Does our economic system require banks in order to function? Should banks exist?

During this time of economic distress, two large concepts have stuck out perfectly. One is that the banks hold ultimate leverage over the political process. Two is that the banks cannot operate without government asistance (and furthermore derive their money itself from government). So consider this observation by Foreign Policy:

Ironically, one of the most radical proposals making the rounds today has come from an economist at the London School of Economics, Willem Buiter, a former member of the Bank of England’s Monetary Policy Committee and certainly no Marxist. Buiter has proposed that the whole financial sector be turned into a public utility. Because banks in the contemporary world cannot exist without public deposit insurance and public central banks that act as lenders of last resort, there is no case, he argues, for their continuing existence as privately owned, profit-seeking institutions. Instead they should be publicly owned and run as public services.

This point is emerging in the national thinking here also. Once you start thinking about how to regulate the finance industry so it doesn’t run amok again, it’s natural enough to ask if some things should just be cut out of the system entirely.

A couple of weeks ago Ezra Klein in a post asking Is Financial Innovation a Good Thing? cited a post from Felix Salmon on regulating financial markets that made a good start but didn’t really propose any solutions. I left a long comment there, the pith of which is this:

I like Felix Salmon’s points, as far as they go, but he doesn’t say or seem to know exactly how to regulate these institutions. Maybe that’s because he’s not going deep enough to cut out the cancer.

I continued this thought, poorly written and a little sweeping, but here it follows anyway.

The more reliable solutions may lie in the fundamental area of asking: what, exactly, do we need banks for anymore? Are they really that good at moving money and credit around? Couldn’t we do it better, at far less cost?

The money power is everywhere a sovereign power, and sovereignty in the U.S. means us the people. We, through the Fed, create (and destroy) money, but it goes first to the banks, who make a percentage on it before it even trickles down to us, discounted in value by the mildly inflationary activity of the banks before us.

The banks also make a percentage on our deposits in checking accounts, while all we need is a trustworthy storehouse of stable currency to draw on for spending purposes.

The modern system of adjusting the money supply through interest-dependent banks is an inheritance from the centuries during which the only thing that could move money around was interest, and banks were the vaults that handled the stores of excess liquidity, paying less interest than they earned, and making their profits in the difference.

The banks still enjoy this legacy position as a supposedly necessary part of the economic matrix. But are they?

Right now a vast amount of our sovereign credit and good faith is going down the drain to make whole a class of people who have violated their obligation to manage their own economic affairs prudently, as good stewards of trust, as the privileged intermediary between the Federal Reserve System’s money creation and the markets.

The only thing that has made our economy stable throughout our history has been Federal intervention as the guarantor of last resort. The government, and thus the American people, have taken up the fiduciary responsibility laid down by the banks. Our latest crisis is little different from all the other panics we’ve had to endure because nobody could come up with a better system of financing the productive economy.

The answers to the failures of finance don’t need to be looked for in a narrow view of what was missing this time around in terms of regulation. The answers need to be sought from the long history of bank and market failures, and in our willingness to take a fresh look at the mechanics of the financial sector. We should be asking, how we can actually create an economy that behaves in a manner as stable as the sovereign guarantee which is the only thing that makes it all possible in the first place?

It’s time to get rid of the whole idea of banks, and time for us to start managing our own money and credit ourselves, using the computers that made the Internet, and our own crowdsourcing, and transparently numerated money and instruments of money.

If finance today is unintelligible to almost all people, that doesn’t mean we can’t design perfectly understandable methods of loan and repayment, and risk and reward, and stable money measures, and have all of this be subject to the rule of law and sovereign political accountability.

The companies that our tax dollars are going to bail out right now are those institutions said to be too big to fail. But do any of the banks that brought our economy to its knees really need to remain in business?

The arguments for bailing out Wall Street are simply that we have to if we want to have an economy again. No one likes to do it, but the government has to step in, as the guarantor of last resort, to apply the healing salve of the American taxpayer’s money to the wounded bankers and make them whole.

The quandary is that if a bank is so over-leveraged that its assets are negative, then funding it into viability would be the equivalent of subsidizing its ownership, at a grossly inflated value, and using tax dollars to pay for the subsidy. But on the other hand, letting it fail and disappear into nothingness as it rightfully deserves to do involves a calamitous loss of banking functionality (i.e. lending) that we need to keep operating – and vigorously at that – in the economy. These are the banks too big to fail, so called.

