And Now, the Counterargument

And Now, the Counterargument « James Kwak at The Baseline Scenario

James Kwak paraphrases Willem Buiter: "William Buiter at the FT argues that the U.S. cannot afford a major fiscal stimulus because the government (by which I think he means the entire political system, not just the Obama Administration) has no deficit-fighting credibility. . . Buiter’s argument is essentially a tipping-point argument. Yes, the markets seem unconcerned about U.S. government debt, but pass that stimulus bill and all of a sudden - or shortly thereafter - they will panic."

Buiter, a Dutchman posing as an English Tory, is convenient for this role as a Cassandra, because his alien status does not call into question the central absurdity of so-called conservatives and centrists opposing the stimulus spending as "too large", but, at the same time, favoring tax cuts that would blow a huge permanent hole in the government's finances. Because let's be clear about this: the "entire political system" does not lack deficit-fighting credibility; the conservative partisans and self-styled "responsible" centrists, who, traditionally, would be arguing for fiscal responsibility, have abandoned that role, to advocate for tax-cuts-for-the-rich as a panacea, and increased military spending as a necessity regardless of circumstance. The "conservatives", in short, are mad for Empire, however, short-lived Empire must be, when their patrons are termites munching on the imperial superstructure.

Buiter's argument is NOT a "tipping-point argument". It is a piece of demagoguery -- a "Be Afraid, Be Very Afraid!" argument, designed to keep people huddling under their blankets upstairs, while Buiter's thieving friends make off with the silver downstairs. Kwak appears to see this, but doesn't say it, though he hints. Until the U.S. government starts borrowing in foreign currencies, the financial structure doesn't exist for the kind of "tipping-point" Buiter conjures. (Buiter knows this, of course. Which makes him a liar.)

That doesn't mean that Buiter is wrong to worry about the political struggle over deficits and taxes. Deficits matter. But, a more realistic assessment would highlight a far more realistic scenario: Republicans and centrists will favor stealing the Social Security trust fund over taxing the Rich, and they will call it "Entitlement Reform" and congratulate themselves on their political courage. It does take courage of a kind to break into someone's house and steal.

There's an on-going political struggle in the U.S., as in every democratic country, and, in the main, as in every country, it is a struggle over the distribution of income, wealth and power. Who gets what, where and when. Duh.

The U.S. has no particular, global political fiscal disability, but it does have an on-going political struggle over the distribution of income and wealth, in which the Federal deficit is a weapon and Federal solvency is hostage.

The choice -- pro and con -- is whether to turn on the lights, and go downstairs, and chase the thieves until they drop the loot, or, as Buiter would have it, huddle afraid upstairs, until all is lost.

Is it time to panic, yet?

The Senate has delivered an absolutely appalling "compromise" stimulus package. But, hey, why worry? The economy is only in free-fall.

Consensus

There's a lot of criticism of Obama's attempt to fashion a politics by consensus, emphasizing compromise, bi-partisanship and a featured role for the centrists.

The bipartisanship is running up against the determined opposition of the most homogenous, thoroughly reactionary Republican Party since Alf Landon led the rump of the GOP into the catastrophic election of 1936. John Cole uses an apt analogy: "I really don’t understand how bipartisanship is ever going to work when one of the parties is insane. Imagine trying to negotiate an agreement on dinner plans with your date, and you suggest Italian and she states her preference would be a meal of tire rims and anthrax. If you can figure out a way to split the difference there and find a meal you will both enjoy, you can probably figure out how bipartisanship is going to work the next few years."

And, then there's the "centrists". They're not exactly insane -- lacking, by definition, the radicalism -- but they are not exactly grounded in the moment either. Appeasing the centrists - Paul Krugman writes:

". . . centrism is a pose rather than a philosophy. And to support that pose, the centrists are demanding $100 billion in cuts in the economic stimulus plan — not because they have any coherent argument saying that the plan is $100 billion too big, not because they can identify $100 billion of stuff that should not be done, but in order to be able to say that they forced Obama to move to the center.

Which raises the obvious question: shouldn’t Obama have made a much bigger plan, say $1.3 trillion, his opening gambit? If he had, he could have conceded to the centrists by cutting it to $1.2 trillion, and still have had a plan with a good chance of really controlling this slump. Instead he made preemptive concessions, only to find the centrists demanding another pound of flesh as proof of their centrist power."

