America’s Financial Crisis is Not a Clogged Sewer Problem


UT Austin/LBJ School of Public Policy economist James K. Galbraith is testifying this morning at 10 am EST for the House Financial Services Committee. He will be joined by economists John Taylor and Alan Blinder. Galbraith, a fervent Obama supporter, is not much impressed by the early moves of President Obama’s economic team.
In the video above, he offers a methodic critique of the financial sector bailout and the stimulus package.
And in National Journal yesterday, Galbraith takes on Obama’s understanding of the financial system arguing that “CREDIT IS NOT A FLOW.”

Obama: “The flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education, how stores stock their shelves, farms buy equipment, and businesses make payroll. But credit has stopped flowing the way it should.”
James K. Galbraith, Professor of Economics, University of Texas: “A remarkable speech, full of good sense and pragmatic determination. But the analysis of the banking crisis relies on a defective metaphor – restoring the “flow of credit.” Credit is not a flow. Banks are not short of funds. (They never are.) They are not blocked up. Adding funds to banks does not make them more willing to lend.
“Credit is a contract. The collapse of values has left the banks short of good borrowers. There are not enough customers with profitable projects. There are not enough customers with stable incomes. There are not enough customers with adequate collateral. Banks will not lend until there is profit in it. And customers will not borrow, until they see more opportunity than risk, and until they have assets they can borrow against.
“Guaranteeing bad assets will not stabilize the price of housing. It will not stabilize incomes and profit opportunities in the economy. Therefore it will not solve the credit problem.
“Meanwhile the guarantees will support incumbent management and shareholders. They will add vast sums to the public debt – directly or contingently – making achievement of the president’s other priorities more difficult. And they will distort the distribution of wealth, by guaranteeing the financial position of an elite group while that of so many others is collapsing.
“Keeping the existing management in place means that we will not arrive at clean and trustworthy audits of the banks. Therefore no one will know to what degree they actually are, or actually are not insolvent. No one will know just how bad the bad assets are, and most will (prudently) suspect the worst. This collapse of trust means that lending to the banks, including by other banks, will continue to be impaired.
“As of tonight, the president and his team are committed to finding an actual solution to the banking crisis. To get to that solution, they need to come to grips with the problem. And for that, they need, first of all, to escape from the prison of a facile metaphor.”

Galbraith’s outline seems sensible to me — and as I see it today, we have a lot of taxpayer money chasing the wrong challenges in the wrong way.
America should begin a major, long-term make-over of all of its core infrastructure. This will help generate jobs, demand, and create an investment that makes sense and that can generate recurring returns to the economy over the very long term.
— Steve Clemons


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