets had gone to directly build solar or wind energy? Or the electrification of manufacturing plants? Or water purification?

If it could have gone to these areas more quickly, then you would see more of a shift. The pace of getting what’s needed to fight climate change would be faster if it weren’t way easier for money to flit about, especially when created in abundance, into areas where it can just multiply itself more easily rather than in awaiting to build a whole new production center and or new energy strategy. The fact that money can multiply so quickly in the markets makes it harder for it to stick around in one of those lasting areas —to build necessary, physical things, like new or upgraded power mechanisms.

LP: You write about developments in cryptocurrencies and the metaverse as responses to this distorted situation. How do you see them evolving in relation to it?

NP: When I wrote about crypto, I also wrote about decentralized finance. They’re not necessarily the same thing, though they do share commonalities in that Bitcoin, for example, was created off of blockchain technology, which has been around for decades. But let’s just focus on the fact that crypto grew exponentially in the wake of the financial crisis. That’s when the famous Bitcoin white paper came out. That’s when the idea of fighting against the bailing out of banks spurred this vision of having some way of financing, borrowing, lending, and keeping money outside of the auspices of the more centralized financial system, which had shown itself to be a) reliant on the Fed and the government and b) not particularly stable.

Even though we’ve got, obviously, centuries of the establishment of different currencies, including the dollar (with the dollar becoming stronger and the reserve currency in the last century), the idea that something else can compete on a currency basis, or at least be another avenue if it were to be regulated and safer, was a direct result of what happened and how it was handled by central banks in the wake of the financial crisis. It’s also why that idea grew exponentially again in the wake of the pandemic, when the same things happened. Instead of saving the economy by saving Wall Street, the idea was that the Fed was saving the economy by — we don’t even know what — but ultimately money gushed into the markets again. That was one thing. But the decentralized aspect of it is also an interesting area of transformation and will be for some time — the idea of using technology to do financial transactions of all kinds away from the auspices of your Chase account or your Bank of America account.

In terms of the metaverse, I’m not talking about gaming and that type of thing, but of using technology to share, more directly, things like medical treatments or surgery secrets or what have you, across countries without everybody physically being in the same place, or engineering techniques that can allow easier fabrication of potential problems in new bridges that could be ironed out before the bridge is actually built or engineered so that you have more efficiency in the use of material. This is about pushing technology into something helpful for the building of real things and the creation of better and healthier lives for people through the auspices of virtual reality techniques.

LP: Some of that sounds hopeful, yet you use the word “permanent” in the title of your book. It sounds like we have no way of correcting this distortion between the financial markets and the real economy.

NP: I chose the term “permanent” specifically. It’s a big word. Given what happened in the wake of the pandemic and the fact that central banks could create so much money so quickly facing a crisis showed me that this can happen again and again. Not necessarily that big of an amount for that big of a crisis, but that we would have this unhinged, uncapped, untransparent process that can occur repeatedly.

Since I wrote the book, we have this high inflationary environment. The Fed is raising rates quickly, as are other central banks around the world. I think that’s creating a looming debt crisis for consumers, in particular, in the process, with the cost of money becoming so high for them so quickly. We’re starting to see delinquencies, defaults, and other problems arising as a result.

But be that as it may, in the U.K, the Bank of England, when faced with a pension crisis recently, was “forced” — as described by articles associated with it — but actually chose to create 60 billion pounds worth of money in order to buy gilts [the equivalent of U.S. Treasury securities] and to give a bid to the gilt market to raise the level of gilts. They chose to do that because gilts were declining precipitously and over-leveraged by a contingent of the pension fund community. The idea was that, as with any pension fund, you invest and the return that you get on that investment is part of what the pensioners needing to draw on their pensions get. But when there’s too much borrowing or there’s too much of a depreciation in the assets, then there’s a problem. You can’t pay what is owed to the pensioners.

That’s what happened in the U.K. As a result, the central bank is still raising rates – tightening policy — and on the other hand, they’re creating more money — loosening policy — in order to buy those gilts. I think we’re going to continue to see these types of situations. That’s what I mean by permanent. There’s always going to be this possibility of money coming into some part of the market when it needs it because (particularly in developed countries) central banks can do that.

