Taming the Borrowing Beast

The last time the United States operated on balanced budgets, that is, spending no more money than collectable in taxes, was during the Democratic Administration of President Clinton. In its final annual quarters, that administration’s budgets yielded a surplus; that is, the federal government collected more in taxes than it spent.

According to the still dominant business cycle theory of British economist Lord John Maynard Keynes (1883-1946), governments should take in more money than they spend during good times so that in hard times they may ease the pain by spending more than they take in.

The Biblical Joseph was a kind pre-Keynesian, interpreting Pharaoh’s dream as forecasting seven “good years” in which to “pile up grain” in “reserve for the seven years of famine” to follow (Genesis 41:35-36). I corresponded with Lord Keynes’ brother, Sir Geoffrey, a distinguished Blake scholar about my edition of William Blake’s Four Zoas. I think Sir Geoffrey might recognize his brother Maynard’s prototype in the patriarch Joseph.)

In the 1970s, President Nixon corrupted Keynes’ theory for taming the business cycle by using it to tame the electorate. Risky inflationary spending made people foolishly happy enough to re-elect him.

Continuing in the Nixon tradition, President George W. Bush, at the first sign of declining economic prospects in 2001, applied a big dose of Nixon voter happiness balm with risky inflationary tax cuts to the wealthy, and, as if that was not enough, began a war in Afghanistan. In 2003, came more tax cuts to the wealthy and the Iraq war.

Tax cuts plus war spending are wildly inflationary. They induce voter euphoria for a while—the seemly endless feast of dollars garnished with patriotic fervor are delicious—but eventually the happiness bubble breaks, and we are at the mercy of a grouchy Borrowing Beast.

That beast leaves us, in the words of Alan Greenspan, with choices that are no longer between “the good and the better,” but between “the bad and worse.”

How do we, an electorate addicted to an illusory prosperity from a political financing fix, tame our Borrowing Beast?

First, as in the ‘twelve steps’ method, we have to face the fact of our addiction.

Next week: Cold turkey, more junk or slow but sure?

Gambling With Your Money

“I am shocked, shocked, to find that gambling is going on in here!”

— Claude Rains as Captain Renault in Casablanca

Voter discontent, including that of the “Tea Party,” has to cut itself loose from the reckless Republican politics of the last forty years if the nation is to survive the economic catastrophe its gambling has led us into.

The recently elected poster boy beneficiary of protest voting, Republican Senator Scott Brown of Massachusetts, is still marching to the tune of the Republican politics that fathered our currently marauding economic monster.

According to John Cassidy’s article, “The Volker Rule” in the July 26, 2010 issue of The New Yorker, Scott Brown, as the price of his critical sixtieth vote to prevent a filibuster of Financial Reform legislation, demanded and obtained changes that plowed a gaping hole in that legislation’s prohibition of banks entrusted with our federally insured checking and savings account deposits investing their capital in risky hedge funds and private equity funds.

These restrictions on “commercial” banks (checking and savings account deposits) distinguish them from riskier, private “investment” banks like Goldman Sachs (trading in stocks and bonds) was a cornerstone of the Glass-Steagall Act passed by Congress in 1933 without a single dissenting vote. It responded to Congressional hearings disclosing outrageous financial abuses that led to the Great Depression of the 1930s. In 1999, the Glass-Steagall Act was described as “archaic” by Alan Greenspan, then chairman of the Federal Reserve Board, and was repealed by a Republican Congress.

October 23, 2008, the chairman of the House Committee on Oversight and Government Reform, Democrat Henry Waxman, after quoting a lot of Greenspan’s former statements urging deregulation of our financial institutions, asked Greenspan, “Were you wrong?” To that question, Dr. Greenspan replied:

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting . . .their equity in the firms. . . . The problem [is that] something that looked to be a very solid edifice, and, indeed, a critical pillar to market competition and free markets, did break down. And I think that . . . shocked me. . . .” (As reported in John Cassidy’s book, How Markets Fail, Farrar, Straus and Giroux, 2009)

Shocked or not, Dr. Greenspan and most professional economists involved repented their mistakes.

Disenchanted voters, however, including Tea Party supporters, may be excused for being unaware of the foregoing history, but not unrepentant Republican congressmen and senators, including Senator Scott Brown.

photo credit: flickr, Jerry Paffendorf