Opinion
Trump Wars II: The Loser Strikes Back
Trashing the nation on his way out the door.
Paul
Krugman
By Paul
Krugman
Opinion
Columnist
Nov. 23,
2020
We all knew
that Donald Trump would react badly to defeat. But his refusal to concede, the
destructiveness of his temper tantrum and the willingness of almost the entire
Republican Party to indulge him have surpassed even pessimists’ expectations.
Even so,
it’s very unlikely that Trump will manage to overturn the election results. But
he’s doing all he can to wreck America on his way out, in ways large and small.
Among other things, his officials are already trying to sabotage the economy,
setting the stage for a possible financial crisis on Joe Biden’s watch.
To the
uninitiated, the sudden announcement by Steven Mnuchin, the Treasury secretary,
that he’s terminating support for several emergency lending programs created
back in March might not seem like that big a deal. After all, the financial
markets aren’t currently in crisis. In fact, defying Trump’s prediction that
“your 401(k)s will go to hell” if he were to lose, stocks have risen
substantially since Biden’s win.
Furthermore,
much of the money allocated to those programs was never actually used. So
what’s the problem?
Well, the
Federal Reserve, which administers the programs, has objected strenuously — for
good reason. You see, the Fed knows a lot about financial crises and what it
takes to stop them — and Mnuchin is depriving the nation of tools that could be
crucial in the months or years ahead.
In the old
days, what we now call financial crises were generally referred to as “panics”
— like the Panic of 1907, which was the event that led to the Fed’s creation.
The causes of panics vary widely; some have no visible cause at all.
Nonetheless, they have a lot in common. They all involve a loss of confidence
that freezes the flow of money through the economy, often with dire effects on
growth and jobs.
Why do such
things happen? Panics don’t necessarily reflect mob psychology, although that
sometimes plays a role. More often we’re talking about self-fulfilling
prophecy, in which individually rational actions produce a collectively
disastrous result.
In a
classic bank run, for example, depositors rush to get their money out, even if
they believe that the bank is fundamentally sound, because they know that the
run itself can cause the institution to collapse.
Which is
where public agencies like the Fed come in. We’ve known since the 19th century
that such agencies can and should lend to cash-starved players during a
financial panic, stopping the death spiral.
How much
lending does it take to stop a panic? Often, not much at all. In fact, panics
are often ended simply by the promise that cash will be provided if needed,
with no need to actually write any checks.
Back in
2012 there was a runaway financial crisis in much of southern Europe. Countries
like Spain saw their ability to borrow collapse and the interest rates on their
debt soar. Yet these countries weren’t actually insolvent; Spain’s fiscal
position was no worse than that of Britain, which was able to borrow at very
low interest rates.
But Spain,
which doesn’t have its own currency — it uses the euro — was the subject of a
self-fulfilling panic attack, as investors fearing that it would run out of
cash threatened to provoke the very outcome they feared. Britain, which can
print its own money, was immune to such a crisis.
In July
2012, however, Mario Draghi, president of the European Central Bank — the Fed’s
counterpart — promised to do “whatever it takes” to save the euro, which
everyone interpreted as a commitment to lend money to crisis countries if
necessary. And suddenly the crisis was over, even though the bank never did end
up doing any lending.
Something
similar happened here this past spring. For a few weeks in March and April, as
investors panicked over the pandemic, America teetered on the edge of a major
financial crisis. But the Fed, backstopped by the Treasury, stepped up with new
programs offering to buy assets like corporate bonds and municipal debt. In the
end, not much of the money was used — but the assurance that the money was
there if needed stabilized the markets, and the crisis faded away.
So far, so
good. But in case you haven’t noticed, the pandemic is back with a vengeance;
hospitalizations are already much higher than they were in the spring, and
rising fast.
Maybe the
new coronavirus surge won’t provoke a second financial crisis — after all, we
now know that a vaccine is on the way. But the risk of crisis hasn’t gone away,
and it’s just foolish to take away the tools we might need to fight such a
crisis.
Mnuchin’s
claim that the money is no longer needed makes no sense, and it’s not clear
whether his successor will be easily able to undo his actions. Given everything
else that’s happening, it’s hard to see Mnuchin’s move as anything but an act
of vandalism, an attempt to increase the odds of disaster under Trump’s
successor.
The thing is,
until this latest move, it looked as if Mnuchin might be one of the few
officials who managed to emerge from their service under Trump without
completely destroying their reputations. Well, scratch that: He’s joined the
ranks of Trump loyalists determined to trash the nation on their way out the
door.
Paul
Krugman has been an Opinion columnist since 2000 and is also a Distinguished
Professor at the City University of New York Graduate Center. He won the 2008 Nobel
Memorial Prize in Economic Sciences for his work on international trade and
economic geography. @PaulKrugman
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