TIME

The Chicken Littles Were Wrong. But Americans Still Think the Sky Is Falling.

The list of false prophesies of doom by Obama's critics is long.

The U.S. economy has added jobs for 55 consecutive months, bringing unemployment below 6 percent. The budget deficit has fallen from $1.2 trillion when President Obama took office to less than $500 billion today, from an unsustainable 10 percent of GDP to a relatively stable 3 percent. More than 10 million Americans have gained health insurance through Obamacare, while medical costs are growing at their lowest rate in decades. Gasoline prices are gradually dropping. Medicare’s finances are dramatically improving.

The sky, in other words, is not falling. On the contrary, things keep getting better. Which means a lot of people have a lot of explaining to do.

To recognize that America is doing better is not to suggest that America is doing great. Wages are too low. Washington is dysfunctional. There’s too much depressing news about Ebola, gridlock and our perpetual conflicts abroad. But the Cassandras of the Obama era ought to admit their predictions of doom were wrong. There has been no hyperinflation, no double-dip recession, no Greece-style debt crisis, no $5-a-gallon-gas, no rolling blackouts, no “insurance death spiral.” Despite “job-killing tax hikes” and “job-killing regulations” and “job-killing uncertainty” created by the “job-killing health care law,” private employers are consistently creating more than 200,000 jobs a month. Our gradual recovery from the 2008 financial crisis continues apace.

Some of the wrong predictions of the last six years merely reflected the paranoia of the Tea Party right—or the cynical exploitation of that paranoia. In 2008, Newt Gingrich got some attention by warning that President Obama would muzzle Rush Limbaugh and Sean Hannity; it worked so well that in 2012, he predicted that Obama would declare war on the Catholic Church the day after his reelection. The National Rifle Association’s fever-screams that Obama would cancel the Second Amendment and seize America’s guns have not come to pass, either, although they helped boost gun sales. Sarah Palin’s “death panels” also have yet to materialize.

It’s doubtful that those opportunists ever believed their own Chicken Little rhetoric; when their doomsday warnings were proven wrong, they simply issued new doomsday warnings. But other prophecies of doom reflected a sincere view of the economy and other public policy issues that simply happened to be incorrect.

The government response to the financial crisis probably inspired the most wrongheaded commentary. Critics complained that the Wall Street bailouts begun by President Bush and continued by Obama would cost taxpayers trillions of dollars. “If we spent a million dollars ever day since the birth of Christ, we wouldn’t get to $1 trillion,” fumed Darrell Issa, the top Republican on the House government oversight committee. Ultimately, the bank bailouts cost taxpayers less than nothing; the government has cleared more than $100 billion in profits on its investments. Obama’s bailout of General Motors and Chrysler also inspired some overheated commentary; Mitt Romney wrote that if it happened, “you can kiss the American automotive industry goodbye.” But it did happen, and the American automotive industry is now thriving, saving an estimated 1.5 million jobs.

It’s fun looking back at misguided crisis predictions. Liberal critics like Paul Krugman warned that the banking system would collapse unless it was temporarily nationalized; Krugman scoffed that Treasury Secretary Tim Geithner’s “stress test” would never end the crisis. “He was right,” Krugman later admitted, “I was wrong.” Conservatives like Dick Morris warned that the president’s $800 billion fiscal stimulus package and other activist policies would create an “Obama Bear Market”; in fact, the Dow has soared more than 250 percent since bottoming out in March 2009. Conservatives like Paul Ryan have also consistently warned that the Federal Reserve’s aggressive monetary stimulus would weaken the dollar—their preferred phrase is “debase the currency”—and create crippling inflation. They have been consistently wrong, as inflation has remained stubbornly low.

After the Great Recession ended in the summer of 2009—sooner than anyone (especially historians of financial crises) predicted—Republicans quickly turned their attention to the budget deficit, which had ballooned to $1.4 trillion. They complained that America was becoming Greece, that we were spending our way into a sovereign debt crisis, that brutal increases in interest rates were on the way. But America did not become Greece. There has been no debt crisis. Interest rates have remained historically low. In fact, despite the howling on the right, non-military spending (excluding mandatory expenses like Medicare) has dropped to its lowest level since the Eisenhower administration. Oh, and speaking of Medicare, its financial position has gotten so much better—thanks to a general slowdown in health care costs—that its trust fund, which was expected to go bust in 2017 when Obama took office, is now expected to remain solvent through 2030.

