Springtime for Wall Street, but not America

The New York TimesMay 23, 2014 

By any normal standard, economic policy since the onset of the financial crisis has been a dismal failure. It’s true that we avoided a full replay of the Great Depression. But employment has taken more than six years to claw its way back to pre-crisis levels — years when we should have been adding millions of jobs just to keep up with a rising population.

Long-term unemployment is still almost three times as high as it was in 2007; young people, often burdened by college debt, face a highly uncertain future.

Now Timothy Geithner, who was Treasury secretary for four of those six years, has published a book, “Stress Test,” about his experiences. And basically, he thinks he did a heckuva job.

He’s not unique in his self-approbation. Policymakers in Europe, where employment has barely recovered at all and a number of countries are in fact experiencing Depression-level distress, have even less to boast about. Yet they too are patting themselves on the back.

How can people feel good about track records that are objectively so bad? Partly it’s the normal human tendency to make excuses, to argue that you did the best you could under the circumstances. And Geithner can indeed blame much though not all of what went wrong on scorched-earth Republican obstructionism.

But there’s also something else going on. In both Europe and America, economic policy has to a large extent been governed by the implicit slogan “Save the bankers, save the world” — that is, restore confidence in the financial system and prosperity will follow. And government actions have indeed restored financial confidence. Unfortunately, we’re still waiting for the promised prosperity.

Much of Geithner’s book is devoted to a defense of the U.S. financial bailout, which he sees as a huge success story — which it was, if financial confidence is viewed as an end in itself. Credit markets, which seized up after Lehman fell, mostly returned to normal during Geithner’s first year in office. Stock indexes rebounded, and have hit records. Even subprime-backed securities — the infamous “toxic waste” that was poisoning the financial system — eventually regained a significant part of their value.

Thanks to this financial recovery, bailing out Wall Street didn’t even end up costing a lot of taxpayer money: resurgent banks were able to repay their loans, and the government was able to sell its equity stakes at a profit.

But where is the rebound in the real economy? Where are the jobs? Saving Wall Street, it seems, wasn’t nearly enough. Why?

One reason for sluggish recovery is that U.S. policy “pivoted,” far too early, from a focus on jobs to a focus on budget deficits. Geithner denies that he bears any responsibility for this pivot, declaring “I was not an austerian.”

In his version, the administration got all it could in the face of Republican opposition. That doesn’t match independent reporting, which portrays Geithner ridiculing fiscal stimulus as “sugar” that would yield no long-term benefit.

But fiscal austerity wasn’t the only reason recovery has been so disappointing. Many analysts believe that the burden of high household debt, a legacy of the housing bubble, has been a big drag on the economy. And there was, arguably, a lot the Obama administration could have done to reduce debt burdens without congressional approval. But it didn’t; it didn’t even spend funds specifically allocated for that purpose.

Why? According to many accounts, the biggest roadblock was Geithner’s consistent opposition to mortgage debt relief — he was, if you like, all for bailing out banks but against bailing out families.

“Stress Test” asserts that no conceivable amount of mortgage debt relief could have done much to boost the economy. But the leading experts on this subject are the economists Atif Mian and Amir Sufi, whose just-published book “House of Debt” argues very much the contrary.

On their blog, Mian and Sufi point out that Geithner’s arithmetic on the issue seems weirdly wrong — order of magnitude wrong — giving much less weight to the role of debt in holding back spending than the consensus of economic research. And that doesn’t even take into account the further benefits that would have flowed from a sharp reduction in foreclosures.

In the end, the story of economic policy since 2008 has been that of a remarkable double standard. Bad loans always involve mistakes on both sides — if borrowers were irresponsible, so were the people who lent them money. But when crisis came, bankers were held harmless for their errors while families paid full price.

And refusing to help families in debt, it turns out, wasn’t just unfair; it was bad economics. Wall Street is back, but America isn’t, and the double standard is the main reason.

Paul Krugman, winner of the 2008 Nobel Prize in economics, is a New York Times columnist.

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