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creditor-friendly policies are crippling the economy


Rule by Rentiers


The latest economic data have dashed any hope of a quick end to America’s job drought, which has already gone on so long that the average unemployed American has been out of work for almost 40 weeks. Yet there is no political will to do anything about the situation. Far from being ready to spend more on job creation, both parties agree that it’s time to slash spending — destroying jobs in the process — with the only difference being one of degree.

Nor is the Federal Reserve riding to the rescue. On Tuesday, Ben Bernanke, the Fed chairman, acknowledged the grimness of the economic picture but indicated that he will do nothing about it.

And debt relief for homeowners — which could have done a lot to promote overall economic recovery — has simply dropped off the agenda. The existing program for mortgage relief has been a bust, spending only a tiny fraction of the funds allocated, but there seems to be no interest in revamping and restarting the effort.

The situation is similar in Europe, but arguably even worse. In particular, the European Central Bank’s hard-money, anti-debt-relief rhetoric makes Mr. Bernanke sound like William Jennings Bryan.

What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.

Of course, that’s not the way what I call the Pain Caucus makes its case. Instead, the argument against helping the unemployed is framed in terms of economic risks: Do anything to create jobs and interest rates will soar, runaway inflation will break out, and so on. But these risks keep not materializing. Interest rates remain near historic lows, while inflation outside the price of oil — which is determined by world markets and events, not U.S. policy — remains low.

And against these hypothetical risks one must set the reality of an economy that remains deeply depressed, at great cost both to today’s workers and to our nation’s future. After all, how can we expect to prosper two decades from now when millions of young graduates are, in effect, being denied the chance to get started on their careers?

Ask for a coherent theory behind the abandonment of the unemployed and you won’t get an answer. Instead, members of the Pain Caucus seem to be making it up as they go along, inventing ever-changing rationales for their never-changing policy prescriptions.

While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.

Who are these creditors I’m talking about? Not hard-working, thrifty small business owners and workers, although it serves the interests of the big players to pretend that it’s all about protecting little guys who play by the rules. The reality is that both small businesses and workers are hurt far more by the weak economy than they would be by, say, modest inflation that helps promote recovery.

No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.

And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn’t have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what’s good for the people you hang out with, the people who seem so impressive in meetings — hey, they’re rich, they’re smart, and they have great tailors — must be good for the economy as a whole.

But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.

13 Responses

  1. “And against these hypothetical risks one must set the reality of an economy that remains deeply depressed,”


  2. Relief for home owners was never a part of the agenda. MBS was nothing but a scam supported by the US government to re-capitalizes the banks and dissolve the Euro dollar. They only thing Obama has done was and continue to deceive the US home owner /taxpayer with his lip service.
    The cover up continues.

  3. If you e-mail me I have an e-mail I can send to you to sign a petition to stop all; foreclosures on MERS, we now need a petition to stop all foreclosures. I am not a MERS MORTGAGE, or at least Deutsche Bank and WAMU have done a good job hiding it., if it is.

  4. People need to be at the Wikileaks demonstrations and we need to plan more over the internet. Organized non violent public demonstrations and exposure to the massive fraud and crime by the people,because the media and politicains are not doing enough. Making appointments and visiting our politicians and demanding we recieve justice is especially important right now. This must be stopped before more suffer, and more will suffer if it is not stopped.

  5. As a practical matter, how in a country this diverse and, it seems, determinedly ignorant, do we create the needed critical mass. The destruction of the middle class has been going on for years. No solution in sight.

    Palin and all the rest are only after money. Look at her behavior and rhetoric: canned, flag waving, knee jerk opportunistic. Bah. Makes me sick to watch her and the rest of them.

  6. They have always known about the lies. It was just easier to blame you.

  7. We need to stand together and forget about the left and right silliness. If Palin stepped up to the place on this, I would be floored. She has done nothing except cause more fighting between right and left. I have to agree with Marie. Relief for homeowners was never on the agenda, because we are patsies. They think we are too dumb to fight back, and they can blame it on us. We have to get rid of the banking cartel before it is too late.

  8. UsedKarGuy. Amen.

  9. Only a small amount of mortgages were in trouble five years ago with low interest payments that suddenly became very high interest payments. It signaled the tsunami to come. Banks refused to refinance. The govt did nothing and the rest is history. Nothing has changed except now values have dropped 50% and 50% will soon be underwater. Now we have five years of foreclosures, bankruptcy, unemployment, vacant homes, vacant storefronts, moms and pops destroyed, communites trashed. The entire population in debt for a lifetime, their savings destroyed and no hope of recovering for most. It never was about free market. Less and less can or wish to buy today. All could have been prevented if that small fast moving snowball five years ago had been dealt with. Now there is a fast moving unending avalanche. The only way for the economy to recover is to stop foreclosures and this has been true for five years. It is not talked about by politicians. It is not talked about in the media. It ravages on unabated and when people suffer, people look away and rationalize it many ways but basically it’s too bad but can’t be helped – the homeowners were stupid, greedy, can’t afford their homes (is that mortgages or homes?) or they are deadbeats and deserve to be homeless. Modification has been another form of predatory lending. It appears there has been a conflict of interest in govt. agencies supposedly helping homeowners. Fraudulent securitized “mortgages” are probably at the root of that as well.


    Okay, so Sarah Palin is a victim of the robo-signing fraud…and as we know, most likely various other fraudulent documents and actions are in the mix…so the question is—will she grab onto this like a “pit bull with lipstick” and REALLY fight for the people effected by fraudclosures??? As much as she turns my stomach, if she did that I would follow her anywhere…she has the opportunity to really help America—I just hope somebody shows her the whole truth…but of course somebody from the bank has probably already paid her to keep quiet…

  11. Hat’s off to Krugman for this article. The moral of the story is that the whole of government and the “ruling class” will continue “playing that game” until “we the people” take a stand. the corruption runs deep.

  12. As I see it, relief for homeowners was never ON the agenda

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