Looking to the future, and trying to prevent economic disasters like the current crisis from happening again, an idea that deserves top place but isn’t getting it so far is the one that any company too big to fail is too big to exist. A host of commentators have advocated this point, but putting it into practice may be harder than it seems.

Underneath the economics of banking and bank failure are the politics of the nation and the money of the rich. It was always going to be a case of the less wealthy subsidizing the more wealthy, this is the power that wealth gives to its holders.

Commentators keep talking about what Obama should do or what we should do, as if the power exists simply to do such things: as if the political establishment has the independence to turn against the finance system that channels the investment of wealth-holders. As if the small part of the money supply that constitutes the wage-earning voters has any comparable influence.

Whatever we see Obama do will be the very most that any president could have done, in reaction to this dramatic lapse of the finance industry. If we had another Great Depression, where the banks faced even more popular hatred, we might find the President able to do more. Short of that, which this is, he can only do less.

We’ve watched for months while banks have declined to show us their books, and while they stopped lending as they used the passage of time to take in more deposits to restore their reserves. And as Secretary Geithner has unveiled his plans to audit the bank books for risk, and to infuse government-insured private capital, we hear that the banks are largely in approval of this emergency treatment of their wounds.

So if Wall Street is somewhat happier now, this is the result of negotiations between the helpers and the helpless. It was only ever going to be a solution that made Wall Street happier. Be glad the wealthy are not ecstatic.

The big things remaining now from the legacy of Bush are the banks, and how to let them gently down to the ground in ways that won’t break the limited Federal capacity. Undoubtedly the banks themselves are the strongest political force in this equation, with everybody in the establishment interdependently existing with everybody else. In a way for me it’s encouraging to see the same debates going on about nationalization: I didn’t miss much since Obama’s speech.

There may be more stimulus actions. The recession is about halfway through now, with another 15 months to run perhaps, according to Roubini. Watch the clip here – I especially like his point, not very well transcribed into the article, about marking down a whole swath of toxic mortgages in face-value reductions across the board, rather than allowing foreclosures. He likens this to a Chapter 11-style reorganization, which would be a better situation, paradoxically, versus a Chapter 7-style shutdown, where everybody loses: homeowner, bank, economy.

I’ll try to post a resource piece about the banking situation, but I can’t promise too much because I really want to move on to the crucial issues at hand, the areas where I’ve been wanting all along to devote my energies, namely the ways and means of slowing and reversing climate change, and of transforming the global economy into a sustainable economy.

I’ve read The Economist for decades, and always found that it gave me a head start on breaking events of about two months. But I’m reading it less now: its reasoning powers and willingness to penetrate to the truth in economic matters seem to have failed it. There’s better information available through specialized economic sites.

The financial crisis has shown The Economist at its worst, completely unreliable when it comes to reporting the glaring flaws in capitalism. Far too many times in its recent opinions and analyses has the newspaper come out with disingenuous fluff, supporting equity over equitableness.

Witness how The Economist reacted to the Obama budget, in a leader headlined A wishful first budget – Wishful, and dangerous, thinking and subtitled, “The president has not explained to Americans that if they want bigger government, they will have to pay for it“

My annotation to my Diigo-bookmarked piece reads”

The Economist has not been making much sense lately, and its leader on Obama’s proposed budget seems couched in rhetoric about taxing the rich that really doesn’t address the fundamentals of the US economy, or even the objectives of the budget. To complain about “growing government” in a time of a notoriously failing private sector seems rather ideological. A shame.

As I’ve found consistently the last few months, the comments are where the sound reasoning appears. Reader bampbs was first off the mark with his usual sensible observation:

March 05, 2009 22:38 bampbs wrote:
To expect an attempt at wholesale reform of the tax system in the midst of the worst economic collapse since the ’30s is spectacularly unreasonable. It is a fact that the GOP has been the party of fiscal nonsense, by cutting taxes and raising spending. The only periods since WW2 in which the national debt as a percentage of GDP increased were the 12 years of Reagan/Bush1 and the 8 years of Bush2. So calm down. I suggest we give President Obama more than a few weeks.

And this comment spelled out my own feelings about the mild hysteria regarding the imminent ambush by socialism:

March 05, 2009 23:53 solarflares wrote:
There continues to be false hand-wringing about “big government” and “socialism” as President Obama attempts to put a plug in the dike and prevent further erosion of the US and global financial crisis. A large number of highly respected economists and European Finance Ministers have suggested that the biggest flaw in his plan is that it is “too little.”

