Slouching Toward Sanity

Economic policy in the aftermath of the financial crisis hasn't been ideal, especially in the US, where banks that were on the brink of collapse are back to business-as-usual, raking in profits and opposing urgently needed reforms. Nevertheless, economic policy has been good enough to prevent an inexorable slide into a 1930's-style depression.

BERKELEY – In America today – and in the rest of the world – economic-policy centrists are being squeezed. The Economic Policy Institute reports a poll showing that Americans overwhelmingly believe that the economic policies of the past year have greatly enriched the bankers of Midtown Manhattan and London’s Canary Wharf (they really aren’t concentrated along Wall Street or in the City of London anymore).

In America, the Republican congressional caucus is just saying no: no to short-term deficit spending to put people to work, no to supporting the banking system, and no to increased government oversight or ownership of financial entities. And the banks themselves are back to business-as-usual: anxious to block any financial-sector reform and trusting congressmen eager for campaign contributions to delay and disrupt the legislative process.

I do not claim that policy in recent years has been ideal. If I had been running things 13 months ago, the United States Treasury and Federal Reserve would have let Lehman and AIG fail – but I would have discounted their debt for cash at face value, provided that the debt also came with sufficient equity warrants. That would have preserved the functioning of the system while severely punishing the banking and shadow-banking systems’ equity holders, and today nobody would be claiming that their risk management practices were adequate and did not need reform.

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