Jacopo: How was it that the Double Dip Depression was not as large as every indication says that it should have been?
Esteban: Would that it could have been. It would have saved the United States and perhaps prevented the entirety of World War III. Two billion lives could have been spared and America might have emerged from it with a second century as a world superpower.
Jacopo: What made the Double Dip so short?
Esteban: Well, we should probably specify that it wasn’t all that short. By the standards of our era when the United Nations regulates the world's banks, it's a long recession. But by the standards of that time, August 2011 seemed like an instantaneous crash that looked to be far more pernicious than anything in the Great Depression. After the collapse of the debt ceiling in 2011, President Obama knew that America had to go into depression in order to avert a superdepression.
Jacopo: I’ve never heard of that term.
Esteban: It was invented by a famous economist of my youth named Paul Krugman. To put it very succinctly, a superdepression is when money becomes so inert that it no longer has a rational function in society. In a superdepression, credit and liquidity fall to such short supply that the entire world can no longer operate according to the basic rules of currency. Hyper-inflation becomes such that there is neither cash nor credit to pay for basic items. In such an environment, the basic items themselves become currency.
Jacopo: Well, what about more solid currencies like gold?
Esteban: In a world without purchasing power, gold is every bit as worthless as every other currency. You can neither eat, drink nor grow gold. What would matter in a super-depression is the material for life itself. Krugman used the example of the Warsaw Ghetto to explain how this would work. People who have access to raw materials like crops, wood, fabric would be considered the new wealthy class. Everyone else would have to pawn and ration what they had.
Jacopo: This sounds almost like a return to medieval economy from the very beginnings of capitalism.
Esteban: A return to the Middle Ages is exactly what it would have been.
Jacopo: What about luxury items? Why couldn’t computers, cars or furniture be used as capital?
Esteban: Luxury items would have had no more use in such an economy than they did in ours. The value of luxury is in buying it, not selling it. It’s not material that’s necessary for life. In any event, Krugman very much had the ear of the President. He was the dominant liberal intellectual of that era which we now call the American Endgame. Other economic intellectuals like Lawrence Summers and Ben Bernancke were in government, and they were very gifted officials who in retrospect kept the United States out of an almost certain superdepression. But after President Obama could not get Congress to pass his jobs bill in October 2011, advisors like Bernancke and Alan Krueger simply seemed too accommodating. So even though the establishmentarian Timothy Geithner remained Secretary of the Treasury throughout Obama’s first term, Paul Krugman became the unofficial economic policy czar for President Obama during his final year. There was not a single decision Obama made without Krugman’s consultaion. After the Republicans defeated Obama job plan, he realized that he barely had a prayer for re-election. And since he had done everything he could to balance the need for re-election with the necessity of change, he saw that change was the only option left and that he could do far more good for the country if he exploded any little chance he still had for re-election.
Jacopo: Was Krugman really that powerful?
Esteban: Oh yes. A more charitable Republican writer called him “The Shadow Secretary of the Treasury.” A less forgiving one called him “An American Rasputin.”
Jacopo: So it was Krugman who pushed Obama to pass the International Emergency Economic Powers Act we detailed last month?
Esteban: Absolutely it was. Krugman basically wrote it in his New York Times column.
Jacopo: How did he acquire the credibility for that?
Esteban: Krugman was the most controversial columnist of his time. But he was controversial because he was uncannily correct about so many things. But none moreso than the fact that he seemed to be the only person in America who predicted the housing crisis almost five years before it happened.
Jacopo: But didn’t the Scottish historian, Niall Ferguson, also predict it?
Esteban: Yes he did. Which is especially ironic considering that Ferguson was a dyed-in-the-wool conservative and a bitter enemy of Krugman with whom he disagreed on almost everything. But when the housing bubble burst, it was Krugman who was vindicated because while Ferguson had called the bubble, he had supported every policy that led to it.
Jacopo: How did the economy recover after that?
Esteban: The economy did not recover immediately. But the government accrued enough capital from Krugman’s plan that President Romney could inject the cash that was necessary to refloat the American economy. And since President Obama had taken such drastic - conservatives might say undemocratic - measures to save the American economy, Wall Street agreed to Romney’s insistence on iron regulations and constant cash injections. They were simply relieved that Obama was no longer president.
Jacopo: What is a cash injection?
Esteban: It’s when the Federal Government makes an offer to buy a percentage of a company which the company cannot refuse.
Jacopo: So it’s basically nationalization?
Esteban: Not quite. Nationalization would be to take over the whole company. But cash injections are the most direct form of government oversight, because the government then has a stake in the way which the bank is run.
Jacopo: But how would that be any different than government officials alternating between working in banks and in government?
Esteban: Well, you’re absolutely right to ask that question. It didn’t work because the practices continued exactly as they did before. When the government and private industry have the same interests, there is no chance for regulation. But you might remember that we talked about how when President Obama was elected to his second term in 2020, he immediately proposed legislation prohibiting any finance person who’d ever held so much as a consultancy with a bank or insurance company from holding a political appointment to an economic position.
Jacopo: To go back to Krugman for a bit, when did rational people first realize that Krugman couldn’t be ignored?
Esteban: When 70 different mortgage companies went bankrupt around Christmas 2007 and a bank called Bear Stearns was stuck with most of the bad mortgages.
Jacopo: And wasn’t the result of that a merger with JP Morgan Chase?