The complaints, of course, emanate primarily from the apologists for the “rich and famous” that are purportedly the champions of “free enterprise” and capitalism. The truth is that this whole group has benefitted by an almost unprecedented period of power in business, finance, government, and – unfortunately – the media. They have done little for the “wealth” of the societies they come from but became, instead, the masters of the casino.

What, really, is the “danger” in Obama’s thinking? Is it that modern aristocracy will lose its privilege and that the other 90% of the population of the world will gain a little more power? It will take time to overcome the mythology of the Reagan/Thatcher years but no society that has survived that has had the levels of disparity that exist between the rich and poor that exist in the US and the UK. Short-term greed always leads to long-term upheaval.

This is the most succinct view I’ve heard yet of what the last decade has done to us. It’s Ezra Klein paraphrasing Martin Wolf:

There are a lot of ways to tell the capsule story of the past few years, but one of the better summaries is simply this: Money got too cheap. Martin Wolf tells this story well in his book Fixing Global Finance. Emerging economies had learned in recent years that running current account deficits triggered massive currency crises. So they stopped running deficits. They kept their currencies at low levels to stimulate exports. The policy worked and they ran large surpluses. But that money had to go somewhere. And it largely went into the U.S, which Wolf argues became the global bank of last resort. He estimates that American consumer spending absorbed 70 percent of the global savings glut. That money had to be spent, and so the financial industry set about figuring out how to make consumers more willing to spend it.

- Ezra Klein | What Comes Next?

Iain Levinson writes a most unusual account of this recent history from the viewpoint of the ultimate victims, the hard-working poor. As so often at ground level, there’s a clear-eyed sanity working that has been infamously missing at the higher elevations of commerce. I must look this author up in the future. Meanwhile try some of this, taken from Sunday’s Washington Post:

They saw it coming. The working poor always see it coming, well before the Wall Street analysts and the Federal Reserve wonks. From the bottom rung of the ladder, you get a more immediate view of the economy and the direction it’s taking. Mark knows that when he makes $8 an hour, and gets a flyer in the mail telling him that he has guaranteed approval on a $40,000 SUV, there is something amiss in the world of finance, a disruption in the force. He doesn’t care, because he likes nice cars, but he knows. And Mark and Robert also know that when the tsunami rolls in, they will be the first ones to be swept off their feet.

Last week, General Motors announced 10,000 job cuts, Wal-Mart 800, and Nobel Prize-winning economist Joseph Stiglitz told an interviewer that in some ways, the current crisis is worse than the Great Depression. But this time around, we appear to have a class of individuals who think that they should not have to suffer with the rest. Circuit City, currently liquidating all its stores and laying off thousands, asked a bankruptcy court judge to let it give bonuses to executives to convince them to stay for the “wind-down process.” The New York Post reported on a disgraced financial executive who transferred property to his wife to protect it from legal action. It is this type of behavior, rather than economics, that the working poor don’t understand. I earned $3.35 an hour at my first job washing dishes in 1981, and today, 28 years later, the minimum wage has barely doubled. Congress voted not to raise it for nearly 10 years, while members awarded themselves pay raises on a nearly annual basis. And during the years that the minimum wage was stalled, the pay of a CEO swelled to hundreds of times the wage of an average worker, according to the Economic Policy Institute.

“You can make a million dollars in America,” says Jim Teal, a former waiter at a high-end Raleigh steakhouse who now stays home with his 2-year-old daughter because business has dried up. “But if you’re making hundreds of millions, you’ve screwed someone over.”

- The Blow the Working Class Saw Coming

That’s nice writing, from someone who seems to be down there working at ground level. We could use more like it.

Getting back to Ezra’s analysis, I totally agree with his forecast:

What replaces the bubble-fueled consumption of the past few years? The answer, as I understand it, is nothing. For the past few years, we’ve been growing like a developed economy but spending as if we were growing like a developing economy. That’s over now, and no similarly unsustainable bubble is likely to replace it.

A commenter on the post points to the future even more succinctly:

The economy is consumption + investment + government + net exports. You usually see written like C+I+G or C+I+G+NX

There’s plenty of I and G to be done.

- chrismealy February 16, 2009 6:06 PM

As we adjust to this we’ll come to value it. After all the bubbles have bust, we have to re-value all the elements of our economy in sustainable terms, with replacement cost factored in right alongside extraction, value-adding, and distribution costs. These are the inelegant and terrifying steps along the way towards that new economy.