That slowdown in medical costs is another example of a phenomenon that critics confidently predicted would never happen in the era of Obamacare. Also, the administration would never meet its goal of 7 million signups by April 2014. (The actual figure topped 8 million.) Yes, but they would never pay their premiums. (The vast majority did.) OK, but those premiums would surely soar. (They haven’t.) Still, the entire program will be doomed to a “death spiral” unless healthy young people sign up in large numbers. (They have.)

Nevertheless, most Americans seem to think that Obamacare is a failure, that the economy stinks, that the deficit is getting worse. There are many explanations for those beliefs, but one is surely that initial predictions of doom are uncritically reported at the time and conveniently forgotten once they’re disproven. There is no penalty in American politics for being wrong. Republicans paid no price for their confident predictions that President Clinton’s tax hikes would destroy the economy, that the Bush tax cuts would pay for themselves, that the Obama tax hikes would create a double-dip recession. Even after the BP spill, petroleum interests proclaimed that tighter regulations on offshore drilling would ravage the oil industry and punish Americans at the pump; domestic production is at an all-time high while gas prices are steadily dropping, but they haven’t changed their tune at all. Similarly, even after the financial meltdown, Wall Street moneymen said financial reforms would shred our free enterprise system; they’re still whining despite their record profits.

Obama is often guilty of rhetorical overkill, too. He’s always warning that Armageddon is just around the corner—when Republicans blocked his American Jobs Act and other infrastructure bills, when they insisted on the deep spending cuts in the “sequester,” and when they threatened to force the Treasury to default on its obligations. (Actually, that last one almost did create Armageddon.) But because he’s president, the media correctly holds his feet to the fire, pointing out that he didn’t keep his promises to fix Washington or let you keep your insurance if you like it. There’s less accountability for his critics on the left and the right.

There’s no need for sympathy; Obama volunteered for the job. He gets a cool plane and a nice house regardless of public perceptions about the state of the country. But if you want to know why voters think the false prophets were right, maybe it’s because nobody ever corrected them.

TIME financial regulation

The Real Silver Lining of the Absurd AIG Lawsuit

Former U.S. Federal Reserve Chairman Ben Bernanke.
Former Federal Reserve chair Ben Bernanke. Jonathan Ernst—Reuters

It's ludicrous that shareholders are suing the government over their losses, but at least it's a reminder that Wall Street financiers did take losses.

Have I mentioned how outrageous it is that AIG shareholders are suing the government over the AIG bailout that prevented them from total wipeout? Have I compared them to homeowners suing the fire department for getting their furniture wet while saving their home? Have I mocked the bailout critics who admit this lawsuit is “asinine” and “mostly insane” but still claim it’s performing a public service?

Oh, I have? Just last week?

Well, this week, the critics will get their wish, as the architects of the Wall Street bailouts—Hank Paulson, Tim Geithner and Ben Bernanke—are scheduled to testify in this frivolous lawsuit. So this is a good time to concede there actually is a silver lining to this cloud of absurd litigiousness. But it definitely isn’t what the critics think it is. It’s that the AIG lawsuit, while breaking new ground in chutzpah, might help remind Americans that even though government rescued some Wall Street firms, the financial crisis still cost a lot of Wall Street investors a lot of money. The financial sector emerged way better than it would have without government help, and it’s certainly thriving today, but financiers didn’t all emerge unscathed.

The critics have applauded the lawsuit for a very different reason. They expect this week’s testimony to reveal The Truth about AIG, which will surely involve Geithner and Goldman Sachs conspiring with Colonel Mustard to destroy Main Street while bwahahaha-ing all the way to the bank. In fact, the truth about the AIG bailout is already out there. It was infuriating, because bailouts are always infuriating, but it was necessary and ultimately successful. After insuring toxic mortgage assets for every major global financial institution, AIG was dead in the water in September 2008, and its failure in the wake of the Lehman Brothers collapse could have shredded the global financial system. Not only did the $182 billion AIG bailout save the firm, it saved the system. And U.S. taxpayers eventually recouped their entire investment in AIG, plus a cool $22.7 billion in profit.

