WEBVTT

NOTE The Bush-Obama Bailout Has Permenantly Changed the Nature of American Capitalism

1
00:00:00.000 --> 00:00:07.000
In my time here, what I want to do is to bring you a message of hope and change.

2
00:00:07.000 --> 00:00:19.520
The title of my talk in the program is something along the lines of the Bush-Obama bailout

3
00:00:19.520 --> 00:00:24.720
will permanently change the nature of American capitalism.

4
00:00:24.720 --> 00:00:28.120
That's the change part.

5
00:00:28.120 --> 00:00:31.120
And the hope part is, I hope it's not true.

6
00:00:31.120 --> 00:00:38.160
I want to talk about, actually a little bit broader than the bailout, I want to talk about

7
00:00:38.160 --> 00:00:41.560
economic policy that's occurred over the past year.

8
00:00:41.560 --> 00:00:42.560
And it's almost breathtaking.

9
00:00:42.560 --> 00:00:46.680
It's hard to talk about and I think maybe in five years' time we'll look back and see

10
00:00:46.680 --> 00:00:48.640
things a little differently.

11
00:00:48.640 --> 00:00:54.080
But a year ago it would have been hard to imagine all the things that we've seen in

12
00:00:54.080 --> 00:01:02.000
in the past year as far as changes in economic policy and I am fearful that these changes

13
00:01:02.000 --> 00:01:07.480
will fundamentally change the nature of American Capitalism in a manner similar to the way

14
00:01:07.480 --> 00:01:14.320
that we look back and think about the New Deal or to a lesser extent the Great Society.

15
00:01:14.320 --> 00:01:18.940
There are four particular aspects of policy I want to talk about.

16
00:01:18.940 --> 00:01:28.380
The role of the Federal Reserve, the TARP program, the stimulus package, and bailouts.

17
00:01:28.380 --> 00:01:35.020
Let me start with the Federal Reserve.

18
00:01:35.020 --> 00:01:42.260
For decades, I've taught my students about what the Federal Reserve Bank does, and essentially

19
00:01:42.260 --> 00:01:46.260
the main thing that the Federal Reserve Bank does is control the size of the money supply

20
00:01:46.260 --> 00:01:50.460
through Open Market Operations, or at least that's what I've taught for decades.

21
00:01:50.460 --> 00:01:55.140
And they do that by buying and selling government securities.

22
00:01:55.140 --> 00:01:56.140
And that's changed.

23
00:01:56.140 --> 00:02:01.420
Over the last year, the Federal Reserve has started buying non-government securities,

24
00:02:01.420 --> 00:02:06.220
something completely new and a major change in policy and something I don't see the press

25
00:02:06.220 --> 00:02:07.940
picking up on.

26
00:02:07.940 --> 00:02:12.580
And the second thing the Federal Reserve does, to a lesser extent now, but this is really

27
00:02:12.580 --> 00:02:18.580
The Federal Reserve was created in 1913 to make loans to member banks.

28
00:02:18.580 --> 00:02:23.580
Banks that are members of the Federal Reserve system can go to the discount window and borrow against their assets.

29
00:02:23.580 --> 00:02:26.580
And a major change has occurred over the last year.

30
00:02:26.580 --> 00:02:33.580
The Federal Reserve is making loans to other financial institutions, non-bank financial institutions.

31
00:02:33.580 --> 00:02:40.580
These are two huge changes in Federal Reserve policy that I don't think have been sufficiently noted.

32
00:02:40.580 --> 00:02:46.180
People have talked about the huge increase in the financial base over the last year.

33
00:02:46.180 --> 00:02:48.340
Yep, that's real.

34
00:02:48.340 --> 00:02:53.260
But the bigger policy change over the long run, I think, when you look at Federal Reserve

35
00:02:53.260 --> 00:03:00.620
policy is they're buying non-government assets instead of federal bonds, federal government

36
00:03:00.620 --> 00:03:07.240
bonds like they used to, and they're extending loans to institutions that are not member

37
00:03:07.240 --> 00:03:09.500
banks of the Federal Reserve system.