How do we get out of it? We can’t. First of all, it’s important to note that this is happening and not to accept false narratives, like the story that a host of $600 stimulus checks paid out two years ago is causing inflation today. That’s just really annoying and stupid. We need to understand that the Fed didn’t inflate money in order to pay people those $600 checks or help fund the PPP loans and whatever else was going on at the time. That’s not what’s causing our inflation. There’s a bigger picture. One of the things I think we can do is literally ask ourselves the question, do you think that this monetary body in Washington has the ability to do anything that can actually make my electricity bills go down by virtue of raising the cost of my credit card debt or my personal loans or my mortgage? The answer should be no. We need to understand and think about these relationships so that at least we don’t accept what’s false and we don’t become blind, to what’s going on. The public needs to know this. Congress should know this. That’s what I hope my book can do: educate people.

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  1. flora

    Thanks for this post.

    I hope it’s not “too out there” to wonder if the FTX centralization, administration (such as it was) of cryptos was a proof of concept scheme for something, (besides being a ponzi scheme) ? / ;)

    ” …administering policies that are good for the markets but very bad for the real economy and real people.” sounds like something Milton Friedman had in mind in his book “Freedom to Choose.” Pure neolib bunk. My 2 cents.

    1. Adam Eran

      One note of interest: Friedman’s manifesto Free to Choose remains in print, and is available in a variety of forms on Amazon for around $10 (free audiobook, though!). There’s also an entire page of Friedman products, including a TV series, and other items. It’s in my library in several forms too.

      What is not in print or in my library now is Friedman student Elton Rayack’s Not So Free to Choose ($84 on Amazon). A devastating take-down of Friedman’s monetarism that, point by point, demonstrates Friedman was an ideologue, not a scientist.

      Anyone who believes the U.S. population is not subjected to massive amounts of propaganda is just not paying attention.

  2. Bubble Man

    So when the markets start collapsing, does that mean they’ll restart QE ? Inquiring minds got to know. My pet theory is all those $$Trillions in bubblicious currency will have to go somewhere to earn a yield if prices start tanking hard, and nothing responds to hot money flow like crypto :>

  3. flora

    “He did that even before the crisis became apparent. Then, in 2007, when things were absolutely crumbling and even the shares of real estate developers were plummeting, when there was so much information all over the place and reports from the FBI were going into the Fed telling them there were issues, what did Bernanke do? He did nothing.”

    I remember in fall of 2007 Bernanke went before a Senate committee who were asking about a growing bubble in the housing market. Bernanke said there was no problem. A Senator asked why some banks no longer required mortgage insurance for loans with less than a 20% down-payment? Bernanke said that was not a problem. … what! No mortgage insurance required for loans made without the traditional down-payment requirement to avoid mortgage insurance? That’s the instant I and thousands of others knew something was wrong in that market. When Benanke later in self-defense asked “who could have known?”,well everybody with any experience in the real world knew. EVERYbody knew there was a Wile E. Coyote moment ahead. When this was pointed out the “experts” said something like “we only listen to other experts. All the experts agreed there was no problem.” riiight.

  4. Glen

    Those policies make it look much less like a “market”, and much more a dole line for oligarch screw ups.

    I’m all in favor of a strong free market, but I don’t think we have one anymore. One first reform must be that any Wall St bank even FORCED to accept a bailout has to also be FORCED to get new people in the C suite. This use to be much more routine back in the day, but now we get to see guys like Jamie Diamon repeatedly run JP Morgan Chase into the ground, and still be hailed as a genius. Sorry, but he’s just a very very rich n’ powerful [family blog] up, and those are the worst kind of [family blog] ups. Let’s not pretend we have in any way a meritocracy as long as guys like him get bailed out and left in charge.

    The laws put in place after the Great Depression were much better at protecting the innocent (the public), and allowing the elite f’ups to get flushed. Bring back Glass-Steagall. Ultimately, that created a better free market than the current Dodd-Frank “perpetual stealth bailout of elite losers”.

  5. Karl

    There is a one-sided risk profile to Fed policy.