The bailout helped AIG shareholders, too. Their equity was worth something instead of nothing. Former AIG chief executive Hank Greenberg, the lead plaintiff in the lawsuit, unloaded $278 million worth of company stock in 2010; it presumably would have been worth nothing if the government had let the firm declare bankruptcy and the global economy implode. Greenberg’s complaint that the government unconstitutionally seized his property—and that AIG was entitled to the same bailout terms as much less troubled banks that posed much less of a threat to global financial stability—should have been laughed out of court.

That said, it’s important to recognize that while AIG’s shareholders didn’t lose everything, they lost an unimaginable amount of money. AIG stock plummeted from a high above $150 a share to less than $5 the day of the bailout. The government then took over 79.9 percent of the company, further diluting the value of each share. And when AIG needed more help, there was even more dilution. In his memoir, Stress Test, Geithner recalls how at a time when the country wanted his head for being too gentle with AIG, Greenberg visited him to complain that the Fed had been overly harsh by taking so much equity in AIG. “I told him we hadn’t done the deal to make money, and we’d be happy to sell him back some of the equity if he’d be willing to take some of the risk,” Geithner recalled. Greenberg wasn’t willing, so taxpayers rather than shareholders enjoyed most of the upside of AIG’s recovery.

I helped Geithner with Stress Test, so I’m biased, but I think Greenberg’s pique is silly; there wouldn’t have been any upside for anyone if the government hadn’t stabilized AIG and the rest of the system. At the same time, I think the terms of the AIG bailout were legitimately tough on investors who made bad bets on a reckless firm. They were certainly tougher than the terms of the broader Wall Street bailout known as TARP—and some bankers complained bitterly about TARP’s terms, which were intended to be (and were) tough enough to encourage banks to pay them back as quickly as possible. All of the bailouts were designed to balance the need to quell the panic in the markets and pave the way for economic recovery with the need to protect taxpayers. They ultimately did both.

The larger point, so often missed in the post-crisis too-big-to-fail debate, is that the lavish Wall Street bailouts did not shield all of Wall Street from pain. Critics of the bailouts often say they sent a message that you could invest in Wall Street behemoths without risk, that government would cover all your losses when markets turned sour. It’s amazing this even needs to be said, six years after a financial shock five times as large as the shock that preceded the Great Depression, but that’s simply wrong. Some of the jerks in suits took baths. Main Street bore the brunt of the pain, and that’s not fair, but there was plenty of pain on Wall Street, too.

Lehman Brothers disappeared; its shareholders were wiped out, and its executives all lost their jobs. Investors in Bear Stearns, Fannie Mae, Freddie Mac, Countrywide, Washington Mutual, Wachovia, Citigroup, Bank of America, GMAC, and other firms that got sucked into the crisis took baths, too. Very few of the big Wall Street CEO’s kept their jobs after the bubble burst, although some were fortunate enough to cash out their stock before the house of cards toppled completely. Some savvy investors have taken advantage of the misfortunes of others; David Tepper, a hedge fund manager, made billions by buying bank stocks after the market hit bottom in March 2009, essentially betting on the success of the government rescue plans. But markets always have winners and losers; the bailouts did help some of the losers limit their losses, but they didn’t change that essential capitalist truth.

The even larger point, which should also be clear but most definitely isn’t, is that the Wall Street bailouts were not designed to enrich Wall Street. They were designed to protect Main Street from a Wall Street cataclysm. The goal was to prevent enough financial failure to stem the panic and lay the groundwork for recovery. The goal was achieved. Main Street was losing 800,000 jobs a month during the panic; now it’s gaining more than 200,000 jobs a month. Yes, Wall Street has enjoyed an even healthier recovery. But punishing Wall Street during the panic would not have made things better for Main Street now; it would have accelerated the panic, which would have been devastating for Main Street.

So we should mock the gall of the litigants who are suing the fire department that saved their homes. Still, we can recognize that some of their furniture got wet.

 

 

 

TIME

The Real Truth About the Wall Street Bailouts

It happens to be the one we already know

It was probably inevitable, which doesn’t make it any less absurd. And it is certainly a reflection of their remarkable success, which doesn’t make it any less unfair. But six years after the spectacularly unpopular Wall Street bailouts, the government rescuers are under fire again—this time, not for their alleged generosity to financial firms, but for their alleged stinginess.

