The Frightening Effects of “Fear Itself” – Especially at the Top

posenkrugmanIn a blog I wrote a few days ago, I wondered why the Obama Administration hesitates to temporarily nationalize American banks as a solution to the nation’s cash-flow crisis.  I pointed out that Sweden did it when they had a similar crisis back in the early Nineties. And I said America appears to be ignoring that lesson, and instead following in the footsteps of Japan, which precipitated a “lost decade” by pumping cash into its banks without taking control of them. Today, Paul Krugman’s blog adds credibility to this view. The Nobel Prize-winning economist (photo, right) repeats this warning from Adam Posen of the Peterson Institute for International Economics (photo far right):

The guarantees that the U.S. government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized …. These kinds of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …

President Obama is no fool, and he is surrounded by some of the most respected economists in the country. So why is he apparently heading down the wrong road? I think the answer is fear. These are perilous times and the political situation is dire. As the Obama Administration attempts to walk a tightrope above the craggy abyss of economic disaster, malevolent Republican politicians are doing everything in their power to pull the rope away.  With the ever-present threat of a filibuster in the Senate, the Republicans hold the power to block our path to safety, and Obama’s team is desperately trying to finesse a way around them.

That’s why the President is risking failure with a – perhaps – under-nourished stimulus package and a foolhardy promise to dramatically reduce the nation’s budget deficit. These dangerous policies are concessions to Republicans and “Blue Dog Democrats” who mindlessly trumpet the shiboleth of “fiscal conservatism” without being aware of the implications involved.

Meanwhile, beyond the specter of economic collapse is the much more terrifying threat of global war. Writing in today, Michael Klare warns:

greeceAs people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants and ethnic minorities …. The result could be a global landscape filled with economically fueled upheavals. (Reuters photo at left shows a Greek policeman looking at the ravages of recent riots in Athens.)

Admittedly the political dangers of following the common-sense path to economic stability are very real. Americans have been brainwashed for decades, and many harbor an irrational terror of such abstract concepts as “nationalization,” “budget dificits,” and “creeping Socialism.” Nationalizing the banks – even temporarily – or budgeting for repeated deficits would provide powerful ammunition for the Republicans’ propaganda war. The political consequences of the policies required to solve the global economic crisis might, indeed, be daunting (for more on the Republicans’ propaganda crusade, see But shrinking from decisive action through fear of political damage could precipitate unthinkable horrors. As FDR so wisely noted, what we have to fear most is fear itself.