|You Were Expecting Maybe a Panacea?
by the Sandwichman
Peter S. Goodman offers a revealing summary in this morning's New York Times of the magical thinking behind the Bernanke/Paulson BIG BAILOUT. A $700 Billion Rescue Plan for Wall St., but Will It Work? After the jump Sandwichman elaborates on what is magical about this thinking, if it isn't obvious from the quote.
If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
First, the "central cause of American economic distress" is not the plunge in housing prices. That is merely a symptom and, moreover, only the latest phase in a symptomatic process. The real cause of distress, to state it simply, is the growing disparity between wages and living costs. Rising house prices temporarily enabled consumers to borry money to patch over the gap between the cost of living and wages. And easy credit kept house prices going up. The jig is up on that game.
Second, trust is a two-way street. Just because the banks resume lending doesn't mean consumers will resume borrowing and spending. If we think of the current crisis in the credit-markets as a lender's strike what is likely to come next is a borrower's reluctance. The inflationary buy-now mentality has been stomped out by the market panic. In its place will be an anxious wait-and-see caution by consumers. Sadder but wiser. Presumably that caution will be reinforced by a tighter regulatory regime that discourages concealed-risk lending.
Fixing the credit crisis will not do anything about the gap betweeen wages and the cost of living. If anything, the cost of living will continue to rise in the U.S. because of a shrinking dollar. The trillion-dollar bailout is at root a trillion-dollar devalution. Real wages will continue to fall because the threat of unemployment will impede wage demands.
Ending "the current downward spiral" of house prices doesn't ensure a rebound. There may indeed be a dead-cat bounce after which the economic decline will resume at a more stately pace. What is just around the corner is not a restoration of the pre-collapse boom but a lingering malaise.
The Way Forward: No Free Lunch, No Quick Fix
The Bernanke/Paulson BIG BAILOUT is a shot across the bow of a sinking ship. It is presented by the same folks who brought us the debacle. If it succeeds in stabilizing markets for the time being -- which is by no means certain -- that in itself will be somewhat of a relief. But it won't be a solution. There is no easy solution. The damage done to the financial system was done by the financial system. Recovery requires not restoring that financial system but replacing it.
Did I say something about wages and the cost of living? How can the two be reconciled? It can't be done by legislating price controls or wage increases. That could only change nominal prices or nominal wages. What counts are real prices and real wages. The regulatory tool for bringing about REAL wage increases is, paradoxically enough, reducing the standard hours of work. In the 1870s, Mary Steward wrote this little ditty, "Whether you work by the piece or work by the day, decreasing the hours increases the pay."
It sounds almost magical. Too good to be true. Shorter hours and higher pay. Happy days are here again! But... does it sound any more magical than the Bernanke/Paulson rescue refrain: easier credit and higher house prices?
People hate paradox. It is important to point out that the paradox of shorter hours and higher wages is only apparent. The seeming paradox is an artifact of a frame of thought that sees no contradiction in the notion that debt is the source and foundation of prosperity. A lot of things are also hard to explain if you insist on the unshakeable principle that the sun revolves around the earth.
A sub-head in today's NYT proclaimed, "A Professor and a Trader Bury Old Dogma." Not so fast. Replacing the free market dogma with the government intervention dogma leaves intact the conviction that prosperity is founded on debt, "since," as the Globe and Mail put it yesterday, "US growth has always been fuelled by easy access to debt." Meet the new dogma. Same as the old dogma. Get on your knees and pray we don't get fooled again...