    QE–> Asset inflation. How much QE is too much? Don’t know. As Powell said “We really don’t understand inflation.”

    This uncertainty about causes (of inflation) means means risk, namely adverse consequences from inflation-fighting actions, some intended some unintended

    But who bears Fed policy risk?

    Here’s the asymmetric risk profile: Heads (QE) the oligarchs win. Tails (demand destruction) the peasants lose. As follows:

    Too much inflation–> Raise interest rates–>Workers get laid off–> Demand Destruction

    Asymmetric risk, asymmetric return, asymmetric pain. Welcome to the plantation economy.

    1. eg

      This is because central banks are aristocratic institutions inimical to labour — it’s their purpose and design which leads to their function and outcomes.

    2. Tom Pfotzer

      And so why have we not developed econ systems which are designed to overcome these limitations?

      Demand destruction for products produced by oligarchs would be a good thing if it was accompanied by demand re-directed toward products whose production system was owned by the little people.

      This is an obvious alternative.

      Why not give it a good look, and ask “what would it take to enable the little people to design, develop, and _own_ appropriate-scale production systems so that the little people can capture more of the benefits of productivity?”

      Not just ask the question, but go on to thoroughly answer it.

      1. Karl

        Are you thinking, perhaps, of “Small is Beautiful” (Schumacher) appropriate technology?

        Today’s computer laptops, which enable the individual to work remotely at home, are analogous to the cottage spinning wheels of yesteryear. Or, for a closer analogy, the home printing presses of yesteryear. Now we compose, “typeset” and “print” digitally. Computers and the internet enable “remote work” for the information processing (PMC) class, which is quite a perk. The gig economy (e.g. home delivery, uber/lyft etc.) has found similar ways for people to find niches with self-owned capital. This is growing, but can it become dominant? In manufacturing at least, I doubt it.

        Consider the economies of scale of the fabled pin factory in Adam Smith’s Wealth of Nations. Today’s equivalents can be vividly seen in China, with veritable armies — numbering in the thousands at one work site — of people sitting at long tables, carrying out a single step of a complex assembly process on a long assembly line. I can’t imagine this kind of thing decentralized and efficiently carried out by individuals with their own capital. So much requires centralization, consistency, and obedience.

        That said, I think getting the assembly line workers to own/control the means of production, decide on their own working conditions, and share the profits is quite feasible. It may well be the future.

        This form of organization resembles the workers’ cooperative. Having an ownership stake in the enterprise may actually make the workers more motivated, and the work itself more meaningful. Hence, the productivity may surpass that of organizations owned by impersonal, absentee capital.

  6. Mildred Montana

    This is a fascinating interview. I will only focus on something the interviewer said as part of a question:

    “…many hail him [Bernanke] as the guy who prevented the second Great Depression.”

    There’s confirmation bias writ large. How do we know Bernanke prevented the second Great Depression? We don’t. How do we know what would have happened if he had done nothing? We don’t.

    Therefore his Nobel Prize (which ain’t actually a Nobel) is based on fallacious reasoning.

    1. Ludus57

      Thanks for remind us that there isn’t a Nobel Prize in Economics.
      It is actually awarded by the Swedish central bank – how appropriate in the context of this article – but purposefully steals a ride on the back of the genuine Nobel Prizes, because apart from a few honourable and noteworthy exceptions, usual winners are usual suspects in the economic and financial fields.
      I’m sure there must be a metaphor for our age and times somewhere in there!

      1. Adam Eran

        I’d suggest some sports / tennis / golf club start giving awards “In Memory of Alfred Nobel” to their good players. Let’s have lots of Nobel prizes! That’ll fix ’em

  7. spud

    bernanke did nothing because he was a kool aid drinker who believed it was smoot-hawley and FDR that caused the great depression.

    bernanke was of course a creation of woodrew wilson, americas first fascist prototype.

    so he ignored the collapse of markets, because he thought it could not happen.

    so i do not blame bernanke, i just understand the fed should not even exist.

    in bernankes eyes, bill clinton set all of the wrongs that FDR did, right.

    so how can someone like that regulate?

    bernanke and his type of course must be exposed and dumped on. but this guy set the whole thing up,

    The financial crash of 2008 was the result of so many complex, compounding factors that people still can’t agree on who, if anyone, was responsible. However, there’s one name that keeps cropping up again and again: Bill Clinton

    1. Adam Eran

      May I also add Milton Friedman as an enabler of fallacious thinking?… I still remember Bernanke conspicuously sucked up to Friedman at some public (birthday?) party.

