Kevin Drum wonders if he’s “too queasy about taking over banks” and says it’s a serious question. I think he is being too queasy. At this point, I would say that the government should probably be taking over just about everything that’s available for taking over.
For a long time, there’s been a well-known “equity premium puzzle” in which, basically, the economy as a whole seems to systematically undervalue equities relative to treasury bonds. And at the moment, investors are in full-scale freakout mode. Even though the government has taken on unprecedented fiscal liabilities, the interest rate we need to pay to borrow money is now lower than ever. Basically a huge swathe of the world’s money is right now unwilling to save itself in any vehicle other than in bonds that are earning practically no interest.
People have a tendency, meanwhile, to look at deficit spending through a moralistic lens wherein it’s somehow just bad and irresponsible as such. In the early days of Bush’s big deficits, you would hear jokes about “credit card conservatism.” But the problem with credit card debt is that the interests rates are enormous. At the moment, the people of the world are, amidst their panic, prepared to hand the U.S. government what amounts to free money. Under the circumstances, I think it makes a ton of sense to take them up on their offer. That means, on the one hand, massive temporary outlays on infrastructure projects — SUPERTRAINS and windmills and transmission lines — and on the other hand it means it’s a good idea to snatch up depressed equity. Any one bet might go terribly awry, but given the incredibly low interest rates that are available to us right now the key is to bet widely — the odds are overwhelming that the US financial sector is not, in fact, collectively worthless. Issuing bonds and buying equity and then doing it again and again and again until people become unwilling to keep lending us free money — at which point we can start selling some stuff back to investors, once investors have once again gotten interested in investing in things other than treasuries — seems like a smart play to me.
I dunno, maybe that’s wrong. But it seems right to me. And after watching what the private sector’s done with the financial system, I’m not exactly trembling in fear at the idea that it might somehow wind up mismanaged.