Why the economic crisis, and its solution, are bigger than you think

No Return To Normal; Why the economic crisis, and its solution, are bigger than you think; by James K. Galbraith.

As I read the article at the bottom (or read it here: http://www.washingtonmonthly.com/features/2009/0903.galbraith.html) I had these thoughts reading it:

I think working people pretty much have known this is much bigger than what all the economists have let on.

And working people are supposed to endure twenty years of hardship, suffering and pain to save capitalism? Is Galbraith nuts?

This analysis has not even taken into account the obscene military spending that is bleeding this country to death as it leaves in its wake massive death and destruction with three wars in progress, support for the Israeli killing machine and a vast network of over 800 U.S. foreign military bases spread out across the globe when what the American people need is a network of 800 public health care centers spread out across the United States--- 16 in each of the 50 states which would create over four-million jobs... good paying jobs and decent work.

I disagree with this approach being put forward by Galbraith which is only meant to lure the left into a trap of continued support for capitalism while his make work on socially useful projects should be vigorously supported on a much larger scale than Roosevelt undertook... and let's be clear about one thing... the Roosevelt projects were almost all public works projects from which no one profited but people were gainfully employed (wages should have and could have been much higher) but the counter to the low wages was that society received very valuable assets lasting many years in return.

Unfortunately, because the left has been so weak many of the environmental projects cited by Galbraith have been ruined... like the Big Bog up here in northern Minnesota which is now being mined for peat by a Canadian corporation which will truck away the profits on roads and infrastructure compliments of tax-payers.

Obama's so-called "economic stimulus" programs are nothing more than a fiasco designed to enable Wall Street to feed at the public trough and gorge itself in a profit-orgy at the expense of the people; Galbraith ignores this... at least 40% will be sucked off in profits and who knows how much in graft and corruption.

I also think Galbraith gives Roosevelt way too much credit in completely ignoring the massive people's movements of the 1930's which pushed Roosevelt in the direction he went creating massive public works programs... and it was those people who were ready to dump capitalism for socialism who Galbraith says had given up on the system who were the very people who pushed Roosevelt.

In my opinion what the left needs to push for is a comprehensive people's bailout that is aimed at trying to solve the pressing problems people are experiencing.

There are those on the left pitching a cooperative effort in what they call a "solidarity economy" where "high road" (good) capitalists are brought in to profit from doing good... turning the entire capitalist system into some kind of philanthropic endeavor or something.

Capitalism is down and going down even further... now is the time for the left to get moving and give it some good hard kicks so it stays down as we do like Galbraith suggests--- educate people really fast to get rid of this rotten system which breeds so much misery once and for all.

This is a very unique "socialist moment" for the very reason that this "is not your garden variety recession." Call it a recession or depression, whatever you like... it is in fact a depression and it is going to be long-term and any recovery will not be of any use to most working people.

This myth of the creation of the "middle class" is a bunch of crap... these are working class people and it is these very people, many of whom suffered as children through the depression of the 1930's have been robbed of their life savings now.

Some working people had a good twenty or thirty years; but these were few and far between... many of them invested substantially in 401k's which have been gutted by 40% to 70% so in effect those so-called "middle class wages" they got don't amount to beans... they would have been better off sticking their wages in a little section of their pillows.

Those like Galbraith are the real middle class and they have no sense of urgency suggesting that working people should stick with this system for another 20 years, quite possibly much longer knowing most of us will be dead by then and our grandchildren will be left with a system more parasitic, cannibalistic and barbaric than what we have now. Who in their right mind wants to put their offspring through something like Galbraith is suggesting... he has never had to work a day in his life.

We need to reorder priorities, advance some kind of anti-monopoly agenda that will put us on the road to socialism... there is no other way out.

This mess is obviously bigger than even Galbraith thinks because he will not have to endure the suffering and hardship, factors that no economist or middle class intellectual can analyze, project or measure.

We better start getting socialist ideas into the hands and heads of working people because the right-wing in this country is on the ball and wasting no time... Obama is providing them the perfect target to enable them to take this country so far to the right we will never even recognize it.

