The mysterious capture of US “left” economics by the John Birch Society

The lesson of the finance crisis is that the finance sector doesn’t work well, but to hear the “liberal/left” on the blogs and on TV, you’d think the problem was Tim Geithner and the Federal Reserve. Which is strange for a number of reasons.

During the financial crisis, the machinery of the financial sector seized up and nearly destroyed the world’s economy. What stopped catastrophe was the work of some underpaid public servants at the US government bank - the Federal Reserve - who moved with enormous speed with temporary loans built on “fiat” money to not only save the banks but to step in and keep huge non-bank (real economy) companies from bankruptcy through things like the commercial paper facility. They did this in the absence of much support and assistance from the US Executive then operating under the careless and inept command of George W. Bush and his Treasury Secretary, a man who had made obscene amounts of money operating in the casino of the finance sector. The Congress was little help either. When the Obama administration came into office, one of those civil servants moved into the Treasury department where he managed to recover nearly all the funds that his predecessor had handed out to Wall Street while stabilizing the banks and at the same time fund the largest rescue of a manufacturing sector in American history: the critical rescue of the Auto industry.  During this period, the Department of Energy revived a left-for-dead program and provided direct grants, loans, and loan guarantees that have given a key emerging industrial sector in electric batteries a running start.  Among the lessons of this period we learned that many of the things that are done right now at a high cost and with a great deal of dangerous volatility by the banks - banks that don’t seem to be able to survive without public support - can be done cheaper and better by the government bank:

  1. The commercial paper market was operated by the Fed when the private one collapsed.
  2. Many of the useful functions of the derivatives market such as interest rate and currency swaps that are essential for international trade were smoothly backstopped by the Fed.
  3. Federal refinancing of the auto industry replaced private financing that had been purely parasitic in character with finance that helped the industry expand production and reorganize.
  4. The Federal government is more interested in productive long term investment that can take R&D, the kind of investment that grows the economy, than our casino oriented banks or private equity or even institutions that are supposed to invest long term like pension funds.

One would have expected “left” economists to cheer and to note that this is exactly what Abraham Lincoln had advocated, in fact, government financing built the country. The “left” could have pointed out that in the absence of a “public sector” in finance, the financial sector had increasingly diverted funds from production and research and development into fees and speculation. By replacing or offering an alternative to expensive banking sector operation of, for example, the commercial paper market, the government could make US non-bank  business more profitable, protect the country against volatility, and even raise money for the government’s general obligations without taxes. And none of this would require heavy handed government regulation or intervention - just provision of services as an optional alternative to what the private sector offers: something that would force productivity improvements in the private banking sector. In fact, there are many economic sectors where a competent left could have used the opportunity to advocate for public finance as an alternative to private benefit tax farms by monopoly capital. Why should farmers have to speculate on futures contracts, for example?

But the “left” in the USA is not a functional opposition -instead it’s a segment of the entertainment industry and so it latched onto the scandal story that the far right keeps constantly smouldering. Instead of attempting to expand the public bank, the “left” joined the Birchers, Republicans, and other extremists in fabulous conspiracy tales and demands that the Fed be audited, arrested, abolished. Tim Geithner became the Emmanuel Goldstein style villain without the merciful time limit that Orwell had imagined. Goldman-Sachs became a cartoon super-villain.  One could and can find on places like DailyKos paens to “market value” and complaints about the “opportunity cost” of Federal loans - as if the government were a payday lender.  The increasingly absurd Dennis Kucinich can be found on Youtube nattering on about “fiat money” for all the world like some demented goldbug with a cache of canned food, arms, and Glenn Beck DVDs in his basement (Kucinich sounds about 3 brain cells away from starting to fulminate about the Jewish bankers.) And Paul Volcker, the protege of David Rockefeller who helped destroy US manufacturing and cause the S&L collapse in the cause of protecting the finance sector in the 1980s suddenly became a progressive folk hero.  “Left” proposals for moving forward are “prosecutions” (for crimes that they cannot specify), abolishing the Fed, embracing “mark to market” pricing, and a number of pseudo-Keynsian nostrums that, on inspection, are an amazing invention: Keynsian Trickle Down.

That’s all too bad because, not only do the banks and other financial institutions, more and more often, require the government to step in and rescue them, but they don’t “allocate capital” to productive investments but prefer to speculate. As an example, for 5 years before the collapse, General Motors kept losing money and kept getting more “investment” in high interest speculative bonds. This investment protected the company management from consequences for its poor performance and squeezed the productive economy for fees and interest payments that could otherwise have gone to old fashioned stuff like paying workers and modernizing factories. As a second example, pension money for public workers in California found its way into pyramid scheme real-estate speculations that priced moderate income people out of their homes while losing money for the pension fund - and generating huge fees for professional money managers in the finance sector. Increasingly, the finance sector looks like a mandatory and unnecessary fee collection system that drags down the rest of the economy and diverts capital into short term speculation that can be churned to generate fees and that may produce casino type winnings for money managers who can walk away from any losses. But we’re not getting that critique from the “left” and we’re certainly not getting any solutions from them.

The “left” was asked by the right wing to open a second front against reform of the economy and they threw themselves into the task with a will.

Via @interfluidity this argument on commercial paper.

and the modest proposal