Esteban: Yes. The solution to the profligate spending of big banks was to simply make them bigger so that they could not fail. It was a very odd period of history. We should have known that we were a dead country walking.
Jacopo: How could you have?
Esteban: Because we knew exactly what was needed to solve all our problems. Yet the solutions were impossible to be enacted - on everything from banking reform to energy reform to even health reform.
Jacopo: But wasn’t health reform successful?
Esteban: Indeed it was, and it was easily the most feasible of the three projects to tackle. But when you’re in a country that has neither an economy nor the liquidity to create an economy, what reason is there to live longer?
Jacopo: You almost sound regretful about Obama having taken on healthcare.
Esteban: Not quite regretful. Though I certainly thought Obama had chosen the wrong project at the time. But when health care proved as difficult as it was, I realized that he chose healthcare over energy and banking because it was the only one that had a prayer in hell of being enacted.
Jacopo: Was financial reform truly impossible?
Jacopo: Can you explain why?
Esteban: There could be all sorts of economic explanations to give, but ultimately it came down to America’s culture of entitlement.
Jacopo: As in they were entitled to freedom of speech?
Esteban: No. America was wrong about many things, but on freedom of speech they were as close to absolutely right as any country has ever been about anything. I don’t care how many arguments are made about World Wars II and III being caused by incitements to hatred. There are moral choices which every individual must make, and for those unable to act morally, the courts must assess them.
Jacopo: There are a lot of people in my generation who would disagree.
Esteban: And they may yet lead us to World War IV.
Jacopo: So what was America’s culture of entitlement?
Esteban: In order to understand the America of this period, you had to understand both the nobility of what we called The American Dream, and also its fragility. It was so easily corrupted that it could be mistaken for something terrible.
Jacopo: Well if I’m not mistaken, the American Dream was the concept every person could work hard, become their own master, and be free from fear and want.
Esteban: Absolutely correct. But the meaning of that dream is very difficult to understand for many people. All too many Americans worked far too hard to never see it a reality, and all too many did not work hard enough.
Jacopo: Does that have something to do with regional differences?
Esteban: That’s surprisingly insightful for someone who’d never lived in America. Yes, it absolutely was. In the American midwest, around what we now call Chicagoland and what was in my time called the ‘rust belt,’ many Americans were worked long long hours in factories to guarantee their children better lives.
Jacopo: But when the factories left America...
Esteban: Precisely. What we used to call the ‘blue-collar’ workers had no guaranteed means of income and became the progenitors of a seemingly permanent underclass. Chicagoland is one of the largest of America’s descendants, it’s also one of the poorest.
Jacopo: It’s still less poor than Deep Southland.
Esteban: Indeed. If the rust belt worked too hard, the ‘Sun Belt’ didn’t work hard enough.
Jacopo: What’s the Sun Belt?
Esteban: It’s the area of American land where the climate was warm for almost all 12 months of the year, stretching from southern Virginia all the way over to southern California.
Jacopo: Wasn’t this also called the Bible Belt?
Esteban: Yes it was. It was, and in many cases still is, a land of fundamentalism. They believed in the absoluteness of The American Dream so fervently that free speech came have a whole collection of meanings.
Jacopo: Most particularly money.
Esteban: Right again. The Sun Belt’s industry was service. Corporations may have taken their manufacturing jobs overseas, but the factories were supervised from the American south. In the south, taxes were low as a matter of principle, and money was the God-given right of those who had enough money to have more.
Jacopo: How did they come to believe this?
Esteban: Two reasons. One was, of course, religion. Which was always extremely important to the life of the American south. Once a person has been indoctrinated with enough credulousness, they can be convinced to believe anything. And that leads us to the second reason. The people who were best able to exploit this credulousness were corporate boards. They could employ hundreds of thousands of people in middle management. And rather than grant true benefits to their workers which would have limited bottom line profits, they advised their workers to patronize banks that would allow them unlimited credit. And because they believed in the rightness of everything they were told, they believed that they would have an unlimited line of credit with no accountability.
Jacopo: And so these were the people who...
Esteban: ...Bought houses on credit, bought boats on credit, bought cars on credit. And because they believed that a line of credit could expand forever, they never felt the need to pay their bills.
Jacopo: It’s difficult to believe that people could be that stupid.
Esteban: It was the culture of the time. This was a culture that assigned moral righteousness to the accumulation of wealth. Americans did not think of their wealth as something greedy, they thought of it as something virtuous. And because everybody could make money, average people convinced themselves they were doing something virtuous by buying things they could never pay for. Enterprising businessmen convinced themselves they were doing something virtuous by selling mortgages people could never pay for. Banks convinced themselves they were doing something virtuous by granting loans people could never pay for.
Jacopo: Why did other countries not simply pull out of their American market when they saw how badly America was managing it?
Esteban: Well they did, at least China and Russia did, but not until the late 2010’s when President Bachmann tried to strong-arm China to accept American terms on trade.
Jacopo: But why not then? Didn’t Vladimir Putin call American finance a cancer on the world?
Esteban: It was a worry. It isn’t like today when China and India can spend on par with their savings. The China of the early 21st century was entirely dependent on American purchasing power. If China had withdrawn their money in American banks, the American economy would have sunk like stone and China would’ve had no one to make products for.
Jacopo: You look tired.
Esteban: I certainly am. I think it’s extremely important that we get to the collapse of the American banking industry in 2024. But I think that will be something for tomorrow.
Jacopo: Sounds good.