Yours in the struggle,
Alan L. Maki

58891 County Road 13
Warroad, Minnnesota, 56763

alternate E-Mail: amaki000@centurytel.net

phone: (218) 386-2432

Please check out my daily blog:
http://thepodunkblog.blogspot.com/





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Why the economic crisis, and its solution, are bigger than you think


No Return To Normal
Why the economic crisis, and its solution, are
bigger than you think.

By James K. Galbraith

Washington Monthly

March/April 2009

http://www.washingtonmonthly.com/features/2009/0903.galbraith.html

Barack Obama's presidency began in hope and goodwill,
but its test will be its success or failure on the
economics. Did the president and his team correctly
diagnose the problem? Did they act with sufficient
imagination and force? And did they prevail against the
political obstacles-and not only that, but also against
the procedures and the habits of thought to which
official Washington is addicted?

The president has an economic program. But there is, so
far, no clear statement of the thinking behind that
program, and there may not be one, until the first
report of the new Council of Economic Advisers appears
next year. We therefore resort to what we know about the
economists: the chair of the National Economic Council,
Lawrence Summers; the CEA chair, Christina Romer; the
budget director, Peter Orszag; and their titular head,
Treasury Secretary Timothy Geithner. This is plainly a
capable, close-knit group, acting with energy and
commitment. Deficiencies of their program cannot,
therefore, be blamed on incompetence. Rather, if
deficiencies exist, they probably result from their
shared background and creed-in short, from the
limitations of their ideas.

The deepest belief of the modern economist is that the
economy is a self-stabilizing system. This means that,
even if nothing is done, normal rates of employment and
production will someday return. Practically all modern
economists believe this, often without thinking much
about it. (Federal Reserve Chairman Ben Bernanke said it
reflexively in a major speech in London in January: "The
global economy will recover." He did not say how he
knew.) The difference between conservatives and liberals
is over whether policy can usefully speed things up.
Conservatives say no, liberals say yes, and on this
point Obama's economists lean left. Hence the priority
they gave, in their first days, to the stimulus package.

But did they get the scale right? Was the plan big
enough? Policies are based on models; in a slump, plans
for spending depend on a forecast of how deep and long
the slump would otherwise be. The program will only be
correctly sized if the forecast is accurate. And the
forecast depends on the underlying belief. If recovery
is not built into the genes of the system, then the
forecast will be too optimistic, and the stimulus based
on it will be too small.

Consider the baseline economic forecast of the
Congressional Budget Office, the nonpartisan agency
lawmakers rely on to evaluate the economy and their
budget plans. In its early-January forecast, the CBO
measured and projected the difference between actual
economic performance and "normal" economic performance-
the so-called GDP gap. The forecast has two astonishing
features. First, the CBO did not expect the present
recession to be any worse than that of 1981-82, our
deepest postwar recession. Second, the CBO expected a
turnaround beginning late this year, with the economy
returning to normal around 2015, even if Congress had
taken no action at all.

With this projection in mind, the recovery bill pours a
bit less than 2 percent of GDP into new spending per
year, plus some tax cuts, for two years, into a GDP gap
estimated to average 6 percent for three years. The
stimulus does not need to fill the whole gap, because
the CBO expects a "multiplier effect," as first-round
spending on bridges and roads, for example, is followed
by second-round spending by steelworkers and road crews.
The CBO estimates that because of the multiplier effect,
two dollars of new public spending produces about three
dollars of new output. (For tax cuts the numbers are
lower, since some of the cuts will be saved in the first
round.) And with this help, the recession becomes fairly
mild. After two years, growth would be solidly
established and Congress's work would be done. In this
way, the duration as well as the scale of action was
driven, behind the scenes, by the CBO's baseline
forecast.

Why did the CBO reach this conclusion? On depth, CBO's
model is based on the postwar experience, and such
models cannot predict outcomes more serious than
anything already seen. If we are facing a downturn worse
than 1982, our computers won't tell us; we will be
surprised. And if the slump is destined to drag on, the
computers won't tell us that either. Baked into the CBO
model we find a "natural rate of unemployment" of 4.8
percent; the model moves the economy back toward that
value no matter what. In the real world, however, there
is no reason to believe this will happen. Some
alternative forecasts, freed of the mystical return to
"normal," now project a GDP gap twice as large as the
CBO model predicts, and with no near-term recovery at
all.

