James K. Galbraith: How to Stop the Path of Economic and Social Destruction
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July 11, 2013 |
The view that was propagated at the time of the crisis was that there was a series of national problems: in the U.S., the subprime mortgage disaster; in Greece, overspending, undertaxing; in Ireland, commercial real estate; in Spain, a residential housing bubble. And somehow, all of these things seemed to come to a head and break out in a crisis at the same time. What a coincidence!
In this view, the crisis was to be corrected by national policies at national scale by the actions of national governments. What policies? Well, the policies were to be the policies they were told to adopt, which in every case were approximately the same: Cut your public sector, raise your taxes, deregulate your markets, privatize, privatize, privatize — that is the new Moses, as is profits.
But while the policy was interpreted by authority, the judgment would be rendered by markets. Good behavior, effective action, would bring back confidence. You must have heard this a thousand times: Confidence would mean interest rates would fall and the credit markets would open. That was the sequence of events. And when that didn’t happen, well there was always an explanation, which was “an inadequate degree of zeal.”
The failure of the policy could always be remedied by making the policy even more harsh. This is the attitude of the gambler who loses every hand he plays and comes back and doubles his bet. This is what we’re seeing. You can keep that game going for quite some time. You may perhaps be familiar with a phrase attributed to Albert Einstein, which is that insanity consists in always doing the same thing and expecting a different result.
Now, from the beginning, there was a different view. It wasn’t very widely held, but it existed. This view held that the central fact of the crisis was the worldwide collapse of a model of growth fueled by private credit markets. It seemed obvious that this was the case. How could it not be? Everything happened at once. Yes, the collapse originated with the debacle of the U.S. mortgage markets, whose losses had been spread all through Europe by the sale of toxic securities to pension funds and townships and private investors and banks. And Europe and the U.S. are the same investment community. They react the same way when they see a disaster, which is they run for safety. So of course they sold all the weak assets – the sovereign credits of the small countries, and bought the sovereign debts of the big countries. And the interest rates go up on one and down on the other. It’s as obvious as anything in front of you eyes. Did the interest rates on U.S. debt go up because the U.S. had a mortgage crisis? No, they went down. It was a massive, worldwide flight to safety.
Now, in Europe, this was especially aggravated by institutions that were inadequate to the purpose, that had been badly designed, in many ways, by my generation of economists 30 years ago in a moment when certain ideas were in fashion that held that, well, you know, the principles that everything would be all right if the central bank simply controlled inflation, and all budgets were balanced, and all markets were private. We’ve had a set of ideas which for a decade had been receding around the world — abandoned in Latin America, never adopted in Asia — but still intensely held and advanced by those who had become committed to them many years ago.
On top of that, we’ve had an attitude toward policy which was basically the mentality of a debt collection agency, a mentality of punishment of debtors and reward for creditors that fails to recognize the elementary truth that you can’t have one without the other, that every surplus has a deficit corresponding. So this alternative idea that this was the problem — a worldwide collapse of private credit met by inadequate institutions and hidebound ideas — existed. And five years have gone by, and we can ask: Which interpretation hold up better? We have cases we can look at.
And in particular — and I’m not one to be a booster of the American experience — but we can compare the U.S. and Europe, and we can see that in the U.S., although there are many problems that remain — unemployment, foreclosures, stagnation — the situation is fundamentally stable. It stabilized some time ago, whereas in Europe it has not. The crisis just gets deeper and deeper. Why is that? It is not because the U.S. instituted and followed a policy of rigorous austerity. It is precisely because we did not.
Yes, we had an expansion package initially in 2009, and that was important. But it was not the fundamental thing. The fundamental thing was that there exists in the U.S. stabilizing institutions that continued to function, that buffered the enormous losses that people suffered in the crisis. What were those institutions? Yes, we propped up the banks, and I’m not particularly proud of that. But that wasn’t the important thing. One of the most important things was that the social insurance mechanisms worked. Social security payments went up. Unemployment insurance applied across the whole country. The health insurance programs, which only apply to part of the population, but nevertheless an important part, continued to function. Disability payments picked up part of the people who had lost their jobs. Food stamps — a very important program — was expanded to cover about 70 million Americans, a very large share of the population.