38
00:03:09.500 --> 00:03:16.540
This has all the makings of setting the Federal Reserve Bank up as a designer of industrial

39
00:03:16.540 --> 00:03:24.920
policy in the United States, at least prior to what the last year's policies, the Federal

40
00:03:24.920 --> 00:03:30.100
Reserve was relatively neutral as far as its treatment of various industries and businesses

41
00:03:30.100 --> 00:03:31.100
in the economy.

42
00:03:31.100 --> 00:03:35.100
Yeah, it could create a lot of inflation by expanding the money supply, but it did so

43
00:03:35.100 --> 00:03:38.540
in a neutral way by buying and selling government securities.

44
00:03:38.540 --> 00:03:44.660
When it's buying securities that are non-government securities, it's essentially picking and choosing

45
00:03:44.660 --> 00:03:46.560
who it's going to support.

46
00:03:46.560 --> 00:03:51.100
And that has the makings, the very foundation of setting up an industrial policy and making

47
00:03:51.100 --> 00:03:55.740
the Federal Reserve an agent of industrial policies.

48
00:03:55.740 --> 00:03:57.120
Very troubling.

49
00:03:57.120 --> 00:03:58.120
Very troubling.

50
00:03:58.120 --> 00:04:00.340
You know, that's the change part.

51
00:04:00.340 --> 00:04:03.700
The hope part is, I hope it's not true, but I'll talk a little bit more about that hope

52
00:04:03.700 --> 00:04:04.700
part at the end.

53
00:04:04.700 --> 00:04:07.500
I'm going to end on a hopeful note, I promise.

54
00:04:07.500 --> 00:04:15.420
But it's troubling to see the change in the Federal Reserve Bank over the last year.

55
00:04:15.420 --> 00:04:23.660
And in my title, I deliberately obviously titled this the Bush-Obama policies.

56
00:04:23.660 --> 00:04:28.040
Ben Bernanke is a Bush appointee and these policies started in the Bush administration.

57
00:04:28.040 --> 00:04:33.460
So regrettably, the policies we're looking at today, the policies I'm talking about right

58
00:04:33.460 --> 00:04:35.540
now are bipartisan policies.

59
00:04:35.540 --> 00:04:40.600
We can't say it's because we now have a democratic majority or a democratic president.

60
00:04:40.600 --> 00:04:45.320
These things were started under President Bush.

61
00:04:45.320 --> 00:04:48.120
Second thing I want to talk about is the TARP program.

62
00:04:48.120 --> 00:04:55.360
Y'all remember when Secretary Paulson announced that the financial system was in such crisis

63
00:04:55.360 --> 00:05:02.640
that we immediately need $700 billion essentially to be spent at the discretion of the Secretary

64
00:05:02.640 --> 00:05:03.640
of the Treasury.

65
00:05:03.640 --> 00:05:19.640
The argument they argued was the $700 billion would go toward buying these so-called toxic securities that we needed to get them off of the balance sheet of the banks and so forth in order to restart the financial system.

66
00:05:19.640 --> 00:05:29.640
Now, in hindsight, was this argument correct? We can see it wasn't because that's not what the money was used for.

67
00:05:29.640 --> 00:05:35.720
Actually, Paulson and Bush rushed this thing through Congress, pressured Congress to pass

68
00:05:35.720 --> 00:05:43.960
this $700 billion emergency package to buy those toxic assets.

69
00:05:43.960 --> 00:05:50.320
The legislation essentially left the disposition of that $700 billion to the Secretary of the

70
00:05:50.320 --> 00:05:56.120
Treasury, and they did look pretty hard at how they could buy up those toxic assets.

71
00:05:56.120 --> 00:06:03.120
I actually have a significant number of economist friends who were hired as consultants to the Treasury Department

72
00:06:03.120 --> 00:06:08.120
to try to come up with an auction scheme to buy those assets.

73
00:06:08.120 --> 00:06:11.120
But I think they decided it just wasn't feasible to do it.

74
00:06:11.120 --> 00:06:13.120
But whatever, they didn't do it.