Considerations of timing also influenced the choice of
line items. The bill tilted toward "shovel-ready"
projects like refurbishing schools and fixing roads, and
away from projects requiring planning and long
construction lead times, like urban mass transit. The
push for speed also influenced the bill in another way.
Drafting new legislative authority takes time. In an
emergency, it was sensible for Chairman David Obey of
the House Appropriations Committee to mine the
legislative docket for ideas already commanding broad
support (especially within the Democratic caucus). In
this way he produced a bill that was a triumph of fast
drafting, practical politics, and progressive principle-
a good bill which the Republicans hated. But the scale
of action possible by such means is unrelated, except by
coincidence, to what the economy needs.

Three further considerations limited the plan. There
was, to begin with, the desire for political consensus;
President Obama chose to start his administration with a
bill that might win bipartisan support and pass in
Congress by wide margins. (He was, of course, spurned by
the Republicans.) Second, the new team also sought
consensus of another type. Christina Romer polled a
bipartisan group of professional economists, and Larry
Summers told Meet the Press that the final package
reflected a "balance" of their views. This procedure
guarantees a result near the middle of the professional
mind-set. The method would be useful if the errors of
economists were unsystematic. But they are not.
Economists are a cautious group, and in any extreme
situation the midpoint of professional opinion is bound
to be wrong.

Third, the initial package was affected by the new
team's desire to get past this crisis and to return to
the familiar problems of their past lives. For these
protégés of Robert Rubin, veterans in several cases of
Rubin's Hamilton Project, a key preconception has always
been the budget deficit and what they call the
"entitlement problem." This is D.C.-speak for rolling
back Social Security and Medicare, opening new markets
for fund managers and private insurers, behind a wave of
budget babble about "long-term deficits" and "unfunded
liabilities." To this our new president is not immune.
Even before the inauguration Obama was moved to commit
to "entitlement reform," and on February 23 he convened
what he called a "fiscal responsibility summit." The
idea took hold that after two years or so of big
spending, the return to normal would be under way, and
the costs of fiscal relief and infrastructure
improvement might be recouped, in part by taking a pound
of flesh from the incomes and health care of the old.

The chance of a return to normal depends, in turn, on
the banking strategy. To Obama's economists a "normal"
economy is led and guided by private banks. When
domestic credit booms are under way, they tend to
generate high employment and low inflation; this makes
the public budget look good, and spares the president
and Congress many hard decisions. For this reason the
new team instinctively seeks to return the bankers to
their normal position at the top of the economic hill.
Secretary Geithner told CNBC, "We have a financial
system that is run by private shareholders, managed by
private institutions, and we'd like to do our best to
preserve that system."

But, is this a realistic hope? Is it even a possibility?
The normal mechanics of a credit cycle do involve
interludes when asset values crash and credit relations
collapse. In 1981, Paul Volcker's campaign against
inflation caused such a crash. But, though they came
close, the big banks did not fail then. (I learned
recently from William Isaac, Ronald Reagan's chair of
the FDIC, that the government had contingency plans to
nationalize the large banks in 1982, had Mexico,
Argentina, or Brazil defaulted outright on their debts.)
When monetary policy relaxed and the delayed tax cuts of
1981 kicked in, there was both pent-up demand for credit
and the capacity to supply it. The final result was that
the economy recovered quickly. Again in 1994, after a
long period of credit crunch, banks and households were
strong enough, even without a stimulus, to support a
vast renewal of lending which propelled the economy
forward for six years.

The Bush-era disasters guarantee that these happy
patterns will not be repeated. For the first time since
the 1930s, millions of American households are
financially ruined. Families that two years ago enjoyed
wealth in stocks and in their homes now have neither.
Their 401(k)s have fallen by half, their mortgages are a
burden, and their homes are an albatross. For many the
best strategy is to mail the keys to the bank. This
practically assures that excess supply and collapsed
prices in housing will continue for years. Apart from
cash-protected by deposit insurance and now desperately
being conserved-the American middle class finds today
that its major source of wealth is the implicit value of
Social Security and Medicare-illiquid and intangible but
real and inalienable in a way that home and equity
values are not. And so it will remain, as long as future
benefits are not cut.