On Monday, a trial began in a lawsuit filed by AIG shareholders who claim the government somehow violated their rights when it rescued the busted insurer and salvaged their worthless investments. But even commentators who have admitted the lawsuit is “asinine” (in the New York Times) and “mostly insane” (in The New Republic) have suggested it’s nonetheless performing a public service, because it’s going to reveal the truth about the Wall Street bailouts. And on Tuesday, the Times ran a blockbuster story quoting unnamed sources who claim the government also could have bailed out Lehman Brothers, the venerable investment bank whose implosion nearly cratered the global economy. Again, the implication is that the official story is askew.

In fact, the lawsuit over the $182 billion AIG bailout is precisely as asinine and insane as it sounds. The government officials who stabilized the world’s most dangerous financial firm were the ones who performed a public service. And they absolutely would have rescued Lehman as well if they could have. Unfortunately, Lehman was hopelessly insolvent, and the government had no legal or practical way to save it without a private buyer willing to take on at least some of its risks. As for the truth about the Wall Street bailouts, well, the truth is already out there.

I have a bias here; I helped former Treasury Secretary Tim Geithner, who helped rescue AIG and tried to rescue Lehman when he was president of the New York Fed, with his memoir, Stress Test. I was even peripherally involved in the AIG case, when Greenberg’s lawyers sought access to transcripts of my conversations with Geithner.

But I wrote a pretty high-octane defense of the AIG bailout back in January 2010, before I ever met Geithner. And it stands up pretty well, except for the part where I said taxpayers would take a hit; in fact, taxpayers ended up earning a $22.7 billion profit on their investment in AIG.

Overall, taxpayers have made more than $100 billion on the bailouts. More importantly, the aggressive U.S. financial response—along with similarly aggressive monetary and (initially) fiscal policies—helped rescue a free-falling economy that was crashing at an 8 percent annual rate. We’ve recovered better than the rest of the developed world—Europe still has 11 percent unemployment—and much better than nations that endured much less damaging financial crises in the past. It’s kind of amazing that we’re still arguing about an emergency response that turned out so much better than anyone, even the emergency responders, expected at the time.

But here we are. Critics still doubt the official story that Lehman could not be saved. They also insist the Fed could have forced AIG’s senior creditors to accept less than 100 cents on the dollar; they’re excited about the lawsuit because they expect it to expose shocking evidence about why the government didn’t insist on haircuts. In fact, these questions have been asked and answered. Geithner tells the story of Lehman and AIG at length in Stress Test. You can find a quick explanation of why Lehman couldn’t be rescued in on pages 206-208 and a quick summary of why AIG’s counterparties didn’t absorb haircuts on pages 246-248. Again, I’m biased, but if you’re interested in this stuff, you should read the whole thing.

Here’s a shorter version. The old conventional wisdom that Geithner and his colleagues were desperate to prevent big Wall Street firms from collapsing during the crisis was basically correct, although I’d say they were right to be desperate. The firms were all dangerously interconnected with the rest of the global financial system at a time when markets had lost confidence in their housing-related assets, and it was clear that any one of them defaulting on its obligations could further depress confidence and spark runs on the others. That’s why when Bear Stearns was failing in March 2008, the Fed helped engineer a deal for JP Morgan Chase to acquire it and stand behind its obligations, providing an emergency loan backed by some of Bear’s sketchiest mortgage securities. And when Lehman was failing that September, Geithner and his colleagues worked feverishly to recruit a buyer for a similar deal, holding a series of emergency meetings documented in crisis books like Too Big to Fail and In Fed We Trust.

So what happened? The only bank willing to buy Lehman and its toxic assets that chaotic weekend was the British firm Barclays—and British regulators balked before a deal could be finalized. That left the Fed without options. It’s only allowed to lend against plausibly solid collateral, and Lehman looked hopelessly insolvent. At the time, then-Fed chair Ben Bernanke and then-Treasury Secretary Hank Paulson suggested publicly that they had chosen to let Lehman fail, because they didn’t want to accelerate the panic by making the government appear powerless. But really, they had been powerless. They knew the consequences of failure would be disastrous. They would have been thrilled to find a way to save Lehman.