75
00:06:13.120 --> 00:06:19.120
Instead, what they've used the money for, about half of it up to this point,

76
00:06:19.120 --> 00:06:22.120
so there's still another $350 billion pending,

77
00:06:22.120 --> 00:06:25.120
but what they used the money for was to take equity interest in banks.

78
00:06:25.120 --> 00:06:30.160
Banks, this is not what the TARP originally was, I mean that wasn't what they said they

79
00:06:30.160 --> 00:06:34.480
were going to use the money for, but instead they've used it to take equity interest in

80
00:06:34.480 --> 00:06:39.720
banks and so now as you know, the federal government owns a significant equity interest

81
00:06:39.720 --> 00:06:43.520
in a lot of large banks.

82
00:06:43.520 --> 00:06:50.520
One result of that is in the popular press, you've seen discussion about the nationalization

83
00:06:50.520 --> 00:06:56.080
of Banks, and sure enough, when the federal government owns a big share of these banks,

84
00:06:56.080 --> 00:07:01.280
you know, what else might we call it but the nationalization of banks? And of course, that's

85
00:07:01.280 --> 00:07:05.140
troubling too, and it goes right along with the Federal Reserve policy. If the federal

86
00:07:05.140 --> 00:07:09.760
government is the owner of the banks, then who's going to get the loans? Who's going

87
00:07:09.760 --> 00:07:16.440
to be financially supported by those financial intermediaries? What's up to the federal government?

88
00:07:16.440 --> 00:07:21.800
So again, we're moving in the direction of industrial policy as the federal government

89
00:07:21.800 --> 00:07:24.360
takes over our financial system.

90
00:07:24.360 --> 00:07:27.320
I hope it's not true.

91
00:07:27.320 --> 00:07:31.260
You know, and what they say, you know, what we can hope will happen is that the federal

92
00:07:31.260 --> 00:07:36.160
government, they plan to divest themselves of this equity interest when the financial

93
00:07:36.160 --> 00:07:44.440
system gets back on sound footing, but I mean, you can see where this might be headed.

94
00:07:44.440 --> 00:07:52.180
You know, where essentially the federal government sort of through the back door here, but controlling

95
00:07:52.180 --> 00:07:56.880
financial institutions ultimately decides which businesses are going to get loans, which

96
00:07:56.880 --> 00:08:01.880
industries are going to be supported and so forth.

97
00:08:01.880 --> 00:08:06.720
You know, very troubling, very troubling.

98
00:08:06.720 --> 00:08:09.840
The third issue I wanted to talk about was the stimulus package.

99
00:08:09.840 --> 00:08:13.640
I think so much has been said about this.

100
00:08:13.640 --> 00:08:20.600
We don't need to talk about it in too much detail, but when you look at the Keynesian

101
00:08:20.600 --> 00:08:25.640
justification for the stimulus package, more government spending, boosting aggregate demand

102
00:08:25.640 --> 00:08:31.400
and so forth, but you look at what the money is being spent for, and really if you go back

103
00:08:31.400 --> 00:08:38.000
and you look at President Obama's campaign rhetoric about where he wanted to spend money,

104
00:08:38.000 --> 00:08:41.800
where he thought the federal government should get more involved, that stimulus bill looks

105
00:08:41.800 --> 00:08:47.800
It's a lot like the fulfillment of President Obama's campaign promises.

106
00:08:47.800 --> 00:08:52.120
He was able to get those things passed through Congress under the guise of it being a stimulus

107
00:08:52.120 --> 00:08:56.640
package, but most of that money isn't even going to be spent in 2009.

108
00:08:56.640 --> 00:09:02.480
Current forecasts seem to suggest by 2010, a year from now, the economy will be recovering.

109
00:09:02.480 --> 00:09:07.640
We won't need the stimulus, but the money already is going to be appropriated.

110
00:09:07.640 --> 00:09:17.520
So, you know, it's not really a stimulus package at all, it's the advancement of President

111
00:09:17.520 --> 00:09:25.280
Obama's agenda for greater federal government involvement throughout the economy.