In addition, some of the biggest banks are bust, almost
for certain. Having abandoned prudent risk management in
a climate of regulatory negligence and complicity under
Bush, these banks participated gleefully in a poisonous
game of abusive mortgage originations followed by rounds
of pass-the-bad-penny-to-the-greater-fool. But they
could not pass them all. And when in August 2007 the
music stopped, banks discovered that the markets for
their toxic-mortgage-backed securities had collapsed,
and found themselves insolvent. Only a dogged political
refusal to admit this has since kept the banks from
being taken into receivership by the Federal Deposit
Insurance Corporation-something the FDIC has the power
to do, and has done as recently as last year with
IndyMac in California.

Geithner's banking plan would prolong the state of
denial. It involves government guarantees of the bad
assets, keeping current management in place and
attempting to attract new private capital. (Conversion
of preferred shares to equity, which may happen with
Citigroup, conveys no powers that the government, as
regulator, does not already have.) The idea is that one
can fix the banks from the top down, by reestablishing
markets for their bad securities. If the idea seems
familiar, it is: Henry Paulson also pressed for this, to
the point of winning congressional approval. But then he
abandoned the idea. Why? He learned it could not work.

Paulson faced two insuperable problems. One was
quantity: there were too many bad assets. The project of
buying them back could be likened to "filling the
Pacific Ocean with basketballs," as one observer said to
me at the time. (When I tried to find out where the
original request for $700 billion in the Troubled Asset
Relief Program came from, a senior Senate aide replied,
"Well, it's a number between five hundred billion and
one trillion.")

The other problem was price. The only price at which the
assets could be disposed of, protecting the taxpayer,
was of course the market price. In the collapse of the
market for mortgage-backed securities and their
associated credit default swaps, this price was too low
to save the banks. But any higher price would have
amounted to a gift of public funds, justifiable only if
there was a good chance that the assets might recover
value when "normal" conditions return.

That chance can be assessed, of course, only by doing
what any reasonable private investor would do: due
diligence, meaning a close inspection of the loan tapes.
On the face of it, such inspections will reveal a very
high proportion of missing documentation, inflated
appraisals, and other evidence of fraud. (In late 2007
the ratings agency Fitch conducted this exercise on a
small sample of loan files, and found indications of
misrepresentation or fraud present in practically every
one.) The reasonable inference would be that many more
of the loans will default. Geithner's plan to guarantee
these so-called assets, therefore, is almost sure to
overstate their value; it is only a way of delaying the
ultimate public recognition of loss, while keeping the
perpetrators afloat.

Delay is not innocuous. When a bank's insolvency is
ignored, the incentives for normal prudent banking
collapse. Management has nothing to lose. It may take
big new risks, in volatile markets like commodities, in
the hope of salvation before the regulators close in. Or
it may loot the institution-nomenklatura privatization,
as the Russians would say-through unjustified bonuses,
dividends, and options. It will never fully disclose the
extent of insolvency on its own.

The most likely scenario, should the Geithner plan go
through, is a combination of looting, fraud, and a
renewed speculation in volatile commodity markets such
as oil. Ultimately the losses fall on the public anyway,
since deposits are largely insured. There is no chance
that the banks will simply resume normal long-term
lending. To whom would they lend? For what? Against what
collateral? And if banks are recapitalized without
changing their management, why should we expect them to
change the behavior that caused the insolvency in the
first place?

The oddest thing about the Geithner program is its
failure to act as though the financial crisis is a true
crisis-an integrated, long-term economic threat-rather
than merely a couple of related but temporary problems,
one in banking and the other in jobs. In banking, the
dominant metaphor is of plumbing: there is a blockage to
be cleared. Take a plunger to the toxic assets, it is
said, and credit conditions will return to normal. This,
then, will make the recession essentially normal,
validating the stimulus package. Solve these two
problems, and the crisis will end. That's the thinking.

