Correcting the Correction of the Big Lie by Dean Baker

Barry Ritholz has a nice takedown of Mayor Bloomberg's claim that Congress forced the banks to make lots of money by selling bad mortgages. As Barry rightly points out, this is not a story that serious people can tell. It's like denying climate change or evolution.

However, there are two items worth correcting in Ritholz's account. First, the core problem facing the economy today is not the legacy of the financial crisis, it is the bursting of the housing bubble. While it was a lot of fun watching the banks fall like dominos in the fall of 2008, and seeing all the honchos who told us this could never happen staying up late on weekends trying to stem the crash, this is really secondary in the story of the economy's current problems.

Whatever the problems of the banking system, they are not holding down the economy. Creditworthy borrowers (by pre-bubble standards) can get mortgages at record low interest rates. The same is true for larger corporations who borrow directly on credit markets. Even few smaller businesses report access to credit as major problem.

Rather the economy's problem is that there is no source of demand to replace the consumption driven by housing bubble wealth that has now disappeared or the housing construction that resulted from hugely inflated bubble prices. We would be in pretty much the same situation today even if there had been no financial crisis. This can be seen by the example of other countries, most notably Spain, that had a much better regulated financial system. Like the United States, Spain had a huge housing bubble that burst, as a result it is still facing double digit unemployment even though it had no financial crisis.

The other item that needs correction is Ritholz's comment that Greenspan and the rest believe that leaving the market to run itself is the best way to manage the economy. In fact, Greenspan and other alleged free marketers have no interest whatsoever in the free market. They totally support explicit insurance, in the form of deposit insurance and implicit insurance in the form of "too big to fail" guarantees. The banks have taken advantage of the latter insurance in a big way in the last three years.
What we are really fighting over is not a free market, but rather whether the banks will have to pay for the insurance that they get from the government and also face restrictions on their actions as a result of this insurance. (The company that insures my house prohibits me from setting up a fireworks factory in the basement.)

It is understandable that banks, that want to get their government insurance for free, would like to pretend that they just want a free market, but people who don't share the banks' agenda should be not be fooled by this claim.

Quick Thoughts on the Obama Administration's Opposition to a Financial Speculation Tax by Baker


The End of Loser Liberalism available for free here.

Jared Bernstein has a blogpost about Baker's new book.

As Dean sees it, conservatives are not at all the free market advocates they claim to be.  You’ll be hard pressed to find Adam Smith’s invisible hand anywhere in the story he tells, but you’ll see conservatives’ thumbs on policy scales throughout the economy.

There’s the anti-inflation bias at the Fed, which puts more weight on price stability than on low unemployment, thus providing greater protection to the assets of the wealthy than to the livelihoods of working families.  There are the strong dollar and trade policies that put our manufacturing workers at a comparative disadvantage to our competitors.

There’s anti-union bias, the government bailout backstopping the biggest banks, government-provided patent monopolies, corporate liability protections, favorable tax rates for non-labor income, and housing policies that disperse the biggest benefits to the richest homeowners.

In every case, the wealthy have used their money, power, and clout to tweak the politics and the market in ways that make money float up.  Yet their rhetoric is all free markets, with lots of deep caterwauling against liberals and their socialist ways.

Dean’s argument is not, however, that liberals should embrace true free market ideology.  While he wants the market to work out the details around those issues that markets handle most efficiently—pricing commodities, for example—he has no beef with structuring market returns.  He just wants them structured on behalf of the broad middle-class on down to the poor.