Crisis is Not Behind Us
Here’s yet another excellent video from the recent INET Conference in Bretton Woods, NH (hat tip New Economic Perspectives). In this video segment, Real News Anchor Paul Jay speaks to Randall Wray of the University of Missouri-Kansas City about the ongoing credit crisis. Professor Wray makes a strong case that we are still in the middle of the credit crisis, meaning the potential for another panic and economic turmoil is still with us.
Wray’s view: Banks are bigger than before the crisis. But, despite their books showing profits, it is not clear if they are adequately reserving for loans and liabilities already on their balance sheets. The right approach is to actually enforce industry regulation while increasing purchasing power and jobs to avoid a bigger crash down the line. Likely, we will not see this kind of reform until we have another crisis.
See the following recent posts in support of Wray’s argument:
- US Financial Institutions Make Accounting Gain of $29 Billion
- Remember when I said banks were under-reserving?
- Gundlach on another crisis: "How much currency do you have?"
- The Myth that the Banks are Solvent
- Simon Johnson: U.S. Banks Need More Capital
- Simon Johnson: ‘We have done nothing that will prevent this from happening again’
On banking, smaller banks did lend against inflated residential and commercial property recklessly too. That’s why they are going bankrupt. It’s not just the big banks. Right now we are seeing mid-cycle economic weakness. The key factor is the policy response. The political fights over deficits tells us what is coming:
Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
Sorry, but this is not a feel good piece. The recession is over but the depression has just begun.
Video below (Runtime about one-half hour)
I totally agree that we need substantial reform. First of all strip banks of any government guarantees. That will eliminate a $20 trillion potential liability, which would bankrupt the government overnight if there was another crisis. We do need to break the banks up and in have fixed rules that cannot be breached like a return to Glass Steagall. Also increase income taxes which hits higher earners to offset a payroll tax cut. Equalise capital gains taxes with income taxes. That will raise a lot of revenue but better still will make asset speculation less attractive.
A New Deal would be essential but one that is labour intensive, but I would aim for a higher number than 14 million as this would act faster to get people back into work. I would also use a living wage as the basis of wages. This will drive up wages in every other sector as employees transfer from low wage jobs to living wage jobs. As people on living wages will have adequate disposable income they can jumpstart the economy. Even if they use the money to pay down the debts they will reduce the costs of a further banking crisis.
I totally agree that we need substantial reform. First of all strip banks of any government guarantees. That will eliminate a $20 trillion potential liability, which would bankrupt the government overnight if there was another crisis. We do need to break the banks up and in have fixed rules that cannot be breached like a return to Glass Steagall. Also increase income taxes which hits higher earners to offset a payroll tax cut. Equalise capital gains taxes with income taxes. That will raise a lot of revenue but better still will make asset speculation less attractive.
A New Deal would be essential but one that is labour intensive, but I would aim for a higher number than 14 million as this would act faster to get people back into work. I would also use a living wage as the basis of wages. This will drive up wages in every other sector as employees transfer from low wage jobs to living wage jobs. As people on living wages will have adequate disposable income they can jumpstart the economy. Even if they use the money to pay down the debts they will reduce the costs of a further banking crisis.