John Buell

A Jobless Future? Bank on it.

President Obama has been smart both economically and politically in pushing his modest job agenda. Nonetheless, he is not without fault, especially in his neglect of the role investment banks have played in the current crisis. Though staunch Republican opposition explains the relative parsimony and poor targeting of the initial job creation package, the President’s premature proclamation of victory and conversion to deficit hawk cast suspicion on his subsequent efforts. Worse still, the President continues to shy away from the role that banks played in the crisis and the problems private debt pose for any future recovery.

Australian economist Steve Keen believes that a modern capitalist economy is intrinsically unstable, that banks and debt creation are the most powerful fingers of instability. There are limits to our ability to predict the course of the economy and we must therefore take steps to build firewalls to limit the range of outcomes the system can generate.

Keen agrees that a Keynesian stimulus is a good short-term response to depression. Keeping teachers, police, fire fighters on board surely clips the unemployment rate and their spending is likely to stimulate some other jobs. But how good is this temporary job creation in the long term and will it produce a self-sustaining recovery? And how accurately can our models tell us what will happen?

Most of the models, even those used by liberal economists, assume that markets basically work and move toward equilibrium at optimal price and quantity points. Conservatives see the process of adjustment to external shocks as automatic. Liberals argue that because some markets are not perfectly competitive, the system must be juiced occasionally but will then move easily to smooth growth.

Keen argues that Keynes had a more profound and compelling view. Uncertainty is at the center of economic life. A new stimulus puts money in the hands of teachers and firefighters who would otherwise be fired. But money also trickles into the banking system and levels of debt remain high. What banks will do with the money and when individuals or entrepreneurs will begin to borrow again even for productive investment remains a question.

Predictions make the most sense when they are short term, based on recently observed empirical regularities, are done with a mindset to monitor their progress continually, and cover domains less subject to volatility. Entrepreneurial investment and new borrowing for consumer durables are areas more subject to volatility than is ordinary consumer spending. Business leaders face an uncertain future. They are trying to guess what consumers and their competitors will do and the latter are busy trying to predict business. In such a climate, a herd mentality easily emerges and is itself highly volatile. With the large private debt overhang, small ups and downs in business hiring make a big difference. If wages and prices fall, the debt burden in real, inflation-adjusted terms becomes greater, leading to further cuts in spending, and panic sale of other assets. A virtual avalanche results.

Debt per se is not the problem, but its level and purposes are the issue. Debt has played a key role in the emergence of capitalism and has spurred productive investment. Entrepreneurs with innovative product and production processes but limited means have approached banks to request that their efforts be funded. But the very growth of the economy often leads banks to move beyond funding such projects to investment in ponzi schemes where interest on loans can only be paid by finding another bank willing to loan at an even higher price. A reform agenda true to Keynes’s recognition of the role of the debt burden currently in economic life would thus also move to reduce that burden and put some structural limits on debt creation in ways that might blunt future volatility.

There would have been no housing bubble had banks not made exorbitant sums through the rapid issuance and securitization of loans. Borrowers, however, could meet their obligations only by selling the asset at a higher price to the next purchaser, a process that could not go on forever. The Fed’s easy money and lax lending standards did allow private debt to grow to 300% of GNP and debt still stands at 130% of GNP. Private debt to GDP was 45% coming out of Great Depression. The Economist reports: “America has begun to pare its debt burden, although the drop is small compared with the build-up in 2000-08.” As long as that is the case, private investment‚ even in productive activities, and new consumer borrowing and demand will remain far from optimal. Banks may sit on new deposits or quantitative easing (QE) injections from the Fed or worse still invest in new Ponzi schemes. Even modest rebounds may soon be followed by setbacks. Unemployment is likely to remain high for another decade as bankruptcies wind their way through the system. This is especially unfortunate since current definitions of unemployment underplay the depth of the economic crisis. In the mid nineties, the US government changed its statistics on discouraged workers and no longer counts someone unemployed for more than a year as part of the labor force. Shadowstats estimates that if these workers were counted as labor force participants, unemployment would be over 20%.

The media may blame irresponsible borrowers, but for every such reprobate there was an incautious or avaricious bank eager to loan and then dump the security. Those banks have been bailed out but not their victims.

That private debt is an issue whose time has come may be seen in growing protests around the country. Occupy Wall Street inspired a working group that has assembled a detailed handbook of how to resist burdensome debt collection. Debt relief has been ridiculed in the corporate media as another form of welfare to the undeserving. (Remember CNBC’s Chicago Mercantile Exchange correspondent Rick Santelli’s rant inspiring the birth of the Tea Party. He condemned help to insolvent householders on the grounds such assistance would be financed by taxing their thrifty but also squeezed neighbors.) One of the new OWS handbook’s great strengths is the wide range of debts addressed, from mortgages, to student, credit card, medical bills etc. By broadening the scope of debts addressed and by the willingness of debtors to stand and speak for themselves, demonization of debtors becomes more difficult. See debt resistance statement (

A QE for ordinary citizens would be both good politics and good economics. Keen recommends a cash infusion for all citizens, borrowers as well as net savers, on the condition that the cash first be used to pay down their debts. By its universal scope, it would reduce the potential demonization of suspect groups.

In addition, Keen’s proposal would reduce banks’ income from fees and interest payments and the size of the financial sector without fostering the insolvencies that simple debt default occasions. The size of the financial sector and its ability freely to expand and contract the money supply, the circulatory system for the whole economy, adds a degree of unpredictable instability to world capitalism, even apart from outside shocks to the system.

Federal job creation is urgent. Direct job creation initiatives are necessary and need our support. But Obama’s mistakes and a relentless Republican assault make their promotion a difficult task. It is time both to call Republican obstructionism for what it is and to demand of the President and the Democrats in Congress a broader counterattack.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email

From The Progressive Populist, November 1, 2012

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