But the plumbing metaphor is misleading. Credit is not a
flow. It is not something that can be forced downstream
by clearing a pipe. Credit is a contract. It requires a
borrower as well as a lender, a customer as well as a
bank. And the borrower must meet two conditions. One is
creditworthiness, meaning a secure income and, usually,
a house with equity in it. Asset prices therefore
matter. With a chronic oversupply of houses, prices
fall, collateral disappears, and even if borrowers are
willing they can't qualify for loans. The other
requirement is a willingness to borrow, motivated by
what Keynes called the "animal spirits" of
entrepreneurial enthusiasm. In a slump, such optimism is
scarce. Even if people have collateral, they want the
security of cash. And it is precisely because they want
cash that they will not deplete their reserves by
plunking down a payment on a new car.

The credit flow metaphor implies that people came
flocking to the new-car showrooms last November and were
turned away because there were no loans to be had. This
is not true-what happened was that people stopped coming
in. And they stopped coming in because, suddenly, they
felt poor.

Strapped and afraid, people want to be in cash. This is
what economists call the liquidity trap. And it gets
worse: in these conditions, the normal estimates for
multipliers-the bang for the buck-may be too high.
Government spending on goods and services always
increases total spending directly; a dollar of public
spending is a dollar of GDP. But if the workers simply
save their extra income, or use it to pay debt, that's
the end of the line: there is no further effect. For tax
cuts (especially for the middle class and up), the new
funds are mostly saved or used to pay down debt. Debt
reduction may help lay a foundation for better times
later on, but it doesn't help now. With smaller
multipliers, the public spending package would need to
be even larger, in order to fill in all the holes in
total demand. Thus financial crisis makes the real
crisis worse, and the failure of the bank plan
practically assures that the stimulus also will be too
small.

In short, if we are in a true collapse of finance, our
models will not serve. It is then appropriate to reach
back, past the postwar years, to the experience of the
Great Depression. And this can only be done by
qualitative and historical analysis. Our modern
numerical models just don't capture the key feature of
that crisis-which is, precisely, the collapse of the
financial system.

If the banking system is crippled, then to be effective
the public sector must do much, much more. How much
more? By how much can spending be raised in a real
depression? And does this remedy work? Recent months
have seen much debate over the economic effects of the
New Deal, and much repetition of the commonplace that
the effort was too small to end the Great Depression,
something achieved, it is said, only by World War II. A
new paper by the economist Marshall Auerback has
usefully corrected this record. Auerback plainly
illustrates by how much Roosevelt's ambition exceeded
anything yet seen in this crisis:

[Roosevelt's] government hired about 60 per cent of the
unemployed in public works and conservation projects
that planted a billion trees, saved the whooping crane,
modernized rural America, and built such diverse
projects as the Cathedral of Learning in Pittsburgh, the
Montana state capitol, much of the Chicago lakefront,
New York's Lincoln Tunnel and Triborough Bridge complex,
the Tennessee Valley Authority and the aircraft carriers
Enterprise and Yorktown. It also built or renovated
2,500 hospitals, 45,000 schools, 13,000 parks and
playgrounds, 7,800 bridges, 700,000 miles of roads, and
a thousand airfields. And it employed 50,000 teachers,
rebuilt the country's entire rural school system, and
hired 3,000 writers, musicians, sculptors and painters,
including Willem de Kooning and Jackson Pollock.

In other words, Roosevelt employed Americans on a vast
scale, bringing the unemployment rates down to levels
that were tolerable, even before the war-from 25 percent
in 1933 to below 10 percent in 1936, if you count those
employed by the government as employed, which they
surely were. In 1937, Roosevelt tried to balance the
budget, the economy relapsed again, and in 1938 the New
Deal was relaunched. This again brought unemployment
down to about 10 percent, still before the war.

The New Deal rebuilt America physically, providing a
foundation (the TVA's power plants, for example) from
which the mobilization of World War II could be
launched. But it also saved the country politically and
morally, providing jobs, hope, and confidence that in
the end democracy was worth preserving. There were many,
in the 1930s, who did not think so.

What did not recover, under Roosevelt, was the private
banking system. Borrowing and lending-mortgages and home
construction-contributed far less to the growth of
output in the 1930s and '40s than they had in the 1920s
or would come to do after the war. If they had savings
at all, people stayed in Treasuries, and despite huge
deficits interest rates for federal debt remained near
zero. The liquidity trap wasn't overcome until the war
ended.

