Several weeks ago, Bob Kuttner published an excellent 1-page piece called “Debtor’s Prison” (pdf) in the American Prospect. The distinction he offers now seems quite clearly to be one of the fundamental battle grounds in American politics—between rentier creditors and debtors. This is a line that’s deeply obscured in our political discourse but one that underlies virtually every economic debate. Reading this article and Paul Krugman’s follow-up offered one of those rare, paradigm-shifting moments where a number of seemingly disparate and complicated elements all fell together into one coherent picture.
The basic idea is that decades of U.S. financial deregulation and the government’s response to the financial crisis have systematically favored the claims of creditors and transferred the losses and downside of their risk to taxpayers, homeowners, and less sophisticated borrowers. To quote Krugman, “everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff.” I also recommend Yves Smith’s post on the costs of rentier rule.
Geithner, Summers, and most of Obama’s financial team have done little to alter this development. Charles Fergesun, the director of Inside Job, has drawn attention to regulators’ unwillingness to see creditors take even minor haircuts. This has proven true even in egregious cases such as AIG’s toxic credit default swaps in which creditors cashed in at 100 cents on the dollar during the bailout. As Shelia Bair, the Bush-appointee who recently stepped down as Chairman of the FDIC, noted in her wonderful farewell op-ed in the Washington Post, there were few prominent regulators advocating that banks write down losses for the bad mortgages and other bad borrowing. Quantitative easing and the Fed’s decision to keep interest rates near zero have likewise served as a second stimulus for large creditors but have not translated into economic growth or more jobs.
As Tim Harford argues in his book, Adapt: Why Success Always Starts With Failure, we need individuals and businesses to take risks because success is an iterative, evolutionary process of failing and building off of what works. But when we punish borrowing so harshly and reward rentiers uncritically, we destroy incentives to innovate and instead encourage speculation and bubble formation. Getting people above water in their homes and allowing businesses to take loans on favorable terms is precisely what we need to stimulate demand and begin an economic recovery. Even Goldman Sachs acknowledged that this job crisis is a problem caused by too little aggregate demand.
But instead the response has been more of the same. In order to stay in creditors’ good favor, Europe is facing what feels like an endless series of sovereign debt crises and austerity measures forced on its population, and the U.S. is quickly throwing itself down the same rabbit hole. By imposing austerity measures and penalizing borrowers, policy-makers risk creating an entire class or an entire generation that’s too indebted to innovate, move, or seek additional training — creditors need to wake up and realize they’re not getting paid this way either.
Perhaps the most frustrating aspect of this entire situation is that because our political system is so closely tied to its own creditor class, this conversation is completely absent from the current fiscal debates. As Peter Dorman rather tragically observed:
“There are lots of interesting, complex issues in political economy. None of that matters now: the world is in the hands of politicians governed by expediency calculations whose time horizon can be measured in weeks. As far as I can tell, the gross illogic of their policies is simply beside the point.”