      Factoid of interest: Friedman’s ideology gets aired in Free to Choose — a book available still (~$11 on Amazon), and in several versions (paper, electronic) in my library.

      What’s not available is Elton Rayack’s answer: Not So Free to Choose. It looks like it’s out of print ($84 for a copy on Amazon), and it’s certainly not in the library. Rayack was a student of Friedman’s and piece by piece dismantles the advanced superstition of Monetarism. Honestly, after reading the book I was astonished that anyone could be as mendacious and deceptive as Friedman. The guy lies just to keep in practice.

  8. Tom Pfotzer

    I have a strong emotional response when I think back to the moments in 2008 when the bailout happened. I made an unprecedented (for me) effort to stop that bailout.

    If you’d like a quick refresher on the positions the politicians, the public, and some prominent critics took regarding that bailout episode, here’s a quick 5 minute refresher.

    Skim the first paragraphs unless you’re unfamiliar with the general structure of the bailout, and go down to the sections on Views from the public, politicians, financiers, economists, and journalists.

    The one I liked the most was from William Seidman.

    Seidman compared the bailout with action he and his team at the Resolution Trust Corporation (RTC) took during the savings and loan crisis of the 1980s: “What we did, we took over the bank, nationalized it, fired the management, took out the bad assets and put a good bank back in the system.”

    RTC was formed in 1989 to clean up the mess caused by … lots of small banks (Savings and Loans) making bad lending decisions during a real estate bubble.

    The Great Financial Crisis of 2008 was caused by …. several very large banks making bad lending decisions during a real estate bubble.

    Look how much different the response was – to the very same behavior – 20 years later.

    1. baldski

      One good thing though, people went to jail because of fraud during the S and L crisis. No one suffered jail from Wall st. during 2008.

      1. Adam Eran

        According to William K. Black, the relevant regulators filed 30,000+ referrals for criminal prosecution during the S&L debacle, and Justice prosecuted 1200+ cases with a 90% conviction rate. They got big fish, too, like Mike Milken and Charles Keating.

        Fast forward to the GFC (Global Financial Crisis = subprime/derivatives meltdown), and you’re talking about something 70 times larger in financial terms. So…how many referrals for criminal prosecution from the Obama administration’s regulators? Answer: zero.

        My Trump-deranged friends simply refuse to believe Obama is to blame for much (“The Republicans were so darned intransigent!”). But the supine treatment of Wall St. is what really angered enough voters to elect Trump (a saboteur). Republican pollster Frank Luntz reports the Obama administration was the first time he’d seen people in his focus groups weep…because they were so angry that Wall St. got the gold mine while Main St. got the shaft.

  9. steelhead23

    I suppose it is too trite to mention that those USTs and other bonds the Fed purchased at par from the banks are rapidly declining in value. How’s that for not losing money? My guess is that they will hold these until maturity or some future crisis to avoid admitting losses from their gaming. Nomi is right, but I cannot accept that these machinations by the Fed, which have demonstrably reduced the quality of our lives and the strength of our democracy (I posit that inequality is the antithesis of unity and a cancer on democracy), are wholly outside our control. Rather, this situation calls for a reduction in the Fed’s autonomy, through legislation or oversight or both.

  10. Jeremy Grimm

    “She spoke to the Institute for New Economic Thinking about who is responsible, what the public needs to understand, and why this tiger will not take us anywhere we want to go.”

    I wonder why the “public needs to understand”. What difference would it make if everyone in the public understood how and how badly they are being screwed? I have not noticed any tendency of late, for the u.s. Power Elite to give any consideration to what the public wants, or needs — with the possible exception of providing ever greater resources to ‘law’ enforcement, prisons, and the MIC to maintain a steady supply of brutal enforcers of the ‘law’ … of the ‘law’ controlling the common public. I should note there is some consideration of the public in the efforts the u.s. Power Elite makes through their largely wholly owned media to control the thoughts of the common public.

