Sounds of Angry Men, Whimpering Politicians & the Global Crisis
Peter Drucker had a famous and insightful saying (many actually): "change the people or change
the people". In other words when an organization had to change to meet new circumstances and challenges either the behavior of the people had to change or you need to get new people on board. We can paraphrase that by in these times by saying, "change the institutions or change the institutions". This applies on the micro-level, for example with the re-regulation of the Finance Industry (Helmet Laws vs Adult Supervision: Re-Regulation & Finance Industry Futures), or on a macro and global scale. To get those changes however we need leadership for and from all the organizations and institutions who are involved as serious stakeholders. That paraphrase can be extended however and just how and when is best captured in the accompanying YouTube video clip. Either change the institutions or they will be changed for you, by a mob of angry citizens. Unfortunately history is not very encouraging as to the results. One cannot argue, for example that the 2nd French Revolution led to either permanent or constructive changes. Rather it seems to have continued a dysfunctional cycle in French socio-politics that still exists to this day. In a Charlie Rose interview Lee Kuan Yew, the founder of Singapore, made the fascinating observation that family ties and guanxi were so important in Asian socieites because they had millenia of surviving failed states and they only thing they knew to fall back on was family and social ties. AS the worldwide credit and economic crisis continues to metastasize into a worldwide social and political crisis it would be well to keep the alternatives in mind !
State of the World Economy
If you look around the world there is no single country where trade hasn't literally fallen off a cliff. That ought to tell the whole story if you understand how critically dependent many, even most, of these countries are on trade for manufacturing, employment and general economic health. Whatever you think the situation is in the US the depth of the economic downturn is more severe in most of these countries. And threatens to drive many of the poorer ones over other kinds of cliffs. That drive will lead over a third precipice - profound socio-political instability that could strain many of these governments to the breaking point. Something they are all well aware of. With the upcoming G-20 meetings the question then becomes how will they respond ?
Trade is the Lifeblood...and Credit the Oxygen
We can say that but it's not entirely clear it has emotional weight to most, including ourselves. Let's consider an analogy. Consider the human circulatory/respiratory system that takes air and food from the environment, processes it, turns it into cellular structures and then carries those to each and every location in the body where complex, large-scale and very fast bio-chemical interactions enable us to breath, burn energy, build new bones, muscles and other tissues and, in short, exist. Not enough food and we begin to waste away, literally eating ourselves up. What allows for that food to be burned up is the oxygen in the air. Well trade is the analogy of food and the energy it contains while credit is the air that fuels the fires.
Where Are the Adults ? Into the Valley of Decision
When the crick's rising to fast, the food running out and there's a fire in the school we can either all pull together or we can run around in circles, screaming, shouting and pointing fingers of blame. And we can look to our leaders to step up the challenges of putting out the fire, organizing the dike repair teams, buying food from other regions and then making sure enough is saved out for Spring planting while also changing the engineering of the dikes and creating a fire department when we didn't have one. The upcoming G-20 meeting was supposed to be the opportunity of the key world leaders to step up and do the right things. Unfortunately there seems to be an extremely limited supply of folks acting to both quell the emergencies, repair the system and start the process of evolving a new and improved one. Actually, broadly speaking, the folks acting proactively and correctly seem to be limited to the US, China, the UK and Brazil while the erstwhile leaders of the EU still seem to be in profound denial and Japan is rocking from one political breakdown to another. When you add those up you've added up the bulk of the world economy. On which the fate of all now rests. What was that about interesting situations ?
Unfortunately the number of self-responsible adults let alone the ones willing to take public responsibility seems to be very limited even in the countries who are leading. Pundits to the left of them, politicians to the right, challenges in front, still into the Valley of Responsible Decision-making rode the six hundred (600 ? Really). With all apologies to Tennyson !
That's hardly our sole assessment, btw. In the readings excerpts you'll find everything from state and outlook on the world to key oped pieces by Steve Perlstein of the WaPo and David Brooks of the NYT to the first in a series by the Economist on re-thinkings of global capitalism. We particularly recommend the Martin Wolf Rose intereview and the Perlstein/Brooks pieces. As well as the Yellen situation summary and our own prior posts on the situation and the realities vs the politics.
The Global Economic and Political Crisis
A conversation about the World Economic Forum Martin Wolf of the FT is interviewed just after Davos (early Feb.) and lays out the depth of the outlook, worldwide severity outside the US, the financial and banking restructuring requirements and changes for the future. As nice a summary as you’ll find and a prescient outline of the last week’s news.
