If you have read me over here at Diary of a Republican Hater you might have guessed by now that I'm a fan of an idea whose time has come. An idea whose time may have come-really it came awhile ago, but never mind, is financial repression.
To be sure the title of this post could just as soon be Contra Alan Greenspan because it is his wrongheaded ideas that we must fight if the American Dream is anything more than a faded memory. This term is one used widely by Carmen M. Reinhart among others.
Greenspan has this ideology that we had this great economy, the Goldilocks Economy that between 1981 or so and 2007 was world class, and the best we've ever had it other than the the days of the gold standard-for some reason he looks back nostalgically on the gold standard now and then. All these musings of Mr. Greenspan can be found in his 2007 The Age of Turbulence.
The timing of this book could not have been more fortuitous for Greenspan, it came out just a few short months before July 2007 when the Countrywide Financial CEO first suggested just how long it might take the housing market to return. At the time he had suggested it could be 2 years. We are 2 years beyond that date and still in the middle of the housing crisis now but at the time it was an earth shattering worry that it could take that long to come back.
Greenspan lucky for him at least didn't get egg on his face before the book even hit the shelves-just a few months after. In famous testimony before Congress in 2008 Greenspan admitted to being completely stunned, that he never thought there could be CEOs that might work against the best interests of their own company's long term health. Where was he when the Brooklyn Bridge was being sold?
It has to be understood that the economy of the last 30 years even prior to the current crisis was a lot more problematic that than the happy label Greenspan and company give it, The Great Moderation. What is moderated is inflation and prices. As Krugman says the 70s should not be romanticized-as if anyone does-but that time was in crucial respects superior to not just today-which is a given-but even the heyday of the Great Moderation.
The bad old days for Greenspan-and many policy makers today-is the 70s, the so-called Great Inflation. Yet the 70s was not Hell on Earth in every respect. For one thing the standard of living was much higher for the median American than today. While 1948-77 was a boom time for median wages, in the subsequent period of The Great Moderation-and Reaganomics-median income has stagnated.
Or take the case of student loans. Due to the high level of inflation in the 70s student loans were not the financial strait jacket they are for students upon leaving school that they are today-as Obama himself has discussed. Indeed what is clear is that while the 70s were not the worst decade for the average American-the worst decades were the 30s, today, and the 2000s during the Bush years were pretty shabby too-they were very bad for student lenders. One reason that inflation is railed against by Greenspan and company is that it executes a redistribution from creditors to debtors.
This aversion to such a transfer is what is retarding the recovery today. In Europe even when they attempt to help Greece they throw in so many sweeteners to the bondholders that it's very little relief at all and so not effective. Until a serious debt restructuring is executed the problem is not gonna be fixed. In the U.S. we had some of this same crazy focus during the debt ceiling debacle where a balanced budget was focused on to the exclusion of jobs.
Whatever the future recovery will look like-assuming there is one-a debt restructuring will have to be part of it: if protecting creditors remains the highest priority there will be none. What we need is some financial repression. An example of a successful restructuring was FDR's getting us off the gold standard which effectuated a massive transfer of wealth from creditors-who will do nothing with the wealth but hoard it-to debtors who will facilitate some actual consumer demand-consumers are 70% of economic demand.