    The best use I can make of knowing and understanding what is going on is to accept that speculation in the stock market will continue to be profitable until it cannot be. The u.s. government will continue its policies supporting the wealthy until it cannot. I am not sure what if anything might limit government supports for the wealthy. Such thoughts tend to suggest careful speculation in equities offers an almost guaranteed gain. The u.s. government watches Big Money’s back, and I might best, at very little risk, ride a few carefully chosen coattails — something I have been loath to do even knowing and understanding what was going on. All power and profits to Finance and Monopoly, and the ‘economics’ justifying government policy is a sadistic and sad joke. I suppose it were wise at this juncture to focus on cultivating my garden.

    1. Tom Pfotzer


      Note in the link I provided above, that public opinion re: bailout was massively against.

      A lot of bludgeoning was required to mute that perspective.

      It was at this time that I finally, finally, after massive beatings, realized that democracy was a sham, and I was a fool to expect reasonable, public-interest behavior from top-down.

      That was the well-spring of the “bottom up” perspective that I advocate.

  11. John R Moffett

    It all boils down to the fact that government let too many rich people acquire far too much money for any single person to actually spend or invest. Once that had become the status quo, you had people with more money than many small countries. You had people who could completely distort the government, the courts and the news media. This was obvious years ago, and is only worse now. My question always has been, how could anyone or anything reverse this now? I don’t see any mechanism whereby people or government could regain control from the oligarchs. I don’t see the government confiscating the ill-gotten gains of billionaires. I don’t see any plausible mechanism to get that money back into general circulation. The rich won’t make that money go to work, they will gamble with it, and bribe people with it and use it fore vanity projects. So how does this end?

    Good question. Love to hear anyone’s ideas on that.

    1. Tom Pfotzer

      To John Moffett, and Jeremy Grimm, above:

      a. We probably can’t change much at the macro level. The rich know what they’re doing, and they’ve perfected the top-down control mechanisms.

      b. Jeremy Grimm proposes two solutions: anticipate the rich people’s wealth-extraction tools, and ride their coat-tails, and plant a garden (produce for one self)

      Both are viable solutions, and IMHO, ought to be pursued in tandem.


      Let’s examine the “plant a garden” strategy.

      Autarky: produce what you need for yourself, as a means of functioning in an economic context that:

      a. Doesn’t need you, or your labor
      b. Predates on your need to acquire key inputs from the macro economy

      “producing for yourself” – certainly cannot be done at the household level. It might be somewhat do-able at the village level, while buying what can’t be produced locally from the regional/national/global macro economy.

      I emphasize: what was ridiculous 20 years ago is now very much possible. And could be quite a bit more possible 20 more years from now.

      Is 20 years a long time?

      Let’s agree that this process leading to autarky is slow, gradual, incremental. Let’s agree that it takes a level of cooperation that is far beyond what we currently exhibit.

      Should we wonder, maybe even experiment, to see if what is actually possible? To plot out the trajectory toward “enough autarky”?

      Many times I’ve suggested that “what’s possible” is very much in motion. What was ridiculous even two decades ago is now being done. It’s perfunctory. The landscape has changed, markedly.

      Would autarky materially change the power relationship between the predators and the sheep? What do you think?

      Please contest these assertions, so I can get a sense of where the objections are, and try to respond to them.

    2. Jeremy Grimm

      How does it end? I believe it ends in tears, lost in the rain. It ends in Collapse. We are past the point of repair and nearly past the point where some deliberate and effective adaptation or amelioration of the future’s Collapse might be done.

      1. Jeremy Grimm

        I was adding the following before sending this comment in —-
        I hope I am not amiss in pointing out that “cultivating my garden” was a reference to Voltaire’s Candide. It is not a direct suggestion of producing what you need for yourself — although that seems like a very good idea. Even if you are unable to produce all that you need for yourself a few plants can provide a lot of summer and winter squash, tomatoes, and potatoes, weather and plant diseases allowing. Corn and soy beans are grown aplenty already, but generally used for other than food uses. Living in the right region might enable the purchase of a bushel or two of these staples, and similarly, some areas offer wheat or barley.

