JONATHAN CHAIT JULY 9, 2010
[Guest Post by John B. Judis]
Want to make me happy? Read carefully James Galbraith’s essay, “Scare the Hell out of Bankers,” on our web site. And read it all the way through because the argument isn’t clear until the end. It’s one of the best things I’ve read on the role of finance in the recession and the recovery. It goes beyond the debates liberals had 18 months ago about finance.
First, on the question of nationalization of the banks. At the time, some of us held out for nationalization of the big banks as the only way to forestall a depression. That proved to be wrong. It was possible to prevent a depression without the government taking over the banks. But Galbraith suggests that by taking over the banks, the government “could have achieved clean audits, replaced top management, cured destructive compensation practices, shrunk a bloated industry, and cut the banks' lobbying power and therefore their capacity to obstruct financial reform. The way to write-downs of bad mortgage debt and therefore to financial recovery would have been opened.”
Second, on the question of whether preventing the banks from collapsing would abet the recovery, which is different from the question of preventing a depression. The administration’s view was that reviving the banks would revive the economy. That proved to be mistaken. Galbraith’s view is that TARP and other government measures have aided the banks themselves without aiding the economy. The banks remain water-logged with bad debt and are reluctant to make loans. Eventually, these debts will have to work their way out of the system, and this could take years, as it did in Japan in the 1990s. To aid a recovery, the government itself would have take on the loan functions of the banks.
Galbraith writes that “we need to create new, policy-focused financial institutions like the Reconstruction Finance Corporation to take over the role that the banks and capital markets have abandoned. Thus, as part of the reconstruction of the system, we need a national infrastructure bank, an energy-and-environment bank, a new Home Owners Loan Corporation, and a Gulf Coast Reconstruction Authority modeled on the Tennessee Valley Authority. To begin with.” Essentially, we have to do what the U.S. ended up doing in the 1940 when defense orders revived the economy, but this time, it will be the industrial equivalent of war orders. I think Galbraith is right about this.