Phillips: The bailout isn’t working; inflation ahead

Kevin Phillips, whose Bad Money came out in a revised paperback edition last week, is doing the media rounds once again. God and publicist willing, I’m scheduled to talk with him late next week for a Q&A that should run a week from Monday. This week Phillips spoke to Reuters and wrote a couple of guest posts at TPM Cafe, the first on the explosive growth of the U.S. financial system since the 1980s and the second a rumination on the relative blame that’s due Republicans (about two-thirds, he reckons) and Democrats.

He’s roundly critical of the whole Bush/Obama bailout scheme, and pronounces Fed chairman Ben Bernanke a “disaster:” “What you’re seeing Bernanke do is he’s trying to create a bailout reflationary bubble, which he can’t describe as a bubble, just as Greenspan couldn’t describe the housing mortgage bubble as a bubble. What we’re seeing by Bernanke is a covert attempt to rebubble.”

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Comments (2)

  1. Submitted by Glenn Mesaros on 04/10/2009 - 08:15 am.

    A leading Japanese economist, Daisuke Kotegawa, currently the Executive Director representing Japan at the IMF, has called for an urgent, simultaneous, government-sponsored inspection of all the major banks, to evaluate and write down the entire gamut of securitized products. These toxic assets should either be valuated at zero and taken over by a “bad bank,” he said, which would return funds to the original bank only if the assets proved to have some value in the future, or written off by the banks themselves. Only if and when a bank could survive this process, should a government infusion of funds be considered. The current bail-out policies can do nothing to cure the crisis, he insisted.

    Kotegawa presented this policy at several university presentations in the U.S. in the past month. In the 1990s and early in this decade, he was in various leading positions in the Japanese Ministry of Finance, where (he told a recent gathering at Brookings) he was considered the leading enemy of Finance Minister Heizo Takenaka, the primary architect of the Koizumi regime’s disastrous privatization and deregulation policies.

    Kotegawa argues that any approach to a bad bank which buys toxic assets from the banks at a discount, rather than taking them over at zero price, will eventually simply transfer huge debts to the taxpayer. He says that banks must be forced to conduct a self-evaluation of these assets, under federal guidelines, but that this must be followed by official inspection by government authorities, since left alone, banks have no incentive to honestly disclose assets, adding that lack of cooperation by banks should trigger criminal charges of executives.

    This approach echoes LaRouche’s demand for an FDR-style bankruptcy protection for the entire Federal Reserve system, coordinated with similar policies internationally, saving the chartered banks while allowing the creditor counterparties (mostly hedge funds and similar speculators) to collapse.

    Kategawa noted that if this approach is not taken soon, then a vicious cycle between the financial sector and the real economy will be unavoidable. If the bail-out insanity continues, he said, or if the foolish global currency concept to dump the dollar for SDRs is pursued, then the dollar will soon collapse, and that will be the end of the world.

    Watch Larouche Webcast on April 11 at 12 noon.

  2. Submitted by Annalise Cudahy on 04/10/2009 - 11:40 am.

    This is what I’ve been talking about on my own blog for about a year now. Combine this with the simple fact that we’ve had a very large stimulus since 2001 and it hasn’t done us much good, a failure is a strong possibility.

    The problem is that there are two failure modes – excessive reflation, which turns us into Weimar Germany, and inadequate support, which fails in general collapse and deflation. It’s hard to say which way it’ll go until we’re there.

    The key to avoiding failure is, naturally, restructuring. That’s difficult for many reasons, but I believe the most important problem is the inflexible job market. Why we may have a general failure is the lack of interest in restructuring the economy as we reflate it. We can ease the pain, but we can’t avoid it.

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