        1. Tom Pfotzer


          Went _right_ over my head.

          Yet another case of projection, of which I am guilty a dozen times a day.

          Good for a laugh. :)


    3. eg

      If Walter Scheidel’s thesis in The Great Leveler is correct, the only force which reliably reverses inequality is mass political violence.

      1. Tom Pfotzer

        I think the countervailing force is mass:

        a. awareness of the situation
        b. evolution of econ systems which meet the public’s needs
        c. implementation of those systems

        We have not yet tried this approach in a systematic way.

        Specifically, item b) hasn’t received the attention necessary to develop econ systems that enable the public to devise, create, and _own_ production systems.

        Furthermore, the tools available to the public are vastly different and better than they were during the periods that the Great Leveler book analyzes.

    4. rob

      I could see “the beginning of the end” of banks dominion over the people, starts with “monetary reform”
      Since the chicago plan of the thirties,which was a response to THE FEDERAL RESERVE private system of banks/money creators, there have been groups attempting to inform the public ever since. They have pointed out the ability of the governemn to create “greenbacks”, debt free money.
      The kucinich bill “the NEED act” made it through the house legal hurdles and is written in bill form for people to SEE “a plan”.
      That bankers creating OUR money supply was going to be a problem, was “the other side of the debate” when “the bankers” created and passed their private money system in 1913 , in the federal reserve act.
      At this time,
      the debate between MMT and monetary reformers is that the monetary reformers believe that LAWS NEED to CHANGE. everyone espousing a fiat currency can believe in the fact that the creation of money by law is viable. It is done now. What monetary reformers are trying to add to the picture is that the “system” of private money creation is part of an ecosystem OF wall st.
      Rolling the functions of the fed, back into the treasury where they belong, is the first key step to having transparency as to what the purpose of all that money creation is. Which seems to be precisely the point of this author. And people who feel the fed can go on as it is now, can not really expect ANYTHING to change. Our system promotes wealth concentration by the top. The bottom is forever at THEIR mercy. And we all know they have no mercy. So the system needs to change.
      But as they say, we can’t get there from here.
      the calls for a national monetary commission, are also echoing in the silence.
      There are plans. there ought to be more discussion of HOW to reign in wall street influence.
      But many people obviously were brought up with a certain mindset, and they just can’t seem to see outside their boxes.

  12. NoFreeWill

    “If you find this baffling, you’re not alone. For many, it seems that the further we travel into this acutely challenging century, the political, economic, and social rules we thought we understood increasingly fail to apply.

    Economist, journalist, and former Wall Street exec Nomi Prins is here to explain the inexplicable. Her latest book, Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever, is a highly readable and clear account of how the financial realm, with its central bank-fueled loose money and mega-wealthy financiers, has split off from the real economy, the place inhabited by regular working people who buy stuff and produce things.

    The upshot: the people’s needs are increasingly ignored in favor of market demands.”

    All of this is basic capitalism as explained by Marx, with the standard machine operating in standard ways. Central banks have always been run in favor of the wealthy by the wealthy… so if you find this baffling you have never been educated about the very basics of political-economy. How people like this can pass for intellectual is beyond me.

    1. Adams

      In my view “…intellectual…” is a sloppy word. It, of course, includes posers (T. Friedman), liars (L. Summers), and characterological, obsessive, self-deceiving dissemblers (slavish, drooling MSM pundits generally in the service of “their betters”/employers and empire). Personally, I like intelligent better. There are many kinds of intelligence. Importantly, intelligence has nothing to do with qualities like goodness, honesty, empathy, etc.

      Nomi Prins is, very obviously, intelligent. Her particular gift is not, as you point out, relating our current disastrous political economy to Marxist or other historical systems of thought critical of, e.g. the inexorable tendency of wealth/power to concentrate in a self-perpetuating cycle interrupted only by violence. It is, rather, the ability to see clearly the political/economic mechanism of our utterly corrupt current financial system and to translate her understanding into language accessible to many. In the tradition of William Greider (“Secrets of the Temple: How the Federal Reserve Ru(i)ns (sic) the Country” (1987)).

