The TARP and the Deficit Hawks

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Dean Baker
The Guardian Unlimited, June 1, 2010

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When politicians demand that the public do something because of the dictates of financial markets, it is best to hold on to your wallet. Back in September of 2008, both President Bush and the Democratic leadership in Congress insisted that if we did not immediately hand over $700 billion to the banks, the whole financial system would grind to a halt.

The threat worked – the banks got their $700 billion from Congress and much more from the Fed – with few questions asked. As a result, Goldman Sachs, Citigroup and the rest are now as profitable as ever and once again paying out record bonuses to “top performers.”

If the market had been allowed to run its course, Goldman, Citigroup, Morgan Stanley and many other major banks would have been bankrupt, leaving their shareholders and creditors out of luck and their top executives walking the unemployment lines. There are reasons that this outcome would have been undesirable for the economy as a whole, but there is a big difference between the TARP blank check and doing nothing. If the politicians and their accomplices in the economics profession had not overwhelmed the public with fear, we could have ensured that the bankers suffered from the crisis that they had themselves created.

With the banks back on their feet, the Wall Street crew and their accomplices in the economics profession are again feeling their oats. They are insisting that we have to put our hopes for economic recovery on the back burner. Instead, we have to focus on deficit reduction. The reason is that we have to soothe financial markets.

The claim is that if we don’t act aggressively now to reduce the budget deficit then the “bond vigilantes” will start a run on U.S. debt just as they have recently done with Greece. This is supposed to make us so scared that we will accept large cuts in Social Security and other important programs.

There are three basic problems with this argument. First, why on earth should anyone trust what the bankers’ economist accomplices are telling us? These people completely missed the $8 trillion housing bubble, is there any reason to believe that their insight into financial markets is better today than it was two years ago?

The second reason not to follow their advice is that the financial markets themselves don’t necessarily reflect the underlying reality in the economy. Are we supposed to twist ourselves into knots over whatever is fashionable in financial markets this week? Suppose we structure our policies to make the markets happy this week and then next week the Wall Street diz brains decide that something else is now fashionable?  This leaves us forever chasing Wall Street fashions. That is not a sound basis for economic policy.

The third reason not to take the deficit hawks argument seriously is simply that it is bad economics. The country needs deficit spending to sustain demand until private demand recovers from the collapse of the housing bubble. This is basic logic – and the prestigious positions of many of the deficit hawks will not allow them to repeal the rules of logic.

Furthermore, the United States is not Greece, as all serious people know. It has a huge economy that is still largely self-sufficient (imports are only 16 percent of GDP). The idea that the United States is about to experience a run on its debt is absurd on its face. The Fed can and should buy the debt, if necessary. Let’s hear the deficit hawks say this will cause inflation. With very few exceptions, they won’t dare make such an assertion because they know it is not true.

The deficit hawks are not concerned about national insolvency; they are not worried about soaring inflation; they are worried about how to take every last penny from ordinary workers and give it to the Wall Street crew. That is what the TARP was about and this is what the latest crusade to reduce the deficit is all about. Now they want to go after workers’ Social Security because, as Federal Reserve Board chairman Ben Bernanke said, “that is where the money is.” The fact that workers have paid for these benefits doesn’t matter at all to the Wall Street crew.

So, if you feel like giving all your money to the Wall Street gang, then you should take the deficit hawks seriously. But, if you think that people who are not Wall Street millionaires have rights too, then get our the pitchforks and send the deficit hawks and their economist accomplices running.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.