One of the best comments I’ve seen on Ezra’s blog – and he has a lot of amazingly substantial discussion there – summarizes in one piece of commentary both the policy history of America in the thirty years since Reagan (and I agree that this is the true timescale of our current malaises, political and economic), and the future requirements.

I think the banking system issue is ultimately more important and more fundamental.

Yes, this is correct.

Except beneath that, the real economy is what’s the problem, here. Essentially we’ve had 30 years of sending more and more GDP to the wealthy, which means sending it to wall street (since the wealthy don’t invest it in their mattresses).

In fact, we’ve actually had the Treasury borrow money to pay for tax cuts and for spending (on military, mostly) that fed GDP which, in turn, went to Wall Street.

Because wages have stagnated, the normal economy hasn’t grown with Wall Street.

And because government has been spending its money on tax cuts instead of infrastructure, the only investments we’ve made have been Wall Street’s capital investments.

So, we’ve ended up with the bizarre spectacle of bridges falling down in the Midwest while consumer spending is propped up by insanely cheap credit which is itself made possible because Wall Street is willing to invest in a huge bet on whether or not strapped consumers will be able to make their mortgage payments. And before that, they were investing in dot com “underpants gnomes” business plans. There’s a reason we keep bouncing from tricked-out bubble to tricked-out bubble.

So, yes, we have to deal with the insolvency of so much of Wall Street. And we have to deal with the impact this has had on the real economy.

But we also have to deal with the distributive issue that has led to both those calamities. Regulation is nice, but the problem simply isn’t that we lacked a regulation to prevent Wall Street from making an insane bet. It’s that Wall Street knowingly made an insane bet. Because they had too much money, and there was nothing else to invest in.

You’ve got to get less money trickling up, and more trickling down. You’ve got to get government making sane investment. Then a lot of this stuff will sort itself out.

- Posted by: anonymiss | February 10, 2009 6:36 PM

I agree with everything said here, and I think, as anonymiss points out, that what matters is the future. My interest revolves around how we get the wealth holders to invest their capital in the reasonable yet infinitely enduring returns that can only come from a sustainable economy – which is the focus of this site, and of all my meanderings through the politics and economics of our times.

by Michael Grabell and Christopher Weaver, ProPublica – February 13, 2009 10:24 am EST

Feb. 13, 10:55p.m.: This post was updated to reflect that the Senate voted for the stimulus package.

The House approved the economic stimulus plan Friday afternoon with a vote of 246 to 183, followed by the Senate with a vote of 60 to 38. Want to know what’s in it? You could read the 1,071-page gorilla that passed today. Or you could let us do the work for you. We’ve dissected the beast in two charts – one for spending below, and one for taxes.

The appropriations section of the bill details spending in excess of $311 billion for programs ranging from Pell grants for college students to clean water in central Utah to nearly $100 billion in new transportation and infrastructure projects.

Here’s our earlier chart comparing the differences between the House, Senate, and conference versions of the bills.

To see a certain category of spending provisions, click on one of the following: Accountability | Aid to People Affected by Economic Downturn | Aid to State and Local Governments | Business | Education | Energy | Health Care | Other | Science and Technology | Transportation and Infrastructure

The Stimulus Plan: A Detailed List of Spending – ProPublica.

Paul Krugman in his NYT blog makes a cogent point about nationalizing insolvent banks:

Oh, and not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie.
- Obama on nationalization

So to think that the culture of America won’t stand for nationalization is to misunderstand the power of words. We’ll just call it receivership. I’m still studying what happens to the ownership of a bank in a situation like this. I’ll write more as this becomes clear to me.

Here’s a very sobering review of the scale of our economic situation. We owe a lot of money, and it’s spread around the world. Representative Kanjorski describes here what happened when more than $5 trillion in claims tried to escape from the money market system of the U.S., all in one morning. Had they not shut the system down, global economic collapse, quite literally, would have followed. We are in a precarious position. We’re looking at 30 years of delusional economic operation at the national level, and this is what it starts to feel like as the abyss looms.