112
00:09:25.280 --> 00:09:33.880
Now, I might step back and say, the whole idea behind this stimulus package, the Keynesian

113
00:09:33.880 --> 00:09:41.380
One idea behind the stimulus package is that if you increase aggregate demand by increasing

114
00:09:41.380 --> 00:09:47.080
government spending, by cutting taxes, and 95% of you people are going to get a tax cut,

115
00:09:47.080 --> 00:09:53.720
but that's the whole part.

116
00:09:53.720 --> 00:09:58.880
But if you look at the logic of that, what that would suggest is if we increase spending

117
00:09:58.880 --> 00:10:03.760
and cut taxes, raising the deficit, that's going to increase aggregate demand and lead

118
00:10:03.760 --> 00:10:21.760
When President Bush took office we had a surplus in the federal budget. If in fact increasing government spending and cutting taxes raising the deficit, if that would stimulate the economy and lead us to prosperity, we ought to be in nirvana now.

119
00:10:21.760 --> 00:10:27.040
Now, I mean, you know, after the huge and increasing deficits of the Bush administration.

120
00:10:27.040 --> 00:10:33.400
But nevertheless, that's the approach that we're taking to stimulus today.

121
00:10:33.400 --> 00:10:39.560
So ultimately, what that stimulus package is going to do is going to build in another

122
00:10:39.560 --> 00:10:44.520
five percent or so of GDP into government spending.

123
00:10:44.520 --> 00:10:49.600
And we're going to have a permanently larger public sector as a result.

124
00:10:49.600 --> 00:10:55.760
I hope it's not true, but it's hard to see how you're going to reverse that government

125
00:10:55.760 --> 00:11:02.080
spending once it gets into place, to the point where even some politicians see this.

126
00:11:02.080 --> 00:11:06.920
I think there's at the moment four state governors who say they're not taking the stimulus money

127
00:11:06.920 --> 00:11:11.300
from the federal government because it's coming with strings attached, and once that stimulus

128
00:11:11.300 --> 00:11:14.800
money runs out, the states are going to have to foot the bill, either that or kick a bunch

129
00:11:14.800 --> 00:11:18.160
and a bunch of people off Medicaid and welfare programs and so forth.

130
00:11:18.160 --> 00:11:22.760
And those governors rightly see, you know, once the state is supporting these people,

131
00:11:22.760 --> 00:11:27.040
it's going to be very difficult politically to move back on that.

132
00:11:27.040 --> 00:11:33.520
So, you know, again, it's very troubling.

133
00:11:33.520 --> 00:11:38.360
The fourth thing I want to talk about is the bailouts.

134
00:11:38.360 --> 00:11:42.360
And, you know, we see the bailouts of these financial firms.

135
00:11:42.360 --> 00:11:48.360
I guess we've talked a little bit about that already under the guys of the TARP program and so forth.

136
00:11:48.360 --> 00:11:56.360
We're in the process of bailing out the automobile industry, Chrysler and General Motors.

137
00:11:56.360 --> 00:12:05.360
And again, I mean, this is very troubling. I mean, it's just elementary economics that the way the market system works

138
00:12:05.360 --> 00:12:10.360
is based on the incentives provided through profits and losses.

139
00:12:10.360 --> 00:12:18.440
If a firm takes resources and combines those resources and produces output that's worth

140
00:12:18.440 --> 00:12:24.240
more than the resources it used to produce that output, that's a good thing for all of

141
00:12:24.240 --> 00:12:25.240
us, right?

142
00:12:25.240 --> 00:12:27.840
Because it's increasing the value of resources.

143
00:12:27.840 --> 00:12:33.280
So these firms that take resources and combine them into output that's more valuable than

144
00:12:33.280 --> 00:12:37.280
the resources they use, we should reward them for that because they're doing a great thing

145
00:12:37.280 --> 00:12:38.280
for our economy.

146
00:12:38.280 --> 00:12:44.280
In fact, the market system does reward firms for that. That's what profit is.