And all of these things meant that while losses were felt, they were not catastrophic to society. And there’s one other thing almost equally important, and that has to do with debts. It’s just a question of a difference of circumstance. In the U.S., the debts that were at the root of the crisis were primarily household debts. They were mortgage debts, credit card debts — but especially mortgage debts. And with a mortgage debt, over time, one of two things is going to happen. It will be paid, or it will default. Defaulting is a very hard thing, but it gets rid of the debt, and so the debt burden goes down over time. That’s not the case in Europe. The problem is public debt, sovereign debts. And they are perpetual until they are renegotiated — or repudiated, but that, again is a drastic measure. The resolution, in other words, has to be an active, and not a passive process. It’s plain as day.
What are the implications? There must be a European solution, and it must begin with an assessment and a change of ideas. That’s the most important thing. When ideas change, everything else will follow. Policies will follow, and, as needed, institutions will follow after that. Many things could be done under current treaty framework. What are those things?
1. First of all, mutualize the debts and reduce the burden so that we are not working under the pretense that debts that cannot be paid will be paid. They won’t be paid. If the burden of those debts is reduced and they are effectively made the common responsibility of the European community, then they become manageable. Without that, the losses are there in any event.
2. Second part, restructuring the banks. We have to recognize that the model of growth that relied principally on the financial system to generate credit is gone, and it’s not coming back. Having large banking institutions that persist unchanged — what is the point? What purpose do they serve? What social function justifies their charters? If we have a smaller financial sector, then we have a larger employment sector. If the profits are not being drained to the big bankers, they can go to the small businesses. Why is that not a reasonable policy change both in the U.S. and Europe?
3. Third point, release funding for investment and jobs. The mechanisms have been outlined very effectively: Using existing institutions to begin a process of reconstruction and reemployment. Institutions at the continental level can do things that institutions at the national level cannot do.
4. And then there is a fourth point, which, to my mind, becomes increasingly pressing at time goes on. It’s a point which really speaks to the question of whether Europe means anything, as it would speak to the question of whether America means anything. If fact, it did speak to the question of whether America meant anything in the 1930s, when we also faced a crisis that threatened national economic and political existence. Let us recognize that our most pressing task is not to restore economic growth. It’s not to bring us back to some past level of prosperity. We’re very far beyond that. We are facing the threat of dissolution of great nations and social communities. It is an urgent matter to prevent that from happening.
Stabilization, therefore, of society, and stabilization of the human condition have a very important role to play in what me must do. That means stabilizing people’s pensions. Stabilizing unemployment insurance. Stabilizing the basic services —education and healthcare. Adequately insuring bank deposits so as to prevent the cataclysm of an uncontrollable run and shutdown of the payment system. These are things we do for each other, mainly with a device that’s called insurance: social insurance, deposit insurance, health insurance, unemployment insurance. And when we extend that to the whole community — and by this I mean the European community or the American community — we bring our populations together and stop processes that are driving us apart.
It’s seems to me that the objective to articulate is really a very simple one for the time being: It is to stop the path of destruction, to stabilize, to quell panic, to defeat violence, to buy time, frankly — not to solve all problems at once — but to buy time so as to effectively open up the possibility for a new politics based on principles that are not foreign in Europe, but that have been forgotten and submerged in recent years: the principles of solidarity and the spirit of true and effective democracy.
If we can do these things, then perhaps we can begin to face together, on a European basis, on a transatlantic basis, on the basis of our joint values and objectives, the very large and challenging problems that we will continue to face once we have turned a corner, changed our ideas, changed our policies, and have brought this crisis, finally, and long last, to an end.
*This speech has been edited and condensed for clarity