In its carefully hedged, anonymously sourced story, the Times is now suggesting some New York Fed officials were “leaning toward the opposite conclusion—that Lehman was narrowly solvent and therefore might qualify for a bailout.” Put it this way: Their bosses did not agree, and neither did the market; as the Times noted, Bank of America had estimated Lehman’s net worth at about negative $66 billion that weekend. In fact, a subsequent study by economists William R. Cline and Joseph E. Gagnon—a study not mentioned by the Times—found that Lehman was at least $100 billion and perhaps $200 billion in the hole at the time.

“Our overall judgment on Lehman is that it was deeply insolvent,” Cline and Gagnon concluded.

One more point about Lehman: Even if the Fed had broken the law to lend into a run on an insolvent firm, and had somehow managed to stabilize Lehman rather than kiss its cash goodbye, it wouldn’t have defused the larger crisis. The government still lacked the authority to inject massive amounts of capital into the financial system—and a Congress that initially refused to grant that authority through the notorious TARP even after Lehman’s failure certainly wouldn’t have granted it before a failure of similar magnitude. Whatever. I guess some people find it comforting to believe the government could have snapped its fingers and ended the crisis early. It’s not a reality-based belief.

The perennial question is how, if the Fed lacked authority to rescue Lehman, it somehow found the authority to rescue AIG the next day. The short answer is that AIG, despite the awful misjudgments of a subsidiary that insured trillions of dollars worth of mortgage securities, had valuable revenue-generating businesses and a plausible claim to solvency. While Lehman was really nothing more than the sum of its toxic assets and shattered reputation as a venerable brokerage, AIG had solid collateral that the Fed could lend against with a decent expectation of repayment.

Ultimately, AIG would receive an astonishing $182 billion in government financing, and it would pay back every dime with interest. Its shareholders, who would have received nothing if the government had let the firm collapse, are now complaining in court that they should have gotten more. In his Times op-ed, Noam Scheiber aptly compared them to “a formerly starving man insisting he deserved filet mignon rather than a rib-eye.” Yet Scheiber argued that their filet mignon demand “may end up serving a constructive purpose.” He thinks the trial underway in Washington will reveal the real reason AIG’s creditors didn’t face haircuts; he doesn’t think the official explanation—that voluntary haircuts were impossible, and involuntary haircuts would have accelerated the panic—makes any sense. Times columnist Gretchen Morgenson not only called the lawsuit a “public service,” she actually portrayed AIG as an innocent victim in the financial crisis, “the patsy at the poker table.”

Uh…no. AIG was as rapacious and reckless as any bank. The government did push for modest haircuts for its creditors that might have saved taxpayers as much as $1 billion, but seven of the eight top creditors flatly refused. Unfortunately, the Fed could not force them to change their minds; several of them weren’t even U.S. firms. And the Fed could not impose the haircuts without forcing AIG into default; the creditors logically concluded a government that was spending $182 billion to avoid a default wasn’t going to create a default on purpose to save $1 billion.

This is the key: In a financial crisis, default is the enemy. The fear that secured debts won’t be repaid in full is the fear that drives panics. The Federal Deposit Insurance Corporation learned this the hard way a week later when it foolishly haircut Washington Mutual’s creditors, instantly triggering a run on the next-weakest bank, Wachovia; its ten-year bonds lost two thirds of their value the day after the haircuts. The whole point of the bailouts was to avoid defaults. This is not “counterintuitive” (Scheiber’s word) to anyone who has endured a financial crisis.

But the critics—who were wrong when they predicted the bailouts would cost trillions, and when they warned that the banking system could not be saved without mass nationalization, and in so many other ways—think the frivolous AIG lawsuit will reveal some dirty backroom deal where Geithner and Lord Voldemort conspired to rip off widows and orphans on behalf of Goldman Sachs. “Traumatic historical episodes often require a high-profile public reckoning before the country can move on,” Scheiber wrote. OK, he then admitted, the financial crisis inspired a litany of those, “but none fully exposed the weakness of Mr. Geithner’s logic.”

Hmm. Maybe it’s someone else’s logic that’s weak. And maybe it’s already time for the country to move on.