I had an eerie flashback to something Joseph Stiglitz wrote back in December of 2007. I’ve been trying to understand the significance of our national debt being held abroad, and Stiglitz wrote back then (my emphasis):

Meanwhile, we have become dependent on other nations for the financing of our own debt. Today, China alone holds more than $1 trillion in public and private American I.O.U.’s. Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion. Most likely these creditors will not call in their loans—if they ever did, there would be a global financial crisis. But there is something bizarre and troubling about the richest country in the world not being able to live even remotely within its means.
- The Economic Consequences of Mr. Bush

I’ve been reading Nobel laureate Joseph Stiglitz for a better understanding of today’s economic troubles. He wrote a number of articles for Vanity Fair in the last year or so, largely warning of the true costs of the Bush administration’s fiscal policies. These costs have now started to fall due, and what becomes more clear to me is that we have about thirty years of policy to account for. And it’s all coming due. Here’s a quick quote from a Stiglitz piece from over a year ago, back in December 2007:

Globalization means that America’s economy and the rest of the world have become increasingly interwoven. Consider those bad American mortgages. As families default, the owners of the mortgages find themselves holding worthless pieces of paper. The originators of these problem mortgages had already sold them to others, who packaged them, in a non-transparent way, with other assets, and passed them on once again to unidentified others. When the problems became apparent, global financial markets faced real tremors: it was discovered that billions in bad mortgages were hidden in portfolios in Europe, China, and Australia, and even in star American investment banks such as Goldman Sachs and Bear Stearns. Indonesia and other developing countries—innocent bystanders, really—suffered as global risk premiums soared, and investors pulled money out of these emerging markets, looking for safer havens. It will take years to sort out this mess.
- The Economic Consequences of Mr. Bush

Attuned as always to the Fed’s primary constituency (i.e. the banking system), Chairman Bernanke in a speech today at the London School of Economics opined that current fiscal actions planned by the new administration would be “unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.” He added, “A modern economy cannot grow if its financial system is not operating effectively.”

Well, maybe. It depends on terminology I suppose. The meltdown has thrown a lot of formerly innocuous words into sharp relief lately. What exactly is “effectively” for example? Does this only mean profitably for the instrument originators? Or does this also mean efficiently enabling the creation of true new wealth with enough synergy to pay back both the investor, and the business actor, as well as the social and ecological environment that holds both sides of the transaction ultimately safe?

Once you start to look at the role of finance – especially in the candid light of its recent massive failure – you can’t help but question all the words. The NYT story continues with more words from this good shepherd of the banks.

Mr. Bernanke reiterated the need for “stronger supervisory and regulatory systems” while being careful not to introduce rules that would “forfeit economic benefits of financial innovation and market discipline.”

“Even as we strive to stabilize financial markets and institutions worldwide, however, we also owe the public near-term, concrete actions to limit the probability and severity of future crises,” he said.
[...]

“Particularly pressing is the need to address the problem of financial institutions that are deemed ‘too big to fail,’ ” Mr. Bernanke said. “It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period.”

“In the future,” he said, “financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking.”
- Bernanke Says Stimulus Alone Won’t End the Credit Crunch

It’s noteworthy that Mr. Bernanke has learned some of the lessons of the meltdown, namely that the system needs rigorous oversight, somewhat better than its own, once-supposed, enlightened self interest. It would be pretty hard for him to buck THAT trend at the moment.

But “financial innovation” and “market discipline” are a minefield.

Financial innovation, as Joseph Stiglitz has pointed out, has failed to apply ingenuity towards structuring deals that safeguard homeowners during market fluctuations, for example. In fact, let’s quote him, from a staged debate in the Economist recently:

Meanwhile, the financial system didn’t create the innovations which would have addressed the real risks people face—for instance, enabling ordinary Americans to stay in their home when interest rates change—and indeed, has resisted many of the innovations which would have increased the efficiency of our economy. In some places, there has been real innovation—the Danish mortgage market (though it’s hardly new) is an excellent example, with low transactions costs and much greater security. But elsewhere in Europe, there has been resistance to adopting this model.
- Financial Crisis

Innovation as it has proceeded from the industry has exclusively aimed at increasing profits and returns for the market players.

As for market discipline, if Bernanke can still use this term with a straight face then the lesson learned can only be that the lesson has not been learned well enough. There is no market discipline, not in the sense that the community of laws (or the theories of economic philosophers) would regard such a thing. Markets strive continually to break the rules – this has to become a fact of life we learn to live with, or it will cost us hard money again in the future.