      “Who Will Tell the People?” Prins is giving it her best shot. Her motivation is humanistic.

  13. John Steinbach

    Curious that she didn’t talk about ultra-low interest rates driving savers into “investors,” spiking the stock market & mainly benefitting the filthy rich.

  14. Tom Pfotzer

    I’ve recently wondered who is officially responsible for formulating the U.S.’ long range econ policy.

    So far, I’ve identified the President’s Council of Economic Advisors as the org with the portfolio and the capacity to do the job. Here’s a link to their latest report.

    The table of contents is:

    Chapter 1: The Public Sector’s Role in Economic Growth
    Chapter 2: The Year in Review and the Years Ahead
    Chapter 3: The U.S. Economy and the Global Pandemic
    Chapter 4: Investing in People: Education, Workforce Development, and Health
    Chapter 5: Barriers to Economic Equality: The Role of Monopsony, Monopoly, and Discrimination
    Chapter 6: Building Resilient Supply Chains
    Chapter 7: Accelerating and Smoothing the Clean Energy Transition

    IMHO, the official plan is reactionary (short-term band-aids), and misdirected (doesn’t solve the core problems).

    If I were to write this report, this is what _my_ table of contents would be:

    Core problem 1: Wealth-creating capacity is too concentrated
    Core problem 2: Design of the economy is wasteful and ruins the planet
    Core problem 3: U.S. economy isn’t producing what the rest of the world needs

    Remedy 1: Invest in local-scale economic development _capacity_. Provide major seed capital, training systems and local facilities which support the design, prototyping and commercialization of production processes which will be built and owned by locally-owned small businesses. Emphasize production processes which create and use renewable energy, are energy efficient, re-use materials, and substitute labor for new materials acquisition.

    Remedy 2: Identify the causes of energy- and materials-waste in our major industries, and provide major seed capital, training systems, and operational standards to systematically replace errant components of these core production systems, with emphasis on the energy, agriculture, materials, transportation and health care industries.

    Remedy 3: Provide seed capital and trade assistance to prepare the products developed in Remedies 1 and 2 for export to the _developing world_, starting with the Americas.

    In the spirit of Economic Democracy, I ask you to consider writing an outline of _your_ National Economic Plan, and see how it stacks up to the Official Version.

  15. Gulag

    Hi Tom:

    I like your general ideas about local-scale economic development. Getting even more concrete, you should check out the Valhalla Network (with its CEO Richard A. Werner–who is an advocate of decentralized economies) now in the process of actual construction in the UK. This network will create a series of small community banks that will fund small and medium size enterprises on local and regional levels.

    He has combined a blockchain ledger (which gives you local accountability and transparency, with small community banks.

    It seems to me like a quite an innovative combination.

    1. Tom Pfotzer



      That is right up my alley. Small community banks … is such a good idea.

      There are almost none in my county, and just one credit union, only open to one local water utility’s employees and family.

  16. Felix_47

    Will the government bail out crypto? There are a lot of paper profits to be saved and a few Muppets that have been fleeced. Under the guise of helping the Muppets the oligarchs will get their paper profits made whole. I suspect it will. And the business model of funding politicians with this type of money seems quite effective. We really have only one political party in the US and it represents the top 5 percent. As Joe points out in his view, and I presume his parties view, 500,000 per year is middle class. Gotta help the middle class. In my family at the Thanksgiving table the only ones doing well are lawyers.

    1. Yves Smith Post author

      No, the banks don’t like crypto. Total market cap down from a peak of $3 trillion to >$900 million now. No wheels have fallen off, so no systemic risk issue.

      And if muppets mattered, we wouldn’t have seen the non-stop erosion of labor rights, real wages, and social safety nets sinc the 1970s.

  17. Telee

    I thought an NC article had explain that there is no Nobel Prize for economics. Yet in this discussion we are told that Bernanke was selected by the Nobel committee. And these are the expert authorities!

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