I'm phobic about kleptocracy, not Modern Monetary Theory
Until we have actual enforcement of securities, consumer protection, and anti-trust laws and intellectually honest rulings on these laws, we are stuck in la la land. It's a chicken/egg scenario with campaign finance. Thanks for keeping the fire burning, Matt.
Love your writing and your podcast! Thank you for creating this space for ideas and discussion.
I was thinking along similar lines (i.e. using the Fed to facilitate a debt jubilee). Couldn't the Fed be used as a massive institutional Trojan Horse? Having the Fed continue to buy all housing, education, and health related debt, then nationalize the Federal Reserve System citing its latest purchase of junk rated ETFs, in violation of Section 13 of the 1913 Federal Reserve Act (as pointed out by Jonathan Tepper in the Financial Times yesterday) as grounds for the revoking of its charter - paving the way for the federal government (whom we elect) to cancel the debts held on its balance sheet? The very fact that so much debt (private and public) has been consolidated in one institution is the very key to actually carrying out a debt jubilee. As Prof. Michael Hudson points out in his latest book, "And Forgive Them Their Debts," prior to the Roman period, Mesopotamian and Egyptian rulers were able to keep wealthy families from usurping their power by wiping out the debts of the population regularly, as most debts were owed to the palace rather than to private wealth. Rome’s lack of a strong central authority brought an end to this social structure and we’ve been trapped in a cycle of debt slavery ever since. For the first time since the Pharaohs the debt of the entire population may be owed to one central, and after nationalization, public institution with the authority to wipe them out. The current, historic level of ‘underwriting’ health care, housing, education, and even corporate debt could, at last, bring us full circle. Rather than being the apocalyptic end of civilization, it could be its cyclical fresh start.
Matt, I hope you have figured out that Yves Smith publishes a lot of stuff to stimulate discussion and she disclaims pretty plainly that what gets posted from other writers does not always reflect her opinions. She understands money and monetary theory and accounting and control fraud very well, and from what i have read there over the years, her publishing a Vague critique sort of slanted at you does not mean you have any disagreement. She and most of the rest of the folks who post at Naked Capitalism hold you in the highest regard, for your masterful explications of how and how badly us mopes have been and continue to be ripped off by the 1%, aided by the 10% ‘eunuchs’ of the PMC and using clubs to assault people and planet, said assaults having been rendered “all nice and legal, see?” by bought-and-paid-for politicians. Maybe she has responded to your letter already. You and she are very definitely on the same side.
By the way, someone at NC today wrote “Matt Taibbi is also a God That Walks the Planet !!” I’m sure you won’t let that go to your head.
Thanks for caring enough to make these comments and share them. I hope they are widely read and that readers absorb the deeply troubling nature of the permanent subsidy our capital markets require. I would like to see some serious discussion about debt jubilee type forgiveness that benefits consumers. If MMT allows us ( not saying this works as proposed) to print unlimited currency, why not pay off student loans and other forms of consumer debt? I repeat, I would like serious discussion to understand as best we can the consequences ( seen and unforeseen) of this and other radical responses to the debt problems choking our country. Love your work. Thanks
MMT people always think that if you don’t agree with them, it’s because you just don’t understand MMT.
This above is totally accurate IMO, but I think your readers would benefit from some analysis of MMT and how it pertains to the tired and extraordinarily cynical arguments against major social investments by the Fed, a la a "New New Deal" or whatever that may be (Green New Deal etc). Basically, MMT is a great way to describe why "how ya gonna pay for that" is a dumb argument (on top of the blatant hypocrisy considering spending in other areas like military adventurism) but that it's not a great argument for continuous bailouts for the financial sector. I can see you're obviously reporting on the one that is currently happening but that readers may be confused (and apparently other journalists) because you do a fair bit of challenging the "how ya gonna pay for that" line of questioning of medicare for all in your political coverage.
Thank you for your phobias; they are well founded. I agree that the gov't is once again rewarding bad behavior to the worst actors, though in this case it's not risky investments but those stock buybacks and exploding ceo salaries that infuriate me. And the fact that the oversight is now in Trump's tiny hands. And the fact that small businesses and individuals have yet to see any money. I wish your friend Yves had included you in that program; a little back and forth would have been productive.
Why does everybody think that economics is like an old Perry Mason show, where there can be only one guilty party, and their job is to show that, say, the collapse of the housing bubble couldn't possibly be because of factor A when factor B was to them seemingly a bigger factor?
That isn't how society works. That isn't how any of other social studies work. In history, are we forced to say that the US Civil War had only one cause? Or can we point out a number of causes, perhaps any one of which wasn't sufficient by itself, and some more important than others, but collectively they led to war?
Along with the other two most dysfunctional industries in this country, healthcare and education, housing and housing finance are industries that are total shaped by the government - its policies, tax law, GSEs, Fed policies, etc. You can't talk about what caused the housing Ponzi scheme to unfold and then collapse without considering government control and influence over every aspect of the industry.
Whenever this subject comes up, commentators see their role as Perry Mason defending the government's policies that sucked unqualified buyers into buying at the top, on the grounds that banks and investment banks, mostly complying with badly designed government regulations but sometimes not, speculated too heavily in the crappy paper that those policies generated. Greedy bankers, Perry Mason says, were the cause of the collapse, not government financing of marginal buyers.
Why can't both of those factors be co-contributors to an unsustainable bubble? Not just those two, but here are eight others that were definitely involved:
Tax advantage #1: mortgage interest expense, but not rent expense, was deductible from taxable income, encouraging people to buy rather than rent.