147
00:12:44.280 --> 00:12:53.280
And if firms take resources and combine them into output, and the output is worth less than the resources that they use to produce the output,

148
00:12:53.280 --> 00:13:00.280
that harms the economy. And we should penalize firms that do this.

149
00:13:00.280 --> 00:13:03.280
And the market system does that. That's what losses are.

150
00:13:03.280 --> 00:13:26.280
When President Obama was campaigning last summer and gas prices were up over $4 a gallon, he said one of the things he was going to do was to put an excess profits tax on the oil industry.

151
00:13:26.280 --> 00:13:45.280
Now, if gas is $4 a gallon, you'd think that people would want more gasoline, and that we would be inclined to reward firms that would provide it to us, but President Obama's idea is, no, we should penalize them, put an excess profits tax on them.

152
00:13:45.280 --> 00:14:00.280
And now, when the auto industry is struggling, the policy is to reward those firms that are squandering our resources, taking big losses.

153
00:14:00.280 --> 00:14:11.280
So we've got a policy put in place, now we actually, gas prices are down and so President Obama's backed off on his excess profits tax for the oil industry,

154
00:14:11.280 --> 00:14:31.280
But nevertheless, and it was part of his campaign, you know, essentially we've announced a policy where if firms are successful and productive and making profits, we're going to penalize them, and if firms are unsuccessful and losing money, we're going to subsidize them and support them, right?

155
00:14:31.280 --> 00:14:37.280
We're doing that with the auto industry, of course, you know, all the financial institutions, all those bailouts.

156
00:14:37.280 --> 00:14:59.280
This is a policy that's going to be exceedingly hard to reverse because the economy will recover, firms are going to start to make profits again, but we've set the precedent for subsidizing failing firms and at least announce the policy of penalizing successful firms.

157
00:14:59.280 --> 00:15:11.280
I just recently re-read Atlas Shrugged. I'm sure most of you are familiar with it.

158
00:15:11.280 --> 00:15:18.280
It's a 50-year-old book, but you read through it, and it's like you're reading current events.

159
00:15:18.280 --> 00:15:26.280
It's a little bit eerie. So you look at what's happened over the last year,

160
00:15:26.280 --> 00:15:30.440
last year, and it's really, it's just mind boggling and breathtaking when you look at

161
00:15:30.440 --> 00:15:35.840
these policies, the Federal Reserve policy, TARP, the bailouts, the stimulus package,

162
00:15:35.840 --> 00:15:43.500
you put this all together and these programs have the potential to fundamentally undermine

163
00:15:43.500 --> 00:15:48.440
the market system, the capitalist system that we know now.

164
00:15:48.440 --> 00:15:57.440
They have the potential to be as substantial a change in our economic system as the New Deal.

165
00:16:01.440 --> 00:16:06.440
That's the change part. I hope that's not true. I hope that's not true.

166
00:16:06.440 --> 00:16:10.440
And let me tell you why I'm a little bit optimistic.

167
00:16:10.440 --> 00:16:15.440
I would hope we can reverse these policies.

168
00:16:45.440 --> 00:16:50.440
I hope. I mean, you know, that people will see, look at what the guy is doing. Yeah, he talks a good game.

169
00:16:50.440 --> 00:16:56.440
Our first indication of that, I think, is going to be the midterm elections coming up a little bit less than two years.

170
00:16:56.440 --> 00:17:02.440
I think that will be a referendum on Obama's policy, so it'll be interesting to see.

171
00:17:02.440 --> 00:17:09.440
The reason why I'm hopeful really doesn't have anything to do with current conditions, but more past conditions.

172
00:17:09.440 --> 00:17:16.640
I really don't feel good about what's going on right now with regard to federal government policy.

173
00:17:16.640 --> 00:17:23.040
But I've had this feeling before. Like, I'm old enough, I've been around enough, I've had this feeling before.

174
00:17:23.040 --> 00:17:29.640
When was the last time I had it? It was about 30 years ago. Let me go back 30 years ago, 1979.

