10-16-08, 9:33 am

A few points from the the continuing economic crisis. The Bush administration, tailing the major European governments injection of hundreds of billions of euros into their banking systems, has a plan to inject $250 billion into the system. Treasury Secretary Henry Paulson has called upon the banks 'not to take this capital to hoard, but to deploy it.'

Oversaving or 'hoarding' of capital is an important part of John Maynard Keynes fiscal theory. Progressive taxation and redistribution of investment so as to increase consumer purchasing power is the way to prevent oversaving or 'hoarding.' In addition, such policies help to create greater income equality which also plays a role in preventing oversaving.

But how, given the present system with 'deregulation' still in effect, can the Treasury Department really make the banks use this capital to revive credit instead of doing what they want with it? Isn't Paulson's comment a little bit like Herbert Hoover's policy in the early 1930s? Hoover held 'White House Conferences' on the economic crisis with big business and labor, and convinced business owners to issue statements that they would work together to maintain production and employment. But business owners went back on their word and reduced both production and employment in order to maintain their profit margins.

The only difference that I can see between Paulson and Hoover was that Hoover didn't throw in large sums of capital into the system to save it. He began to do that at the end of his presidency with the establishment of the Reconstruction Finance Corporation and his Secretary of the Treasury, Andrew Mellon, who had earlier advised Hoover to let the crisis run its course, promptly resigned so that his Pittsburgh-based financial empire could take RFC loans.

But working families should find other aspects of the Paulson plan equally disturbing: the limits Paulson wants to impose on the project. One think tank economist is quoted as asking the question 'is this a recasting of capitalism? I think that what we will see is that the government acts as a silent partner and gets out as fast as it can.' Richard Sylla, an economist and financial historian at NYU is quoted also as saying, 'I think it is a good thing that there is a sunset provision that limits the length of the government's investment.'

Most Americans don't really know that there is a 'sunset provision' after the bailout, or for that matter have any basis for comparison with what European countries are doing in this matter. Instead, the economists and historians who are being interviewed by the press are saying that Europe is 'different' than the US, that it has a history of nationalizing industries and credit that Americans would not accept. Robert Bruner of the University of Virginia summed up the standard view when he said, 'In Europe the concept of a social contract is much more social – that is socialist than we have been comfortable with in America.'

But who is we? Nobody asked the American people to deregulate the economy, to reduce the real value of minimum wages, to create economic stagnation and greater income inequality in support of the economic holy trinity of deregulation, detaxation and privatization over the last 30 years. What is being advocated today, as historians and economists understand, is essentially a revival of the Reconstruction Finance Corporation with much more capital.

But during the Great Depression, Americans also accepted the federal government's Tennessee Valley Authority project, its construction of thousands of plants during the war, and its direct stimulus of new productive capacity. The labor movement and the millions of people who benefited from job growth saw it as the basis for a productive public sector after World War II.

The social contract is about social protections for the people. Public control of the credit and currency system should be part of that social contract. The government shouldn't be a silent partner but an active participant with the banks representing the effort to fulfill social contract. Having a mixed public private banking system, with of course reregulation, would be a way to guard against the disaster which is still rolling through the US and global economy and finally get rid of the lunatics in the asylum of economics who continue to expect government to bail them out and then let them get back to their deregulated business as usual.

--Norman Markowitz is a contributing editor of Political Affairs.