It was the war, and only the war, that restored (or,
more accurately, created for the first time) the
financial wealth of the American middle class. During
the 1930s public spending was large, but the incomes
earned were spent. And while that spending increased
consumption, it did not jumpstart a cycle of investment
and growth, because the idle factories left over from
the 1920s were quite sufficient to meet the demand for
new output. Only after 1940 did total demand outstrip
the economy's capacity to produce civilian private
goods-in part because private incomes soared, in part
because the government ordered the production of some
products, like cars, to halt.

All that extra demand would normally have driven up
prices. But the federal government prevented this with
price controls. (Disclosure: this writer's father, John
Kenneth Galbraith, ran the controls during the first
year of the war.) And so, with nowhere else for their
extra dollars to go, the public bought and held
government bonds. These provided claims to postwar
purchasing power. After the war, the existence of those
claims could, and did, establish creditworthiness for
millions, making possible the revival of private
banking, and on the broadly based, middle-class
foundation that so distinguished the 1950s from the
1920s. But the relaunching of private finance took
twenty years, and the war besides.

A brief reflection on this history and present
circumstances drives a plain conclusion: the full
restoration of private credit will take a long time. It
will follow, not precede, the restoration of sound
private household finances. There is no way the project
of resurrecting the economy by stuffing the banks with
cash will work. Effective policy can only work the other
way around.

That being so, what must now be done? The first thing we
need, in the wake of the recovery bill, is more recovery
bills. The next efforts should be larger, reflecting the
true scale of the emergency. There should be open-ended
support for state and local governments, public
utilities, transit authorities, public hospitals,
schools, and universities for the duration, and generous
support for public capital investment in the short and
long term. To the extent possible, all the resources
being released from the private residential and
commercial construction industries should be absorbed
into public building projects. There should be
comprehensive foreclosure relief, through a moratorium
followed by restructuring or by conversion-to-rental,
except in cases of speculative investment and borrower
fraud. The president's foreclosure-prevention plan is a
useful step to relieve mortgage burdens on at-risk
households, but it will not stop the downward spiral of
home prices and correct the chronic oversupply of
housing that is the cause of that.

Second, we should offset the violent drop in the wealth
of the elderly population as a whole. The squeeze on the
elderly has been little noted so far, but it hits in
three separate ways: through the fall in the stock
market; through the collapse of home values; and through
the drop in interest rates, which reduces interest
income on accumulated cash. For an increasing number of
the elderly, Social Security and Medicare wealth are all
they have.

That means that the entitlement reformers have it
backward: instead of cutting Social Security benefits,
we should increase them, especially for those at the
bottom of the benefit scale. Indeed, in this crisis,
precisely because it is universal and efficient, Social
Security is an economic recovery ace in the hole.
Increasing benefits is a simple, direct, progressive,
and highly efficient way to prevent poverty and sustain
purchasing power for this vulnerable population. I would
also argue for lowering the age of eligibility for
Medicare to (say) fifty-five, to permit workers to
retire earlier and to free firms from the burden of
managing health plans for older workers.

This suggestion is meant, in part, to call attention to
the madness of talk about Social Security and Medicare
cuts. The prospect of future cuts in this modest but
vital source of retirement security can only prompt
worried prime-age workers to spend less and save more
today. And that will make the present economic crisis
deeper. In reality, there is no Social Security
"financing problem" at all. There is a health care
problem, but that can be dealt with only by deciding
what health services to provide, and how to pay for
them, for the whole population. It cannot be dealt with,
responsibly or ethically, by cutting care for the old.

Third, we will soon need a jobs program to put the
unemployed to work quickly. Infrastructure spending can
help, but major building projects can take years to gear
up, and they can, for the most part, provide jobs only
for those who have the requisite skills. So the federal
government should sponsor projects that employ people to
do what they do best, including art, letters, drama,
dance, music, scientific research, teaching,
conservation, and the nonprofit sector, including
community organizing-why not?

Finally, a payroll tax holiday would help restore the
purchasing power of working families, as well as make it
easier for employers to keep them on the payroll. This
is a particularly potent suggestion, because it is large
and immediate. And if growth resumes rapidly, it can
also be scaled back. There is no error in doing too much
that cannot easily be repaired, by doing a bit less.

