Cuckoo Birds

by digby

Many of us have been girding ourselves for the inevitable emergence of the fiscal responsibility scolds, who pop up like stinkweed whenever Democrats take office. It was clear they were preparing a full frontal attack on government spending, but after the events of the last month I would have thought they'd stick their heads back down and wait for a little bit to see if their case would now endanger the entire economy.

No such luck. They are still flogging their obsession with entitlement spending uber alles. But some economists aren't taking this lying down. Here's James Galbraith:

Excuse me for asking an impolite question.

But did David Walker, Eugene Steuerle -- or Peter G. Peterson himself -- devote even five percent of the vast resources that they have lavished in recent years on the supposed "entitlement crisis" to warning about the impending mess on Wall Street?

Did they write anything about it? Did they speak out against the Bush administration's abandonment of supervisory responsibility in the financial system? Did they protest the massive abuse of unsophisticated home buyers by the loan originators in the subprime sector? Did they comment on "liars' loans," "neutron loans" and "toxic waste"? Were they heard about the risks involved in securitizing subprime loans? Did they foresee that credit default swaps could collapse like a house of cards? Did they caution that the stock market might crash, ruining the private retirements of millions of Americans?

If they did, I must have missed it.

Peter G. Peterson is one of the leading figures on Wall Street. Isn't it reasonable to ask, that if he and his team wish to be taken seriously on matters of public finance, that they should have shown some leadership, some wisdom, some insight and some foresight on the disaster brewing in their own backyard?

As the disaster on Wall Street developed, George Soros was heard from. Warren Buffett was heard from. Was Peter G. Peterson heard from? Was David Walker heard from? Was Eugene Steuerle heard from? I think they were not.

What is Mr. Walker's approach to subprime crisis today? His comment above makes his approach clear. It is to use the crisis as a rhetorical springboard, in order to divert the conversation back to what he calls the "super sub-prime crisis associated with the federal government's deteriorating finances..."

But the fact is, the subprime crisis is real. The collapse of interbank lending is real. The collapsing stock market is real. The disintegration of the financial system is real. The collapse of the housing sector is real. The credit crunch and the recession are real. You can see this in the interest rate spreads and in the credit that is unavailable at any price.

Mr. Walker's "super subprime crisis" of the federal government is not real. It is a pure figment of the imagination. It is something Mr. Walker sees in his mind's eye. He sees it in his budget projections. He sees it in his balance sheets, which are the oddest balance sheets I've ever seen, because they have all liabilities and no assets.

But the financial markets do not see it. How can we tell? Because those markets are willing, today, to lend unlimited sums to the Federal Government on supremely favorable terms. What is the 20 year Treasury bond rate? Last month, it was 4.32 percent. That is almost exactly what it was in December 1959, in the last month of the Eisnehower administration. The United States Government wasn't going bankrupt then and it isn't going bankrupt now.

The point is directly relevant to the question posed by National Journal: "is there room for fiscal stimulus?" Of course there is.

Not only that, sustained fiscal expansion (I dislike the term "stimulus" because I do not think that a short-term policy will work) will be essential in the next administration if the financial rescue just undertaken is to succeed. It will be necessary to stabilize the housing sector. It will be necessary to stabilize state and local government spending, undercut by falling property tax revenues. It will be necessary to stabilize the incomes and expenditures, in the aggregate, of the elderly. It will be necessary to finance new capital spending at the federal, state and local levels.

Failure to do this will cause the housing crisis to get worse. And that will cause the losses in the financial sector to multiply, overwhelming all efforts to stabilize finance.

I was at the Peterson Institute the other day. There I heard a very good panel discussion of the financial crisis, featuring Fred Bergsten, Adam Posen, Morris Goldstein and others. All agreed that the deficit would exceed one trillion dollars next year. All agreed on the need for the expansionary and stabilizing steps outlined above. Nobody was defending, in any serious way, the Walker-Steuerle line.

I found this greatly encouraging.

I would find it encouraging too if the Village CW wasn't gelling around the idea that the government is going to have to "tighten its belt" at a time when it most needs to take the belt all the way off. It's almost as if they are those little birds on cuckoo clocks popping out every hour on the hour during a Democratic presidency, squawking about deficit reduction and entitlements. Even in the middle of an economic crisis they maintain that the government is going to have to tackle the deficit right this minute despite the fact that it is, as Galbraith points out above, a disastrous policy.

I don't know how much pressure these people can bring to bear on an Obama administration, but so far, he hasn't taken this on directly. I'm inclined to cut him some slack in these last few weeks simply because it's too difficult to reeducate the American public in such a short time. But he's going to have to start doing it at some point or risk the success of his administration for outmoded Republican cant.