One final note on businesses “too big to fail.” Chairman Bernanke speaks of increasing the scrutiny of risk undertaken by firms large enough to crack the system, but a better idea (completely theoretical for now) might be to divorce such firms formally from any guarantee of safety, and institute an “at your own risk” policy for all investors in such firms. Then we’d see some interesting free-market dynamics at work with the firm’s stock value and shareholder oversight (not to mention CEO bonuses).

Personally I like the comment I read recently, that “too big to fail” should mean “too big to exist.” No company can exist except at the sufferance of the community. If we allow entities to grow to a size large enough to create their own weather patterns within the systems given to them to inhabit, maybe we should break them up.

Why not? What of the argument that size brings efficiency? Efficiency to whom, beyond shareholders? Efficiency to their distorted markets, or to the social fabric they strain? We’ll look more at this issue of size.

The best way to understand the underlying fundamentals of today’s economic crisis is probably to study the analyses of those few people who saw it coming and tried to warn us. Economist Joseph Stiglitz is one such person. His article in Vanity Fair in November of last year was a solid piece of work, reviewing how we came to be where we are, and conjointly, how to recover. I highlighted numerous excerpts from the article, some of which are reproduced below.

You should read the whole piece, called Reversal of Fortune. “Describing how ideology, special-interest pressure, populist politics, and sheer incompetence have left the U.S. economy on life support, the author puts forth a clear, commonsense plan to reverse the Bush-era follies and regain America’s economic sanity.”

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Ideology proclaimed that markets were always good and government always bad.
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We learned from the Depression that markets are not self-adjusting—at least, not in a time frame that matters to living people. Today everyone—even the president—accepts the need for macro-economic policy, for government to try to maintain the economy at near-full employment. But in a sleight of hand, free-market economists promoted the idea that, once the economy was restored to full employment, markets would always allocate resources efficiently. The best regulation, in their view, was no regulation at all, and if that didn’t sell, then “self-regulation” was almost as good.
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Economic theory—and historical experience—long ago proved the need for regulation of financial markets. But ever since the Reagan presidency, deregulation has been the prevailing religion. Never mind that the few times “free banking” has been tried—most recently in Pinochet’s Chile, under the influence of the doctrinaire free-market theorist Milton Friedman—the experiment has ended in disaster. Chile is still paying back the debts from its misadventure.
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Financial markets produced loans and other products that were so complex and insidious that even their creators did not fully understand them; these products were so irresponsible that analysts called them “toxic.” Yet financial markets failed to create products that would enable ordinary households to face the risks they confront and stay in their homes. We need a financial-products safety commission and a financial-systems stability commission. And they can’t be run by Wall Street.
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If banks won’t renegotiate, we should have an expedited special bankruptcy procedure, akin to what we do for corporations in Chapter 11, allowing people to keep their homes and re-structure their finances.
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I have been critical of weak anti-trust policies that allowed certain institutions to become so dominant that they are “too big to fail.” The harsh reality is that, given how far we’ve come, we will see more bailouts in the days ahead. Now that Fannie Mae and Freddie Mac are in federal receivership, we must insist: not a dime of taxpayer money should be put at risk while shareholders and creditors, who failed to oversee management, are permitted to walk away with anything they please. To do otherwise would invite a recurrence. Moreover, while these institutions may be too big to fail, they’re not too big to be reorganized. And we need to remember why we’re bailing them out: in order to maintain a flow of money into mortgage markets. It’s outrageous that these institutions are responding to their near-monopoly position by raising fees and increasing the costs of mortgages, which will only worsen the housing crisis. They, and the financial markets, have shown little interest in measures that could help millions of existing and potential homeowners out of the bind they’re in.
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Confidence in the economy won’t be restored as long as growth is low, and growth will be low if investment is anemic, consumption weak, and public spending on the wane. Under these circumstances, to mindlessly cut taxes or reduce government expenditures would be folly.

But there are ways of thoughtfully shaping policy that can walk a fine line and help us get out of our current predicament. Spending money on needed investments—infrastructure, education, technology—will yield double dividends. It will increase incomes today while laying the foundations for future employment and economic growth. Investments in energy efficiency will pay triple dividends—yielding environmental benefits in addition to the short- and long-run economic benefits.
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In fact, the tax cuts in 2001 and 2003 set the stage for the current crisis. They did virtually nothing to stimulate the economy, and they left the burden of keeping the economy on life support to monetary policy alone. America’s problem today is not that households consume too little; on the contrary, with a savings rate barely above zero, it is clear we consume too much.