As these measures take effect, the government must take
control of insolvent banks, however large, and get on
with the business of reorganizing, re-regulating,
decapitating, and recapitalizing them. Depositors should
be insured fully to prevent runs, and private risk
capital (common and preferred equity and subordinated
debt) should take the first loss. Effective compensation
limits should be enforced-it is a good thing that they
will encourage those at the top to retire. As Senator
Christopher Dodd of Connecticut correctly stated in the
brouhaha following the discovery that Senate Democrats
had put tough limits into the recovery bill, there are
many competent replacements for those who leave.

Ultimately the big banks can be resold as smaller
private institutions, run on a scale that permits
prudent credit assessment and risk management by people
close enough to their client communities to foster an
effective revival, among other things, of household
credit and of independent small business-another lost
hallmark of the 1950s. No one should imagine that the
swaggering, bank-driven world of high finance and credit
bubbles should be made to reappear. Big banks should be
run largely by men and women with the long-term
perspective, outlook, and temperament of middle
managers, and not by the transient, self-regarding
plutocrats who run them now.

The chorus of deficit hawks and entitlement reformers
are certain to regard this program with horror. What
about the deficit? What about the debt? These questions
are unavoidable, so let's answer them. First, the
deficit and the public debt of the U.S. government can,
should, must, and will increase in this crisis. They
will increase whether the government acts or not. The
choice is between an active program, running up debt
while creating jobs and rebuilding America, or a passive
program, running up debt because revenues collapse,
because the population has to be maintained on the dole,
and because the Treasury wishes, for no constructive
reason, to rescue the big bankers and make them whole.

Second, so long as the economy is placed on a path to
recovery, even a massive increase in public debt poses
no risk that the U.S. government will find itself in the
sort of situation known to Argentines and Indonesians.
Why not? Because the rest of the world recognizes that
the United States performs certain indispensable
functions, including acting as the lynchpin of
collective security and a principal source of new
science and technology. So long as we meet those
responsibilities, the rest of the world is likely to
want to hold our debts.

Third, in the debt deflation, liquidity trap, and global
crisis we are in, there is no risk of even a massive
program generating inflation or higher long-term
interest rates. That much is obvious from current
financial conditions: interest rates on long-maturity
Treasury bonds are amazingly low. Those rates also tell
you that the markets are not worried about financing
Social Security or Medicare. They are more worried, as I
am, that the larger economic outlook will remain very
bleak for a long time.

Finally, there is the big problem: How to recapitalize
the household sector? How to restore the security and
prosperity they've lost? How to build the productive
economy for the next generation? Is there anything today
that we might do that can compare with the
transformation of World War II? Almost surely, there is
not: World War II doubled production in five years.

Today the largest problems we face are energy security
and climate change-massive issues because energy
underpins everything we do, and because climate change
threatens the survival of civilization. And here,
obviously, we need a comprehensive national effort. Such
a thing, if done right, combining planning and markets,
could add 5 or even 10 percent of GDP to net investment.
That's not the scale of wartime mobilization. But it
probably could return the country to full employment and
keep it there, for years.

Moreover, the work does resemble wartime mobilization in
important financial respects. Weatherization,
conservation, mass transit, renewable power, and the
smart grid are public investments. As with the armaments
in World War II, work on them would generate incomes not
matched by the new production of consumer goods. If
handled carefully-say, with a new program of deferred
claims to future purchasing power like war bonds-the
incomes earned by dealing with oil security and climate
change have the potential to become a foundation of
restored financial wealth for the middle class.

This cannot be made to happen over just three years, as
we did in 1942-44. But we could manage it over, say,
twenty years or a bit longer. What is required are
careful, sustained planning, consistent policy, and the
recognition now that there are no quick fixes, no easy
return to "normal," no going back to a world run by
bankers-and no alternative to taking the long view.

A paradox of the long view is that the time to embrace
it is right now. We need to start down that path before
disastrous policy errors, including fatal banker
bailouts and cuts in Social Security and Medicare, are
put into effect. It is therefore especially important
that thought and learning move quickly. Does the
Geithner team, forged and trained in normal times, have
the range and the flexibility required? If not,
everything finally will depend, as it did with
Roosevelt, on the imagination and character of President
Obama.