False Profits: Recovering from the Bubble Economy
Let me tell you my story about reading this book.
I spent some time last month in San Francisco for a little thing called the Prop 8 trial (perhaps you’ve heard of it?), which happened to coincide with the worst week for liberalism in recent memory. In the space of a few days, Martha Coakley failed in Massachusetts; the Supreme Court opened the spigot on money in politics with the Citizens United ruling; Air America signed off; and on and on. What’s more, it rained pretty much every second that week in San Francisco, and I spent most of my non-courtroom time huddled on a street corner waiting for a MUNI bus. I’ve often joked that in the movies, rain always symbolizes rain, but in this case it accurately symbolized the general mood of progressives circa mid-January 2010. The gloom represented the lost year for the progressive agenda; an economy saddled with millions of Americans jobless and seemingly no plan to get them back to work; a moribund legislative branch bound by arcane rules and processes that frustrated action; an executive branch aloof and adrift; and a judiciary branch that might as well have their own personal corporate sponsorships. Most of all, progressives were wondering where the fight had gone from their political leaders, how the steadfast and resolute nature of Truman, Roosevelt and Kennedy, could lead to the tepid mush that passed for boldness today.
My literary accompaniment for this week was the book False Profits by Dean Baker, which dared to name names about the elites most responsible for the biggest economic crisis in generations. In the book, Baker highlights the trillions of dollars they squandered, the suffering they caused, the mistakes they made and continue to make, and asks the obvious question: “Why do these people still have jobs?”
It was oddly comforting.
Because Dean Baker, armed only with facts and common sense, actually presented a simple and coherent argument, actually offered solutions, actually held the responsible parties accountable and actually vowed not to forget about their transgressions.
You know, like a Democrat is supposed to do, in the theoretical model of politics that inhabits our best hopes.
Baker, the co-director of the Center for Economic and Policy Research, pens a fairly simple message, broadly described – our elites have failed, and yet they somehow remain elites. Make sure you understand this phrase before embarking upon this book – “the eight trillion dollar housing bubble.” Baker points to this as entirely responsible for the economic collapse, and provides the economic underpinnings for such a claim, so rarely heard in Washington debates about spending and deficits.
In Baker’s retelling, the Federal Reserve Board and the Treasury Department, specifically Alan Greenspan, Ben Bernanke and Henry Paulson (featured on the cover as the “false profits” of the title), allowed the housing bubble to grow unchecked, ignored and even encouraged the reckless mortgages that intensified risk, and were caught completely off-guard by the eventual meltdown. Stripped of their home equity wealth, consumers could not ring up the purchases that fed the national economy. Foreclosures and a glut of vacant housing on the market devastated the construction industry. The write-offs and toxic securities at the banks brought them to their knees. Baker says this was completely predictable:
“None of this is complicated or mysterious. Anticipating this disaster didn’t require brilliant insights or complex models. In fact, a good student in an introductory economics course would have possessed all the knowledge needed to see this train wreck coming.
However, the political elites do not want the official story to be that simple. They don’t want the public to know that the people holding the top economic policy positions are incompetent, corrupt, or both. By burying the story in complexity, these elites are trying to confuse the American public.”
It’s perhaps unsatisfying to chalk up a recession which has caused so much pain and suffering to the fact that a few people in key positions simply didn’t do their job well. But that’s Baker’s thesis statement, and he proves his point over and over using simple math and common sense, making the complexities of financial and housing policies seem perfectly obvious. Baker attacks the usual excuses from the elites – that they needed more regulatory tools (actually, the Federal Reserve had plenty of authority to crack down on the housing bubble) or that they lacked a “systemic risk regulator” (the Federal Reserve is quite well-equipped to serve in this capacity), and comes back to his core point constantly – that any economic “expert” who created this much havoc through sheer negligence doesn’t deserve the title, let alone their job.
Most important, Baker goes beyond identifying the central problem but articulates innovative solutions for both the jobs crisis and the reforming of the financial sector. Baker, an idea factory for stimulus, follows the principles of Keynes while offering new ways to introduce those types of demand-side stimulus measures. Baker endorses ideas you’ll never hear from other liberals, such as: subsidies for local transit agencies to encourage low-cost ridership; public funding for clinical drug trials (which could lower the cost of prescription drugs and allow generics to be sold more immediately); New Deal-type funding and support for writers and artists to post copyright-free work on the Internet; and a work-sharing tax credit that would pay companies to reduce worker hours at the same salary, allowing for more hiring. Some of Baker’s previous ideas, like transitioning homeowners facing foreclosure into renters of their own properties or instituting a financial transactions tax on stock purchases, have begun to gain traction, with Fannie Mae implementing a modified “own to rent” program, and global financial leaders talking about financial transaction fees.
I’m pleased to have Dean Baker with us today to talk about his book. Heck, I’m pleased to have read it when I did, considering the faith it gave me that somewhere out there, liberals still know how to come up with policies that solve problems, and how to call incompetence what it is.