SHEILA BAIR: PART OF THE PROBLEM

The Pragmatic Capitalist discusses SHEILA BAIR: PART OF THE PROBLEM.  He finds her position disappointing and wrong. The fact that the United States, unlike countries such as Greece and Ireland, can create money out of nothing changes the need to speak of austerity and balancing the budget. – Ilene 

Courtesy of The Pragmatic Capitalist

Sheila Bair, the head of the FDIC, has remained one of the more levelheaded and helpful leaders during the financial crisis.  But in an op-ed in the Washington Post this morning she took a decisive turn for the worse when she waded into waters that were certain to drown her. Bair is now echoing the cries that have been heard across Ireland for the last 2 years – cries of fiscal austerity. Of course, the USA is nothing like Ireland and has an entirely different monetary system, but Bair ignores all of this (in fact proves she is entirely ignorant of this). What’s sad is that Bair clearly understands that this crisis is still largely hurting Main Street America:

“Two years ago the United States experienced its worst financial crisis since the 1930s. The crisis began on WallStreet, where misguided bets on risky mortgage loans resulted in enormous losses that few anticipated. More than 4 million jobs were lost in just six months after the peak of the crisis. There is hardly one Main Street in America not still feeling its effects.”

So, we know we’re in a debt de-leveraging cycle.  Officials literally can’t create sustained above average inflation despite huge efforts.  We have saved the banks, greased the engines of the banking sector, attempted to prop up markets and ignored the household crisis.  And yet the problems persist. And what is Bair’s conclusion?  We are becoming Ireland or the next Greece:

“Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That’s more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.”

It’s an absurd notion to compare the Euro’s single currency system to that of the United States.  In fact, Ireland’s inability to deal with this crisis is entirely due to the fact that they lack monetary sovereignty.  The USA has no such problem.  Unlike Ireland, which is akin to a state in the USA, the federal government of the USA has no solvency problem.  The USA is like the alchemist who can create money from nothing. US States (and Ireland) have no such ability.  They are revenue constrained.  But the comparisons persist.  Ireland has very real solvency problems.  The United Sates has no such thing.  We are not dependent on raising money from taxes or bond markets to spend. When the US government wants to spend more money they tell men and women to walk into a room and change numbers up and down in a computer.

What the USA has is a very serious need to maintain the value of its currency (read, price stability). With prices sustaining very low levels there is no need for austerity currently. There is no solvency crisis in the USA. There is no need to cut spending and attempt to run a surplus in times of a balance sheet recession.  This recovery is already tepid at best. With people like Bair in charge it’s likely that the risk of a prolonged and deepening recession on Main Street will persist.  Those in doubt need look no further than the fantastic failure of austerity in Ireland…..