175
00:17:29.640 --> 00:17:39.040
President Carter was in office. Carter had, one of the things he ran on was the so-called Misery Index,

176
00:17:39.040 --> 00:17:42.540
which is the sum of inflation and unemployment.

177
00:17:42.540 --> 00:17:47.240
He says, you know, I mean, look at the misery index, how high it is under President Ford,

178
00:17:47.240 --> 00:17:49.740
that when you add together inflation and unemployment.

179
00:17:49.740 --> 00:17:52.740
When Carter was running for re-election four years later,

180
00:17:52.740 --> 00:17:55.740
the unemployment rate was higher than when he got elected,

181
00:17:55.740 --> 00:17:59.040
and the inflation rate was higher than when he got elected.

182
00:17:59.040 --> 00:18:03.040
For some reason, Reagan never mentioned the misery index in the campaign.

183
00:18:03.040 --> 00:18:05.540
Carter made such a big deal about it.

184
00:18:05.540 --> 00:18:11.540
We had periodic gas lines because we still had a legacy of Nixon's wage and price controls.

185
00:18:11.540 --> 00:18:13.540
The price controls were still on gasoline.

186
00:18:13.540 --> 00:18:19.540
We still had periodic lines at the gas pump with a stagnating economy.

187
00:18:19.540 --> 00:18:27.540
We had American hostages in the American embassy in Iran, you may remember.

188
00:18:27.540 --> 00:18:32.540
And for those of you that do remember the 70s, you probably also remember

189
00:18:32.540 --> 00:18:38.320
Polyester Leisure Suits and Disco Music. So the decade was just...

190
00:18:38.320 --> 00:18:43.140
There's a lot of negative things about the seventies.

191
00:18:43.140 --> 00:18:49.220
And there was good reason to be pessimistic, and I didn't feel too good about things in 1979, thirty years ago.

192
00:18:49.220 --> 00:18:52.980
But other people didn't also.

193
00:18:52.980 --> 00:18:57.260
And when President Reagan was elected in 1980...

194
00:18:57.260 --> 00:19:02.460
Do you remember when President Reagan was elected in 1980, the highest marginal income tax rate

195
00:19:02.460 --> 00:19:32.460
was 70%. I keep this in mind, sometimes people say things aren't politically feasible. Well, as an academic, I don't really need to worry about that myself anyway. But when Reagan was elected, the highest marginal income tax rate was 70%. In 1989, after Reagan had left office, the highest income taxpayers paid a marginal rate of 28%. If you're in the highest income tax bracket, your marginal rate fell from 70% to 28%. If you'd asked me in

196
00:19:32.460 --> 00:19:37.740
1980. Would that be possible that we could see that kind of decline in marginal tax rates?

197
00:19:37.740 --> 00:19:42.260
I would have said no. Now, if you ask me if things are possible, you know, I say, well,

198
00:19:42.260 --> 00:19:45.540
I'm an academic. I don't worry about that. But there's an example where something that

199
00:19:45.540 --> 00:19:52.540
seems like politically this just wouldn't be possible. It happened. We had a prosperous

200
00:19:52.540 --> 00:20:05.540
The first decade in the 80s, 1989, 20 years ago, the Berlin Wall fell, move up to 10 years ago, 1999.

201
00:20:05.540 --> 00:20:13.540
It's the end of the Clinton administration, but we had a prosperous economy, we had a federal budget surplus.

202
00:20:13.540 --> 00:20:18.540
So my reason for optimism really isn't anything about looking at current conditions.

203
00:20:18.540 --> 00:20:48.540
I wish I could point to something in current conditions and say you know I hope things turn around but rather it's looking back 30 years ago to 1979 and what things looked like there and there was a backlash and the ideas of liberty came to the forefront and I'm hopeful that will happen again I think there's some reason for pessimism but I'm an optimist by nature and though I don't

204
00:20:48.540 --> 00:20:56.540
I don't see what the grounds for hope is, historically I see things can change and I'm optimistic we can turn this around.

205
00:20:56.540 --> 00:21:04.540
If not, I seriously believe what we've seen happen in the last year will fundamentally change the nature of American capitalism.