fresh voices from the front lines of change







Rep. Paul Ryan, R-Wis., is the Republican Party’s latest effort at putting forward a credible economic ideologist. His recent interview with Ezra Klein reveals this effort as a complete failure. Ryan’s views about the financial sector completely contradict his statements about the federal budget deficit, making his policy prescriptions as an incoherent mess of meaningless talking points.

Paul Krugman and Matthew Yglesias do a nice job explaining how Ryan really doesn’t know what he’s talking about. But the conservative politician makes things much worse for himself when he attempts to defend himself against these criticisms. Here’s Ryan, emphasis mine:

I’m not convinced – but intrigued – with the debate over the carry trade that is going on right now. What I mean by that is banks can borrow at essentially no cost from the Fed, plow the money back into no-risk Treasury securities, and earn that modest spread. This dynamic, while obviously helping banks recapitalize, could be curbing capital deployment in the private sector.

There’s no question that banks are doing this. At the moment, banks can borrow from the Fed for 0 percent, and invest that money in U.S. government bonds. A 10-year bond pays the bank interest of 2.91 percent right now, with the 30-year bond closer to 4 percent. Since there is no funding cost, every basis point of that return is pure profit for the bank. It is a “modest spread,” to be sure, but as Ryan says, it’s all risk-free profit.

Banks are doing it because they know the U.S. government isn’t going to default on its debt. Although 2.91% isn’t an amazing return, it’s a sure thing, and it’s much less risky than lending to businesses during a deep recession. Banks can borrow as much as they want from the Fed, and they can invest that free money in as many Treasury bonds as they want, allowing them to make a killing in millions of small installments. It’s called a carry-trade, and it’s a huge part of what financial analysts are talking about when they say banks are “earning their way back to health.” One arm of the government—the Fed—is enabling banks to make tons of money from another arm of government—the Treasury.

Unfortunately for Ryan, this behavior is totally inconsistent with everything else he says during his interview with Ezra. Ryan makes an aggressive push to claim that the U.S. budget deficit is a terrible, terrible problem that puts the economy in grave danger. The only way to deal with this, he says, is through drastic cuts in government spending. But it’s impossible for the budget deficit to be a dire problem when Treasury securities to carry “no-risk.” If the budget deficit was a big deal, Treasury securities would be extremely risky. Investors would be worried that the big, bad budget deficit was about to spark a default, and investors worried about default either don’t invest or demand a very high interest rate to compensate them for the risk their taking on.

There are really only two ways for budget deficits to create economic problems. First, they can spur high interest rates, as investors demand a greater return on their investment in government debt. Those high interest rates can impede economic growth. Second, if big enough, budget deficit can force governments to actually default on their debt, which makes it much harder for governments to borrow money in the future. Ryan tries to make these points repeatedly. Earlier in his interview with Ezra he says this:

“Locking in budget reforms and spending control will help us in the short run by taking pressure off interest rates.”

and this:

“At this point, given the borrowing costs, stimulus is counterproductive.”

But if there were any real pressure on interest rates, we’d be seeing high interest rates on Treasury bonds. Of course, we are not seeing high interest rates on Treasury bonds. We are, instead, seeing record lows, something Ryan acknowledges when he says that banks can only earn a “modest spread” by investing in Treasurys!

What’s more, those low interest rates that Ryan acknowledges mean that the government has record low borrowing costs. Ryan tries to argue that spending money to create jobs will cost so much that the measure won’t work. But there has never been a better, cheaper time for the government to borrow money than right now. The bank behavior Ryan cites means that the government should be borrowing as much as it can and spending that money to create jobs, since we are still in the middle of the worst jobs crisis in 75 years.

And make no mistake, Ryan’s quest to slash government spending is a job-killing agenda. He has to resort to crazy incoherent arguments about interest rates because everybody can see that spending money to create jobs will, you know, create jobs. Ryan is simply ideologically opposed to the idea of government spending (at least now that Democrats are in power). He is looking for any excuse he can find to cut that spending, regardless of the consequences for the economy. Sane policymakers should be worried about creating jobs, not looking for ways to push a bizarre anti-government agenda.

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