Yesterday, I started deconstructing the Wall Street Journal’s most recent Perry-praising and Fed-bashing editorial. But you have to give the editors credit at least for this: they write very economically. They pack a lot of misinformation into very few words. The job of correcting the record accordingly occupies more space than the original item. Can’t be helped. Below follows Part 2, as promised.
I’m picking up at the mid-point of the editorial. If you recall Part 1, you’ll remember that a lot of art went into insinuating that the housing bubble of the 2000s – and the slow wage growth of that same period – were somehow the fault of a (non-existent) loose money policy at the Federal Reserve. What comes next is audacity itself:
Then huge chunks of middle-class net worth were wiped out in the panic. And now, even as the recovery is supposedly underway, their meager salary increases are being washed away with another burst of commodity inflation caused by near-zero interest rates and quantitative easing. This is what happens when politicians and central bankers try to use monetary policy to compensate for the slow growth caused by bad fiscal and regulatory policies.
The insinuation here is that the Fed’s (non-existent) loose money policy, having first created the bubble, must bear responsibility for the crash.
This is an especially important insinuation for the Journal, because the page has its own guilty conscience on the subject to quell. The financial crisis of 2008-2009 destroyed trillions of dollars in real-estate and financial wealth. As has been pointed out by every expert to study the question, from the Financial Crisis Inquiry Commission on down, there is just no way that the US housing bubble alone could have triggered such a global cataclysm. The cataclysm was too big relative to the size of the mortgage market.
We have a real-world example of the point: the failure of the Savings & Loan industry in the late 1980s. The collapse of this entire banking sector, then about a $200 billion industry, pushed the US into a mild recession that lasted for less than a year. Four years after the recession’s end, the US shifted into one of the most roaring expansions of the post-World War II period.
If the US could so easily shake off a $200 billion financial loss in 1990, how is it that the collapse of the not-very-much-bigger subprime market–$1 trillion at its peak–could threaten to wreck the entire financial system of the western world in 2008? How could it cause a market plunge that wiped away at least $13 trillion in wealth? How could it trigger the biggest and steepest plunge in economic activity since the 1930s, extending into a mini-depression that has lasted now almost three years and looks likely to last for at least three more?
The story as told by the Journal makes no sense.
Subprime became a lethal weapon because a finite number of subprime loans were packaged and repackaged into a vastly greater derivative market. That greater market had grown up entirely unregulated, based on all kinds of dubious practices. And when the decision was made back in 1998, 1999, and 2000 to leave the derivative market unregulated, guess which media outlet was the most powerful voice in favor? Of course–the Wall Street Journal.
It was that same derivative market, and not the loose money policies of the Fed, that enabled the dramatic run up of household debt in the 2000s. By 2007, household debt had reached a share of GDP last seen in 1929.
Why was household lending so much more permissive in 2007 than in, say, 1997? Not because Fed policy was looser. (In fact, the Fed repeatedly raised rates through the 2000s, after holding them steady through the later 1990s.) Lending was loosened because of the illusion of security fostered by securitization. A bank that might have blinked at extending an unsecured $15,000 loan to a $60,000 a year household happily allowed them to run up credit card debt that could then be repackaged and sold as a AAA credit thanks to the good offices of the people at J.P. Morgan and Standard & Poors.
It ought to be a waste of your time and mine to recapitulate this familiar history. But the recapitulation is made necessary by the determination of America’s leading financial newspaper to bury the history in favor of a bizarre myth made plausible only by the power of the mythmaker’s megaphone.
And that’s just sentence 1 of the above paragraph!
Sentence 2 contains a remarkable confession of perspective. Many might think the most salient economic fact of the moment to be the horrifying level of unemployment in the United States. The Journal cannot muster even a crocodile tear for them, perhaps because such a tear would prompt the question: Won’t tighter money worsen the job situation?
It’s certainly true that for those still in work, wage increases are difficult to come by. You’d think a free-market paper might appreciate the role of supply-and-demand in setting wages. Pay increases are scarce because labor markets are slack. Tighter money will make labor markets even slacker – and thus render wage increases even more unobtainable even for those workers who retain their jobs through the second recession that the Journal is demanding.
As to the idea that commodity price increases are the biggest problem that Americans face – well yes, it’s annoying to pay more for gas. Some food items cost a little more too. But this too is supply and demand in operation. China and India continue to buy oil and grain. The global middle class is growing. A long period in which commodities became cheaper relative to manufactures and services is yielding to a period in which manufactures and services are becoming cheaper relative to commodities.
But tightening money inside the US won’t alter that shift in global terms of trade – except by pushing more Americans out of work and thus reducing the ability of American citizens to bid for these goods in world markets. That’s a cure worse than the ailment.
As to the third sentence, the one about bad fiscal and monetary policies causing our problems:
This is revisionist history at its most brazen. The fiscal policies in place in 2007-2008 were precisely those consistently advocated by the Journal. Even now, the tax policy of the US ought to be close to the Journal’s heart: the Bush tax rates in place through 2012, a 15% capital gains rate, no taxation of corporate dividends, etc. President Obama has cut taxes, not raised them, and the federal tax take has been forced down to levels last seen in the Truman administration.
On the spending side, yes, the Obama administration has spent a lot. But how possibly did the spending policies of 2009-2011 cause a financial crisis in 2007-2008?
Hey – it looks like I’m going to need a Part 3…
- MORE TO COME-