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Grasping reality?

DeLong writes:

The government, however, is the agent of society at large.

No, it isn't. The goverment -- not entirely, but surely largely -- is the agent of the banksters; of the financial class. You've only got to look at who gets the money and how:

1. Manufacturing sector, unions: Nada.

2. States and localities: Bailout billions, with fingerwagging on not wasting a dime of it.

3. Banksters: Bailout trillions, with no accountability and no transparency at all.

See how it works?

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Mandos's picture
Submitted by Mandos on

I think that you really aren't responding to DeLong's main point there. He would automatically respond that bailing out the manufacturing sector is not the same as bailing out banks. In general, mainstream economists are opposed in principle/the long run to bailing out or protecting industries, but bailing out banks is a form of tinkering they can often get behind, because it makes no judgements about production, which again they oppose. I have fought this very battle in DeLong's comments on more than one occasion. (cf free trade)

See this comment on the thread by one of DeLong's supporters (Twofish) that encapsulates the mentality:

...I think the question boils down to is nationalization a first step or a last resort, and I'm in the last resort camp, partly because when I think nationalization, I think Amtrak. Once you nationalization the banks, I don't think that you'll be able to unnationalization them anytime within the next decade, and I don't think that Treasury has the staff or the capacity to manage nationalization.

If the banks get nationalized, then basically what your credit card limits are and whether you get a mortgage will be a government decision, and at that point you have the same sorts of problems that Amtrak has, and I can't imagine that you'll ever get a nationalized bank quickly back to profitability, since it will be much too easy to use it as a piggy bank...

DeLong's point is contained in the rest of his own post:

As such, it is close to risk neutral: only the losses associated with truly great depressions get substantial extra weight. It doesn't care much about bad news that leads to further declines in the values of toxic assets it holds: if worst comes to worst, it can always offset them by printing more money and so generating an inflation that is annoying and painful but not something to be avoided at all costs.

It is this difference between the (extremely low) risk tolerance of private financial intermediaries and the (relatively high) risk tolerance of the government and of society at large that creates the rationale for a program like the Geithner Plan.

For him the problem remains bank risk aversion. Regardless of whose agent the government really is, he sees its proper part as that of alleviating bank risk aversion, because a risk-averse bank is not greasing the wheels of the economy.

Now, you may ask: what is the point of greasing the wheels of the economy when the economy is not doing anything (ie, manufacturing), and to me that is a very good question, but one that many economists like DeLong somehow decide is not very interesting.

Submitted by lambert on

.... that DeLong is making a statement that is demonstrably untrue, as the most cursory analysis show.

In what sense is the government "an agent" of "society" "at large"? Seems that's a rather naive view for a smart guy like DeLong to have?

Mandos's picture
Submitted by Mandos on

Yeah, but you're picking on a point for which DeLong's post can stand completely without. DeLong, of course, naturally Believes In Our Democracy* and believes that Congress is representative of the people who elect it and so on and so forth. But if he simply hadn't said that, his entire post would have stood.

I suspect he would say that even if the government were wholly corrupt, it would still be an objectively good thing for them to attempt to rescue the existing banks without nationalization, but that's mind-reading from my own longtime experience of reading him.

I mean, I totally agree with you, it's an objectively bizarre statement to make, although reasonably predictable. But it's just not that relevant a point to pick on.

*Well, Your Democracy, but the same criticisms apply to Canada so Our may still be the right word.

Mandos's picture
Submitted by Mandos on

...a blog-wide flamewar on cilantro!!!

Mandos's picture
Submitted by Mandos on

DeLong's point does not stand or fall on whether the government is a good-faith representative of the nation. It's not a "basic operating assumption" in the mental model DeLong is using to construct his bailout theory. Following his logic, the government could be totally corrupt, but subsidizing toxic assets would still be a mitzvah for which we should be grateful it tried.

It's not that *I* don't consider it to be relevant. It's that DeLong could easily say that it isn't. The question is, will the bailouts have the intended effect regardless of the motivations of the bailers-out?

pie's picture
Submitted by pie on

(via Atrios)

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

We're screwed.

Mandos's picture
Submitted by Mandos on

DeLong is opposed to the bonuses and, in any case, it's kind of irrelevant to the point he is making. Irrelevant to the point of so-called truthiness and clouded thinking. Are we discussing whether there should be oversight, or are we discussing whether the bailout of toxic assets is a good idea in itself? Would you be satisfied with the toxic assets bailout if there was a perfectly impartial, empowered watchdog?

The bonuses were great to focus public attention on the things that are really at stake (inequality), but I happen to believe that the toxic asset bailout is a bad idea even if it were all done above board, by perfectly honest people. So does Krugman, Angry Bear, etc.

DeLong thinks otherwise. That's what's at stake. DeLong is a standup guy. Do you want him running the Fed or Treasury? I think not. That's the issue.

pie's picture
Submitted by pie on

My point is that these guys who caused this are getting this bail-out on their terms. All of them. The bonuses are just more icing on their cake. Obama and Geithner and Summers are giving it all away - no strings attached. That's one big reason I do not think the bail-out will succeed, at least as far as we're concerned.

Maybe there are strings. Maybe there will be oversight. As it stands, it's certainly not apparent.

The question is, will the bailouts have the intended effect regardless of the motivations of the bailers-out?

How can they possibly have the intended effect? Of course, it depends what your idea of "intended effect" is. A positive effect on the economy as a whole? Sure doesn't seem to be the popular consensus right now.

Mandos's picture
Submitted by Mandos on

How can they possibly have the intended effect? Of course, it depends what your idea of "intended effect" is. A positive effect on the economy as a whole? Sure doesn't seem to be the popular consensus right now.

The intended effect, selon DeLong, is to keep civilization afloat. How could they possibly have that effect? By convincing private lenders to lend, because private lenders are unwilling to lend because they hold Toxic Assets.

I disagree with this approach (the ultimate right answer is to abolish the assets). But the argument has to be made against that proposition or the zombie will keep reanimating...

Submitted by lambert on

This is not true:

The government, however, is the agent of society at large.

When you've got the government running a multi-trillion dollar bailout with no transparency and no accountability, I'd think it's important to know who the bailout is being done on behalf of. YMMV.

Mandos's picture
Submitted by Mandos on

...but he's not arguing against that (accountability) in that post. The truthiness is to suggest that he is, and to make it seem as though his argument depends on that.

But whatever. I just find it really odd that you're focusing on that one point where DeLong's wrongitude is so much bigger than that.

Submitted by lambert on

I guess you're just going to have to live with your sense of oddness, then. If you don't think the role of government in a government bailout is critical, then so be it.

Mandos's picture
Submitted by Mandos on

But more critical is whether there should be a bailout of toxic assets in the first place.