TIME

Sometimes the Government Puts Money in Our Pockets

Cash Money Dollar Bills
Getty Images

The percentage of women who get free birth control has skyrocketed since Obamacare went into effect, providing new ammunition for the political wars over Obamacare as well as the cultural wars over birth control. But there’s been almost no attention paid to the practical effect of this trend: It’s the equivalent of a modest tax cut for millions of women whose insurers used to require co-payments. It’s putting money in ordinary people’s pockets.

These days, the big economic story is about inequality, about a recovery that’s benefited the rich more than the poor, about middle-class wages that haven’t increased in fifteen years. It’s an important story. But the storytellers often overlook a variety of public policies that have helped offset the structural trends widening the gap between the rich and the rest. “Instead of promoting equality,” Tom Edsall wrote in a recent New York Times jeremiad, “public policy has…bestow[ed] the benefits of growth on the very few.” In fact, the government has put money into ordinary people’s pockets in all kinds of ways.

The most obvious way has been tax cuts. President Obama’s 2009 stimulus bill—a topic I’ve discussed at some length—included $300 billion in tax cuts, mostly for the non-rich. The centerpiece was called Making Work Pay, which provided up to $800 a year for the bottom 95% of working families, and was later converted into a payroll tax credit worth up to $2,136 a year before it expired in 2012. Most stimulus tax cuts were “refundable,” which meant low-income workers who don’t pay income taxes—the “47 percent” that Mitt Romney was caught denigrating on video—would be eligible to benefit. When Obama famously told former House Majority Leader Eric Cantor “elections have consequences, Eric, and I won,” he was talking about refundable tax cuts for the poor, which House Republicans opposed but could not block.

This extra money for the poor and middle class doesn’t show up in charts illustrating how the rich are vacuuming up all the recovery’s income and wealth. Those charts and the pundits who love them also tend to ignore the impact of Obama’s tax hikes on the rich, especially his repeal of the Bush tax cuts on income over $400,000. In his Times essay, titled “America Out of Whack,” Edsall speculates at length about the impossibility of redistributive taxation in modern Washington, somehow failing to mention that it just happened in a big way last year. As Zachary Goldfarb calculated for a Washington Post piece on inequality in July, repeal cost the average member of the top 0.1% income bracket nearly half a million dollars.

Obamacare is also financed by hefty new taxes on the rich, including a 3.8% hike on investment income and a 0.9% hike on earned income above $250,000. But its main push against inequality will be its health benefits for the uninsured and underinsured. Free birth control is just one example. There’s also free primary care and other preventive services. Families up to 138% of the poverty line are now eligible for Medicaid benefits in participating states. The law also eliminated the “donut hole,” reducing drug costs for seniors. None of this will show up in the inequality data, but it all helps make ordinary Americans less financially insecure. And so far, Obamacare insurance premiums have been significantly lower than expected, which means more money in ratepayer pockets. Jason Furman, chair of the Council of Economic Advisers, says the combination of Obamacare plus progressive tax changes has offset a decade’s worth of rising inequality.

There are many less memorable ways that public policy has tried to narrow the gap. For example, the stimulus, if you’ll pardon my obsession, also sent $250 checks to retirees and disabled veterans, increased Pell Grants for low-income students by more than $600, and expanded unemployment benefits by $25 a week. Oh, and the stimulus—along with the much-maligned Wall Street bailouts and the Federal Reserve’s aggressive monetary policies—helped prevent a depression, a very good thing for the poor and middle class as well as the wealthy and the Dow. The 10 million new jobs created in this recovery didn’t all go to rich people.

The stimulus also financed energy-efficiency retrofits of more than 1 million low-income homes, which will save families money and power for decades to come. And beyond the stimulus, the Department of Energy estimates that the Obama administration’s new energy-efficiency mandates for refrigerators, air conditioners and dozens of other appliances will save consumers $450 billion on their electric bills through 2030. The administration’s strict fuel-efficiency standards for cars and light trucks are expected save drivers another $500 billion. That’s real money.

