Socialism for the Rich

U.S. economic policy is partly responsible for the current financial crisis. America deliberately supports keeping prices artificially high and doesn’t worry about bubbles-–with fatal consequences.

In Anglo-Saxon political economy, the financial system plays a prominent role. The financial crisis is therefore a special challenge for economic policy. One question begs to be asked in this regard: to what extent was American economic policy the cause of the current crisis?

The Anglo-Saxon economic system differentiates itself from our own in that it places a high priority on growth instead of monetary and foreign economic stability. Price stability is also a goal of monetary policy in the U.S.A., but it plays a subordinate role. It is accepted, but if short-term conflicts arise growth and full employment take precedence.

U.S. economic policy has likewise no concrete goals in the area of international trade balance. As long as foreign investors are willing to finance American debt, one need not worry about current accounts deficits in the six-seven percent range. A negative savings rate is not only accepted, it’s presented as sustainable. Americans see themselves as the consumers of last resort.

In American orthodoxy, not even bubbles are worth fretting over. According to the mantra of many economists, it’s only when they burst that the Federal Reserve is expected to rush to the rescue like a fire department and extinguish the blaze.

Competition only on the Surface

As far as the structural aspects of economic policy go, the U.S.A. is more liberal in regulating goods and labor markets. In financial markets, on the other hand, free competition exists on the surface, but only in appearance. The Federal Reserve and the government stand as lifeguards, ready for battle. The semi-governmental mortgage insurance giants Fannie Mae and Freddie Mac cover most mortgages. Cynics refer to this as “socialism for the rich.”

As a rule, American economists react with indignation to the suggestion that these things have anything at all to do with the current financial crisis. They blame the turbulence on politicians, regulators, bankers, ratings agencies and hedge funds. They don’t blame the Federal Reserve, and they certainly don’t blame themselves.

One should expect, in light of this, that they would try to overcome this crisis with the same methods used in previous crises. The Federal Reserve clearly demonstrated, however, that their focus remains on growth when they lowered interest rates 325 basis points despite rising inflation. Even today, the danger of inflation is played down in the United States. The hope is that a lowering of oil prices will take care of the problem – that despite the fact that the latest indicator of inflationary expectations has risen by more than five percent.

The Fed, with its low-interest rate policy, is either abetting inflation or the creation of a new bubble in another sector of the credit market or perhaps both. At the same time, U.S. economic policy, with its low interest rates and direct government grants, is preventing a long-overdue adjustment in real estate prices. Economic policy is clearly being used here to keep prices artificially high. Simultaneously, the government and the Fed are trying to keep as many ailing banks and investment houses from going under. Rescuing the US economy is becoming a gigantic effort that may end up causing more problems than it solves. This sort of strategy cannot be sustained.

The theory behind American monetary policy originates from Anglo-American economic doctrine and is called Neo-Keynesianism. It has nothing to do with the Neo-Keynesianism we know here in Germany. Rather, it is a relatively modern theory whose technical model has meanwhile spread to central banks throughout the world. It is designed so that capital and financial markets play no role. In this model, only the actual economy exists. It’s no wonder then, that central banks fixated on this model didn’t see the sub-prime crisis.

Pull the Plug on Super-Privilege

This theory, developed mainly in the United States, is as dominant today as monetarism was in the 1970’s. Exponents of this theory include Federal Reserve chief Ben Bernanke and the departing Fed Governor, Frederic Mishkin. The economic policy establishment in the United States won’t abandon a theory they were largely responsible for creating. But even this theory will fall someday when it becomes apparent that it’s not supported by the facts.

Beyond that, I expect current global imbalances cannot be sustained over the long haul. The United States won’t survive for long with negative savings rates. The United States is poised to lose a possession for which there’s no German translation: “exorbitant privilege,” the privilege of being allowed to live permanently above its means while the rest of the world is stuck in the role of financing this privilege.

This privilege has influenced economic thinking in the U.S.A. Only those who enjoy such privilege come quickly to the conclusion that deficits of all kinds are unimportant or that bubbles are of no concern. U.S. economic policy and its creators are now confronted with a world of finite resources in which one can’t spend the same dollar twice. In this world, the dollar is no longer so almighty that the U.S.A. can do and act as it pleases.

In other words, as far as economic policy goes, America will soon start looking noticeably more German.