Friday, April 17, 2009

Keynesians Fail Stress Test; Backpedal On Ideology

Subsidizing failing institutions does more harm than good. This is the song I and many others have been singing since the beginning of this crisis. And after nearly 2 years of failed attempts to reinflate the bubble, even the big government apologists are now joining the choir.

The fa├žade of government confidence is crumbling. There is simply no way to hide the blatantly obvious any longer. So it should be no surprise that people of still good reputation are electing to jump on the "It Ain't Gonna Work" bandwagon as opposed to the alternative - going down with a sinking ship.

Granted, these characters are not embracing the Austrian Theory of the Business Cycle. But they are at least acknowledging that what has been tried has failed, and attempting to do the same - only on a bigger scale - is not going to have any better chance of success. Baby steps.

Nobel Prize winning neoclassical economist Joseph Stiglitz gave an interview to Bloomberg yesterday echoing some of my sentiments toward those in the Obama Administration. (emphases mine):

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

It's hard to know what to make of a situation where one minute you feel like the lone voice - written off as sensationalist, while in the next, eminent scholars are repeating you almost verbatim to the national media. Should one be honoured for the indirect affirmation, or skeptical of the motives? More from the article:

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

It would have been nice to have a simple admission from Mr. Stiglitz that the Keynesian policy of economic stimulus was wrong all along, but his admission that "we don't have enough money" is actually another way of saying the same thing. It might not look like much, but that very sensible statement is a damning critique of 100 years of failed economic policy that suggests money grows on trees.

It should come as no surprise that big name economists are pulling subtle about-faces. After being the first to promote government interventionism as the be-all end-all cure for this crisis from day one, they can see how it has so miserably failed and are now faced with the raving mad public. People are fingering bankers, politicians, analysts, economists, the media and anyone that has anything to do with the financial industry.

Wednesday, an estimated 250,000-500,000 took to the streets in anger over wasted money and the rising taxes that will inevitably result from it. No economist wants to be implicated. An economist with a bad public image is an economist without a job.

Despite the media's best attempts to label these "Tea Party" events as a left vs. right thing (controversy sells), the truth of the matter is it is fairly bi-partisan. People are sick and tired of being stolen from and lied to. And even the most sedated (next to Canada of course) country in the world is taking to the streets in anger. Watch this video for not only the media's direct attempts to polarize people, but people catching them in the act and lecturing them on their terrible reporting tactics.

And some pictures from the protests:

Lansing, Michigan

Columbus, Ohio

Sacramento, California

(courtesy Lance Iverson / The Cronicle)

Expect these protests to intensify. And expect the government to cave on their demands eventually. Congressional midterm election campaigns are scheduled to begin in about 6 months. Anyone seen as complicit with government bailouts won't have a hope of being reelected.

Lastly, a prediction. Tim Geithner's position as Treasury Secretary won't hold through the summer. Larry Summers' position as economic advisor likely won't either. We are embarking on a new era of public outrage.

As we should be.

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Beat the Blues said...

Love that video. We can finally see how the media are not really REPORTING the news. This has been going on for a long time, but because of the extreme situation we have with the bailout schemes et. al., the average citizen on the street is now so angry they are lecturing the media and their tactics - this was just supposed to be a reporter showing us what's happening on the street: the bias in the media is way more evident than it's ever been, thanks to the anger of the citizens.

The lady at the end of the video is the icing on the cake - calling the reporter on her false neutrality.

I agree, big changes are coming. The citizenry is angry, and some are enraged. It will only get worse now. I'd love to see Obama fire Timmy.

prodigal son, Ramon said...

Stiglitz sounds like a bigger Keynesian than the Obama Keynesians because Stiglitz want to spend more money to solve the problem. You aptly point this out in Stiglitz comment: "The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall".

Why are you using a Pro-Keynesians Stiglitz to prop up you anti-Keynesians arguement of "Subsidizing failing institutions does more harm than good."? Stiglitz is clearly Keynesian he just want a policy change. "Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said."

Twistng Pro-Keynesian Stiglitz comments to suit your Anti-Keynesian arguement isn't fooling anyone, especially me.

mike.montchalin said...

Great post. Great video. Thanks.

The Tea Party protest may have originally been about taxes. But really, are taxes all that bad in comparison to the rest of the world?

The real issue is diverting the present value of future taxes to failed corporations. And that seems to be what the TeaParty is morphing towards.

The final footage, "It's all over the news." also illustrates the marginalization of managed news.

The managed news, Fox, CNN, etc. frame this as a tax issue. The reality is that this is a public theft issue.

RRB said...


With all due respect, if you went to an actual tea party, you would see that everybody who attended 'gets it'.

The protests are about the way taxes are SPENT. And people are upset that Obama has even begun spending taxes from the FUTURE - i.e. public debt is really an arbitrage over time, in the form of a bet on increased productivity. However, he is betting the house on a losing bet, since he is enacting policies that REDUCE productivity at the same time (e.g. carbon taxes, repealing bush tax cuts, universal healthcare, card check, etc. etc.).