Even the federal response to the foreclosure crisis, widely perceived as an abysmal failure, has provided financial help to millions of Americans in need. The most important move, widely perceived as a gift to undeserving corporations, was the $400 billion government bailout of Fannie Mae and Freddie Mac, which kept mortgage credit flowing at a time when no one else would provide it, averted a dramatic increase in mortgage rates, and helped 26 million homeowners reduce their monthly payments by refinancing their mortgages by 2014. Federal programs like HARP (which helped 3 million of those homeowners refinance) and HAMP (which helped modify another 1.3 million loans) were slow and often inefficient, but low mortgage rates—maintained by the Federal Reserve’s aggressive purchases of mortgage-backed securities as well as the government backstop for Fannie and Freddie—meant money in the bank for anyone with an adjustable-rate mortgage.

Reasonable people can disagree about whether government should be in the business of redistribution—what Obama called “spreading the wealth” in his 2008 chat with Joe the Plumber—but we should recognize that it is. The inequality trends, as severe as they are, would be far more severe without government intervention. Yes, the average CEO earns almost as much in a day as the average worker earns in a year, but government—through progressive taxation, the safety net, public education and other public services, and the policies of the last five years—has been pushing back.

Is it pushing back hard enough? Well, reasonable people can disagree about that, too.

 

TIME energy

The Case for Staying Connected

We don't need to ditch the grid. We need to fix the power business

The solar-rooftop revolution has inspired a lot of talk about grid defection, about electricity independence, about firing your utility and freeing yourself from its wires. And this power-to-the-people rhetoric isn’t just coming from hippie-dippy environmentalists. The banking giant UBS recently predicted that as more homeowners produce and store their own electricity, big utilities and their centralized power plants will gradually become irrelevant. The energy company NRG is already shifting its focus from massive fossil-fuel plants to home-energy solutions. “The future of energy isn’t 120 million butt-ugly wooden poles,” says NRG Energy CEO David Crane. Even the Edison Electric Institute, which is run by utilities, has warned that the rise of rooftop solar could disrupt the utility business model.

It’s an exciting concept, with the potential to empower homeowners and save them money while slashing carbon emissions. As solar costs have plummeted and the number of installations has exploded–over half a million Americans became at-home solar-electricity producers over the past five years–I’ve talked big too. I’ve compared the rise of do-it-yourself power generation to the shift from landlines to mobile phones.

Well, as the politicians say, I’d like to revise and extend my remarks. I still think rooftop solar is an incredibly disruptive technology and a serious threat to antiquated utilities. But the solar revolution is not the telecommunications revolution, and I doubt it will usher in a new era of grid defection and electricity independence. Nor should it. Why disconnect from the grid when you can get paid for providing it with stuff it needs? It might feel good to fire our utilities and escape their wires. But it’s in everyone’s interest for us to figure out a way to get along–and for the politicians to write rules making that possible.

After all, most of us will still need the grid in the solar age. Just about everyone has a cell phone, but some rooftops aren’t right for solar. And most homes and businesses that do go solar will still need extra power; energy analyst Hugh Wynne says factories, malls and apartment buildings generally produce less than 15% of their electricity on their rooftops, while single-family homes usually produce less than 75%. You can go off the grid without losing reliability if you get a backup form of home-electricity production, like the gas-fired generators NRG is pushing, or some form of storage for when the sun isn’t shining. But while batteries are getting cheaper–as are electric vehicles, which can function as car-shaped batteries when not in use–they’re still not as cheap as the grid.

The grid, after all, is an awesome form of power storage, constantly moving electrons to where they’re needed from where they’re not so that our refrigerators keep running. It provides an amazing service to all of us by balancing power supply and demand every second of every day; it ought to, given the trillions of dollars we’ve invested in it. Sure, you might be able to declare independence from the grid, just as you might be able to grow all your food in your backyard, but it’s hard to see how that would make economic sense. On the other hand, staying connected should improve the economics of going solar; in peak afternoon hours, when the grid needs more supply to power air conditioners, you should be able to sell excess electricity to your utility at an attractive price, so it doesn’t have to build and operate additional plants to keep the lights on. It should be good for you, the grid and other ratepayers.

The key word is should. Some utilities have declared war on rooftop solar, shrieking that it threatens their business model–and in many states, it does.

Utilities usually get paid for selling more power and building more power plants. When you produce your own power, you cut into their profit margins. That’s why so many utilities are fighting to limit net metering, which lets solar customers sell power back to the grid, while pushing to charge customers additional fees for using the grid. They argue that otherwise, nonsolar customers will have to pay more to make up for their shortfalls.