Somewhere out there, I would hope that progressives and liberals are rousing themselves to leadership. It is not going to be easy for them to seize the dominating frames, but it is necessary, if the country is not going to slide to disaster on the back of making a habit out of too little, too late.

Follow the Money?

Thomas Philippon of the NYU Stern School produced the above graph. (He's also discussed the same results on VoxEU)

Other than that, how was the play, Mrs. Lincoln?

The Day Obama's Honeymoon Died | The Agonist:

"In the last 24 hours, that golden halo that was over Barack Obama, is over. The Senate is about to gut his version of the stimulus bill, creating a bill that is 'all tax cuts, all the time' and far too small to deal with the economic crisis. Obama has been out Reaganed, and America is set to go on a downward spiral because of it. The stimulus gutting of at least 100 billion and perhaps as much as 200 billion in spending to get just three votes: Snowe, Collins, and Ben Nelson, will mean that these Senators will get to control between 33 billion and 70 billion of spending each. 200 billion essentially ends the 'spending' part, and leaves us with a bill that will be about 400 billion tax cuts, and 300 billion spending. So much for unity and bi-partisanship.

The withdrawal of Daschle destroyed another precious Obama asset: namely the uber-competence image that they had cultivated. Cool, competent, collected. Then on one day two nominees withdrew for tax problems.

Then the Republicans struck preëmptively to make sure their kind of stimulus, defense spending, continues to increase. Cuts for the poor, war for the rich. Cuts for the poor, war for the rich."

Flirting with disaster

About that deflation risk - Paul Krugman - NYTimes.com: "We truly are flirting with disaster."

Shock and oy - Paul Krugman Blog - NYTimes.com:

". . . it was widely expected that Obama would have a stimulus plan ready to pass Congress even before his inauguration. That didn’t happen. We were told that this was because the economic team was working flat out on the financial rescue.

In fact, when it comes to bank rescue it’s hard to see much evidence that anything was accomplished during all that time; the team is still — still! — running ideas up the flagpole to see if anyone salutes. And the ideas look remarkably bad.

Meanwhile, when it came to stimulus legislation, when Obama finally introduced his economic plan he immediately began negotiating with himself, preemptively offering concessions to the GOP, which voted against the plan anyway. (And Obama appears, in the name of bipartisanship, to have thrown away a Senate vote he may well need.)

As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there’s a sense, watching the process so far, of low energy. What’s going on?"

Digby pointed to Michael Hirsh | Newsweek.com expressing the new conventional wisdom:

"The reason Obama is getting so few votes is that he is no longer setting the terms of the debate over how to save the economy. Instead the Republican Party—the one we thought lost the election—is doing that. And the confusion and delay this is causing could realize Obama's worst fears, turning 'crisis into a catastrophe,' as the president said Wednesday.

Obama's desire to begin a 'post-partisan' era may have backfired. In his eagerness to accommodate Republicans and listen to their ideas over the past week, he has allowed the GOP to turn the haggling over the stimulus package into a decidedly stale, Republican-style debate over pork, waste and overspending. This makes very little economic sense when you are in a major recession that only gets worse day by day."

I don't think Obama has the best economic advisers. Larry Summers is fat and obnoxious, Tim Geithner has a reputation as a technocrat, and Christina Romer is way too kind to conservative ideas. They are all neo-liberals, which is not a good thing, when what the country needs is revolutionaries.

But, politics is also a process, and it is not, primarily, an economic process, nor a rational process. It is a theatrical process.

It is kind of like a movie, where the bully has to have a series of wins, beating down the oppressed hero, before the hero can win triumphantly at the end. The Republicans may well be winning the battles, but losing the war. We'll see. But, right now, it does not look good. Stay tuned.

Bank insolvency: tips & tricks

Interfluidity | Steve R. Waldman: "Bank insolvency: tips & tricks"

Zombie banks beg for money. They are very clever. They come up with ways you can give them money while pretending not to give them money, such as guaranteeing their assets, guaranteeing new debt issues, or buying up assets at "hold to maturity" values. Just say no! A healthy financial system cannot be run by zombies. "Rescuing" insolvent banks makes about as much sense as tying string to the arms of a loved one's corpse so it can come to the dinner table as a marionette. For a while that may be comforting (or not), but pretty soon it's sure to smell really bad, and it's gonna ooze. If you think you have engineered a miraculous turnaround, you have only made matters worse. An undead bank is an abomination. It will pretend good health but hide a rot. It will afflict you, over and over and over again, with harrowing near insolvencies (cf Citibank). Dead banks must be allowed to die.