The common person see Washington spending TRILLIONS without seeing any impact on his daily life, as he continues to pay taxes on a reduced income. He is angry about the way his hard earned tax contributions are spent - and he is beginning to show his anger.

Matt Stiles said...

prodigal son,

I wasn't trying to make Stiglitz look good. I was trying to point out that Keynesians all over the place are making subtle overtures that their policies can't work (perhaps unintentionally). But more importantly, I was showing how after cheering for all the bailouts, they are now joining in the populist outcry over the very policies they championed for nearly 2 years. A tad ironic, no?

I'm not trying to fool anyone.


Fish10 said...


The problem IS the News media like Fox, which have convinced the sheep that they can have Constant Wars, big Military spending, entitelment programs and still not pay tax.

The ironic thing these big bail-outs are going into the pockets of the wealthy bond holders and Wall Street types who are so averse to paying tax in the first place.

I guess they are less upset by accepting other people's tax dollars.

ViewFromTheSouth said...

I suspect that these "tea parties" were largely managed by people behind Fox news. Just look at the kid glove handling of the protesters. Protesters against the wars in the middle east or environmental issues get the riot police jammed down their throats.

This whole thing smells fishy from my perspective.

Matt Stiles said...

View From the South,

Fox hijacked the protests to give an impression that neocons still have support. They've been playing the "Libertarian apologist" game since Bush left the white house. Beck has started talking about the constitution , Cavuto says things like, "Ron Paul was right all along." It's pathetic.

The events were first organized by the folks at I know, because I frequent the site and watched them do it. The neocons are looking for any strings to hold on to. So they co-opt things like this in order to preserve the phony left/right paradigm. It's not going to work though. It's not even quasi-believable.

Matt Stiles said...

And if you're still skeptical of the events being a "Republican Only" thing promoted by Fox, check out this video:

This Republican congressman showed up thinking he was going to be speaking to a party convention. He got booed off the stage. Might make others think twice about voting for bailouts, no?

I've never been more encouraged...

RRB said...

Matt - for the record, Cavuto was supportive of Ron Paul during the presidential campaign, as was Glenn Beck (even BEFORE he was on Fox). They were the ONLY TWO television anchors that treated Ron Paul with respect when he was being derided all over the MSM. You need to research YouTube - you are way off base on these guys.

Moreover, Rupert Murdoch consistently has self-identified himself as a libertarian. (the link below is from 1999 - TEN YEARS AGO).,9171,33716-1,00.html

Not sure why you guys are getting distracted by the whole neocon conspiracy theory thing. If Foxnwes wants to get on the tea party bandwagon, GOOD. We NEED the coverage.

And you might want to consider the idea that the main reason Fox is doing it is for ratings, not manipulation - and it works. Their ratings on April 15th were FOUR times CNN's. Its not the neocon network (this coming from a dedicated, die-hard, campaign-donating Ron Paul supporter) in my humble opinion - its the only news company out there with a good business model of going after the completely untapped non-leftist television news audience. If they have an ideological neo-con bent, how would you explain, for example, that has been the ONLY national network website to consistently host libertarian opinion columnists since its inception?

I believe if the tables were turned and media bias tended to be right-wing and libertarian, Fox News would be left-wing. Its just a business based on common sense.

Matt Stiles said...

RRB - Well, the word "Libertarian" is one that is often misused - often by people like Milton Friedman, Alan Greenspan and Ayn Rand. It is no surprise to me that someone like Murdoch would call himself a libertarian. But actions speak louder than words in my opinion. Murdoch (and the others) believes in foreign and monetary interventionism - fundamentally unlibertarian by it's very nature.

You're right that Cavuto and Beck were fairer with the Paul '08 campaign than most. But that's not saying much. I also remember Beck saying that the movement was full of dangerous "McVeigh types" and deserve to have their phones tapped, etc.

I don't think their support can hurt in the short term, but I would be wary of them just trying to gain the support of the Paul supporters and subsequently supporting a neocon for '12 nomination.

But I'm a very distrustful person when it comes to anyone giving information.

Anonymous said...

Beck and Cavuto were never Ron Paul supporters during the campaign. Beck called Ron Paul supporters terrorists and Cavuto tried to claim Paul encouraged illegal activity. It was only after the campaign was over that they started treating Ron Paul better.

mannfm11 said...

The questions is, at what point does what they use as money cease to be money? The problem is that those that owe the banks can't pay and the bank owes others that can pay, but don't owe. What we end up with is more being owed around the corner though the government by those that can't pay in an effort to prop up those that can pay. The only hope is an around the block theft of the money in the accounts of those that are owed by the system and can pay by the strongest group that can't pay, the banks. Would be nice to borrow a few billion then be able to walk in and rob the bank so I could pay them back.

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