Tax advantage #2: favorable treatment of capital gains from the sale of a house; some changes over the years, but each $1 of profit from the sale of your house was either never taxed, or taxed at a much lower rate, than $1 of capital gain from investing in a business. This also pushed renters into buying.
Official subsidies for housing finance: GSEs that used their implied government guarantees to raise money at below market rates to subsidize and guarantee mortgages. (Note - the problem was not so much that they subsidized unqualified buyers, but bubble level prices were an effect, partially, of GSEs first subsidizing qualified buyers.)
Indirect subsidy #1: FDIC and FSLIC insurance, backed by the government, that assured plentiful deposits to banks and Savings & Loans with reckless or fraudulent lending policies, since they typically paid the highest interest, with no risk to the depositor of the loss.
Indirect subsidy #2: Rules by banking regulators anointing Moody’s, S&P, and Fitch as the only legitimate rating agencies, despite securities packagers shopping for and paying for higher ratings. Potential competitive rating agencies whose models reflected more accurate risk assessments were effectively prevented by the government from entering the ratings business.
Speculative Stimulant #1: Although the ostensible intent was not to push house prices up, that was the predictable result of the combination of strict zoning, town planning, historical preservation and other regulations restricting the addition of new housing in places more people wanted to live. That rapid rise in prices stimulated speculative greed.
Speculative Stimulant #2: Not a subsidy as such, but standard mortgages of the type guaranteed by the GSEs include no recourse to the borrowers’ other assets if they fail to pay, which made buyers willing to pay more for a house, take on more debt, then abandon them when their market value fell below the mortgage amount.
The Usual Suspect: Finally, there was the Fed, doing its usual thing of keeping interest rates too low for the entire bubble, until the very end when all it took was a slight increases to topple the unsupportable price structure.
These all helped get house prices so high that there were no more renters that could afford to buy, and speculators couldn't afford the negative cash flow. It had to collapse, but house prices on average in the US had gone since 1932 without a single down year, so that seemed a fact of life rather than just a very long cycle.
The defense of the GSEs, on the grounds that "the GSEs were really followers rather than leaders in the MBS boom, and actually made much better and safer decisions about subprime than their private-sector counterparts" is like saying the driver of the getaway car was only driving a car, which isn't illegal, and not personally robbing a bank, so maybe give him a speeding ticket at most. Sorry, every gang member participated in the joint venture.
I'll add that the Richard Vague, the government regulator that Yves Smith was interviewing, claims: "So Taibbi writes that we’ve been living off highly leveraged markets for more than a decade, and, yes, he’s correct, but we’ve been living off highly leveraged markets for a hundred years or more."
Absolutely not true. After WW2 total private debt was minuscule. Debts had been wiped out in the Depression. Returning soldiers and those on the home front had been paid for the previous 5 years and saved nearly all of that. There were almost no durable consumer goods produced for them to buy - no cars, houses, appliances or anything else for which they might borrow. Credit cards did not exist. House prices were pre-Ponzi, so what mortgages existed then were tiny. Nobody needed or got student loans. Initially there was enormous government debt from the war, but that got paid down rapidly.
It was the strong balance sheets in the private sector, and, by a few years after WW2, drastically reduced government debt, that allowed the decades of expansion that followed. Our long term goal should be to try to recreate that situation, not push debt higher.
I think you've done a great job responding to a series of explicitly Vague assertions misrepresenting your position. ;-)
Basically MMT is about how govt finance can be used the mobilize society’s resources to the fullest. Its founders assume that govt would use such an approach to improve our lives, not to steal the nation’s wealth.
Matt, I've enjoyed your writing since stumbling on it when I lived in Moscow (about a decade after you had already left). As soon as I saw this post, I signed up for a paid subscription. Hoping this format will give you more leeway for analysis and humor. Udachi!
This is why I sub to this substack.
Wonderful. Just here in the comments to say I'm a republican who loves your stuff Mr. Taibbi. We need more real journalists like you.
I am appalled at the new bailout plan, if it can be called a plan, and also think that economic theories are limited in use. They can only create a mechanical perspective for understanding how past and future might intersect. But when there is so much factual information and actual experience to consider, do we really need a theoreticized canned response? As is clear from your comments, we can and should be looking at what we empirically know are related, not theories about them, to grasp what are actually pretty simple things. I am phobic about false complexities.
Someone needs to drive a stake through the heart of Greenspan's economic theories. His performance in South American should be held up as a warning to anyone hypnotized by his bullshit. The US no longer makes things or provides value-added markets which create real wealth. We have managed to turn rent/lease economics into the driving force of where the money goes but that does make food or consumer products.
Farming is now a mechanized corn/soybean factory. The corn gets turned into ethanol or corn syrup. The soy beans are exported or used for animal feed. The government has to subsidize all of it and the only winners are John Deere and the banks financing all of this fun. The farmers are going broke. How does that square with Modern Monetary Theory?
Someone needs to take a closer look at the food supply in this country and see who the winners and losers are. Corn syrup and feedlot beef and pork are not health choices and neither are the economics of the system.
Great writing! As you point out, there are many basic problems here. Only some of they you have touched upon. We all know that ever increasing debt needs ever increasing debt service. Even if you never pay any of it off, you still need to service it. Second, as I pointed out earlier. to pour billions into GM will not automatically get them to start producing Chevrolet s unless someone has the money to buy them. United Airlines will not fly empty planes just because you poured billions into them. Has not anyone thought of this?? The question is what will billionaire stock holders do with the money? History says that they will use it to buy back more shares and enrich themselves.
Trickle down says that they will spend it helping the poor. We have been following that theory for 40 years now. How many times have they done that?? Can anyone find one??