That’s not entirely wrong–anyone who uses the grid ought to pay for the privilege–but it also encourages solar customers to go off-grid. It would be better for everyone if they stay connected, so they can generate energy for the grid when it’s needed and, if they get electric vehicles, store energy for the grid when it’s not. But that’s going to require an entirely new way of regulating utilities so they get paid for the services they provide rather than the power they sell us.

We don’t need to fire our utilities. We need to fix the utility business.

FOR MORE ON NEW ENERGY, GO TO time.com/newenergy

TIME Regulation

The Fed Is Staying the Course, and That’s Great

Janet Yellen, chair of the U.S. Federal Reserve, listens to a question during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington on Sept. 17, 2014.
Janet Yellen, chair of the U.S. Federal Reserve, listens to a question during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington on Sept. 17, 2014. Bloomberg/Getty Images

Why boring monetary policy is good

The Federal Reserve’s monthly statement Wednesday was typically dull. Basically, the Fed is staying the course, because the economy is continuing a path of gradual improvement.

The Fed continued its “taper,” reducing the monetary stimulus it’s pumping into the economy by $10 billion for the 10th consecutive month, while announcing that this stimulus—known as “QE3”—should end on schedule next month. The Fed also continued to signal it won’t raise interest rates above zero “for a considerable time,” despite speculation it might soften that language. Fed Chair Janet Yellen then devoted most of her news conference to a mind-numbing discussion of procedural arcana involving “policy normalization principles” and “overnight RRP facilities.”

This is not exciting stuff. But boring monetary policy is an excellent thing to have, especially just six years after a spectacular financial crisis. At the time, the Fed took all kinds of unprecedented actions to save an economy that was contracting at an 8% annual rate and shedding 800,000 jobs a month. Some critics thought those actions would fail to prevent a depression. Others thought they would lead to hyperinflation, a devastating run on the dollar, or a double-dip recession. Instead, we’ve had 54 straight months of job growth. The jobless rate is down from 10% to just over 6% percent. The stock market is booming. Last year, the U.S. had its largest one-year drop in child poverty since 1966, and this year is looking even better. Two of the Fed’s inflation hawks actually dissented from the latest statement, arguing it “does not reflect the considerable economic progress that has been made.”

In other words, things are OK.

Things are not great; as Yellen pointed out, many American families are still dealing with aftershocks of the crisis, including tight credit, lingering debt, depressed wages and a shortage of jobs. Incomes for the non-rich have grown modestly since 2010 and not at all since before the crisis, although tax cuts for the middle class and the poor, tax increases for the rich, and expanded government benefits for the vulnerable have helped offset those trends. It’s true that our recovery from the Great Recession has been slower than previous recoveries from ordinary recessions. But it has been much stronger than previous recoveries in nations that endured major financial crises—and much stronger than Europe’s current recovery. The euro zone’s output has not yet reached pre-crisis levels; it’s still struggling with 12% unemployment and a risk of deflation.

We’re doing a lot better than that. We had more effective bank bailouts, more generous fiscal stimulus—until Republicans took over the House after the 2010 midterms and began demanding austerity—and much more accommodative monetary policy. It’s all worked remarkably well. We’ve faced some headwinds—the contagion from the near-collapse of Greece in 2010, the turmoil after we nearly defaulted on our debt in 2011—but the economy has continued its path of slow but steady growth. That’s why Yellen was able to discuss those mind-numbing “policy normalization principles,” the guidelines the Fed will follow as it starts raising rates and reining in its bloated balance sheet in 2015. We’re approaching normal. And the Fed’s forecast for the next few years also looks pretty decent.

It doesn’t look fantastic. But in 2008, the U.S. suffered a horrific financial shock, with a loss of household wealth five times worse than the shock that preceded the Depression. We’re still dealing with the aftershocks. Many Americans still don’t feel like the economy is working for them, an understandable reaction to persistent long-term unemployment, stagnant wages, and continuing foreclosures.

But as dull as it sounds, it’s working better every year. The lesson of our current plight is not that the system doesn’t work. It’s that financial crises really suck.

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