Kicking the Keynes Down the Road

[NOTE: This is a guest post by Dan Bischoff]
If paying off the debts of the big banks with public money and transferring their bad loans onto national balance sheets hasn't worked so far, well, what else can we do?

Not much.

Ben Bernanke hinted again today that the Fed might do something -- though he was careful not to say what -- to support the economy. But the sense is growing, after the stock market actually ticked up earlier this week on the weird notion that fundamentals were so bad Bernanke would have to announce another round of Quantitative Easing, that what he really thinks is that the world economy is now on its own.

That would be entirely in line with the policies of most of our allies and competitors. Stimulus has been tried and failed. Ditto on bailouts. We've nothing left in the quiver except riot police. And many countries have shot that bolt too.

Which would mean that the era of Keynesian economics is now officially over.

If you don't succeed, fry fry the yen
The interesting thing about the argument over John Maynard Keynes isn't really its academic underpinnings or intellectual rigor, but its essential grounding in contemporary politics. Keynesianism failed politically, as Meg McArdle says, because nobody really had the courage to try it. If a $900 billion American stimulus package was too small, as Paul Krugman claims, no nation on Earth, minus a global war or some such other existential conflict, could possibly borrow more than 15% of GDP to invest in its future.

Never mind that more than half that stimulus was in the form of tax cuts, which are not terribly stimulative (because, like bailouts, they are aimed at people who already have money). Or that the rest was either a subsidy for consumption (like unemployment benefits) or more than canceled out by massive cuts in state budgets.

Of course, China pushed out a stimulus that verged on half its GDP in 2008, but it had all those foreign currency reserves, and an army ready and willing to shoot workers who don't like their deals. Anyway, China's been clawing that money back ever since. Without more trade, we will never pay off our debts to China -- and without government spending, there's no one to finance new trade.

But blaming the Chinese is one way out. The only problem is, that could lead to war, real major state-on-state war, the like of which we haven't seen for almost 70 years. That's almost unimaginable -- though it would fit Krugman's so-called Watchmen solution.

Jubilee
If we can't reimagine our society, grow out of its contradictions, or spend ourselves into solvency again, then there is only one other possiblity: Forgiveness of debt.

In a way, we're already doing some of this. The Chinese are trying to renege on boom-era contracts whose price ratios no longer make sense, and part of the market mark-downs of the past six months have stemmed from cancelled contracts for factories and services. Again, most of these are biz-to-biz. But what if we tried the one thing we haven't up to now -- forgive the debts of ordinary people?

The $1.2 trillion given to the top bankers over the past three years, by some accounts, could have retired nearly all civilian consumer debt out there, freeing Americans to spend once again. If we are not going to build a new future, why not disencumber our economy from crazy deals made in the past?

That hasn't been tried because its political implications-it would change the fundamental relationship between creditors and debtors-run against the urge to power. But think of the rewards, in social comity if nothing else. And it's been done before, in fact, at the very beginning of credit/debt societies (read this, by economic anthropologist David Graeber, for a fascinating historical overview).

Hey, iIt'd be better than an alien invasion.

Dan Bischoff writes about art for The Star-Ledger in New Jersey; He was European editor for WorldBusiness and National Affairs Editor for The Village Voice.