Trump Wars II: The Loser Strikes Back
Trashing
the nation on his way out the door.
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