Rapid Declines in Manufacturing Spread Global Anxiety . In a pattern familiar to industrial businesses in Europe, Asia and the United States, Mr. Welcker says his company, Schütte, which makes the machines that churn out 80 percent of the world’s spark plugs, is facing “a tragedy.” Orders are down 50 percent from a year ago, and Mr. Welcker is cutting costs and contemplating layoffs to prevent Schütte from falling into the red. That manufacturing is in decline is hardly surprising, but the depth and speed of the plunge are striking and, most worrisome for economists, a self-reinforcing trend not unlike the cascading bust that led to the Great Depression.In Europe, for example, where manufacturing accounts for nearly a fifth of gross domestic product, industrial production is down 12 percent from a year ago. In Brazil, it has fallen 15 percent; in Taiwan, a staggering 43 percent. Even in China, which has become the workshop of the world, production growth has slowed, with exports falling more than 25 percent and millions of factory workers being laid off. In the United States, until recently a relative bright spot for manufacturing despite the steady erosion of blue-collar jobs, industrial output fell 11 percent in February from a year ago, according to statistics released Monday by the Federal Reserve.“Manufacturing has fallen off the cliff, and it’s certainly the biggest decline since the Second World War,” said Dirk Schumacher, senior European economist with Goldman Sachs in Frankfurt. The pattern of manufacturing and trade ominously recalls how the financial crisis of 1929 grew into the Great Depression: tightening credit and consumer fear reduced demand for manufactured goods in one country after another, creating a downward spiral that reduced global trade. “Plunging manufacturing suggests that as bad as things were in the fourth quarter, they are at least as bad now,” said Robert J. Barbera, chief economist at ITG, a New York research and trading business. “This is a classic adverse feedback loop. It won’t quickly correct itself.” That means more workers can expect to lose their jobs around the world in coming months as manufacturers continue to cut production, especially as global trade contracts.In fact, trade is shrinking even faster than production. Germany’s exports down are 20 percent from a year ago, Japan’s have plunged 46 percent, and in the United States, exports fell at an annualized rate of 23.6 percent in the fourth quarter of 2008. Mr. Welcker says he has never seen anything like it. For parallels, he has to hark back to the Great Depression and World War II, when Schütte’s factory was destroyed.
WTO Predicts Global Trade Will Slide 9% This Year The World Trade Organization issued the most pessimistic report on global trade in its 62-year history, forecasting a drop of 9% or more in 2009. Monday's prediction is worse than previous estimates by the WTO, the World Bank and independent economists, and adds to evidence that the financial crisis is badly hurting trade. "Many thousands of trade-related jobs are being lost," said Pascal Lamy, director of the Geneva-based organization. Mr. Lamy urged the leaders of the Group of 20 leading economies, who will meet in London on April 2, "to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective." When that recovery happens will be determined by the effectiveness of stimulus plans, which will amount to 3% of total global production in 2009, and of reforms to the banking system, the WTO said. "Further adverse developments in financial markets could prolong the current crisis, as could a surge in protection," the group warned. The report is based on recently available trade figures showing steep drops in the first two months of 2009, as well as on broader economic projections. Mr. Lamy's economists listed four reasons for gloom. First, all regions of the globe are hurting, and consumer demand is shrinking, especially for imported goods -- from cars to stereos. There aren't any "decoupled" areas that aren't affected, the WTO said. Second, the trade crisis will mostly affect the richest countries, whose citizens borrowed and bought beyond their means, the WTO said. Trade in developed countries will decline 10% this year, compared with a drop of 2% to 3% for developing nations. Third, companies big and small have globalized their supply chains, so goods that cross the world on their way from factory to shelf add to trade statistics in several countries. As a result, global trade now grows or declines more than global economic growth. The global economy is expected to shrink 1% or 2% in 2009. "This kind of globalization entails volatility," says Fredrik Erixon, director of the European Centre for International Political Economy, a Brussels-based think tank. Finally, there's been a flurry of protectionist measures, as countries from Mexico to Russia imposed new tariffs on imports. The World Bank estimates that 17 of the 20 countries coming to London on April 2 have already broken free-trade promises. With the prospects slim for another international trade treaty following the Uruguay Round of 1994, the WTO is hoping to shame its 153 members into keeping trade open by cataloguing protectionist excesses and publishing a bimonthly list. It will release its latest such report this week.
The Uncertain Economic Outlook and the Policy Responses (Yellen). We are struggling to assess the effects of conditions we haven’t seen before, including a near-collapse of the financial system, and to predict the impacts of policies that haven’t been tried before, including an array of new Fed initiatives designed to improve conditions in private credit markets. I share the guarded optimism of most professional forecasters that the economy may begin to grow again within the next several quarters. But I must admit that I see considerable downside risk, and my confidence in this outlook is greatly diminished by the nearly unprecedented set of circumstances we face, circumstances that severely challenge our ability to use historical economic relationships to anticipate future developments. We face an extraordinarily uncertain future, and our main hope for economic recovery lies in the sorts of innovative and aggressive economic policy responses that are being carried out by Federal Reserve and federal government policymakers. With the caveat that my forecast is subject to exceptional uncertainty in the present environment, my best guess is similar to that of most forecasters, who expect to see moderately positive real GDP growth rates beginning later this year or early in 2010, followed by a gradual recovery. However, I am well aware that my views are strikingly more optimistic than those I hear from the vast majority of my business contacts. They tend to see conditions as dire and getting worse. In fact, many of them can’t believe I would even suggest what they see as such a patently rosy scenario! So why is it that so many of us who prepare forecasts seem to be more optimistic than many others? I think there are several reasons. First, as forecasters, we distinguish between growth rates and levels. It’s true that the Blue Chip consensus shows moderate positive growth rates in output in the second half of this year. But even so, the level of the unemployment rate would still rise throughout 2009 and into 2010. So, in this sense, the worst of the recession is not expected to occur until next year. And, even by the end of 2011, I would expect the unemployment rate to be above its full-employment level. So I wouldn’t call this a particularly rosy scenario. For me, this extreme uncertainty about the future creates a very strong case for bold policy actions on a broad front—by both the monetary and fiscal authorities—to stimulate economic activity and prevent inflation from falling any further. I am heartened by the aggressive and innovative actions that policymakers are taking.
Tactics and Strategies of Repair
How to fix the global economy Globalization -- and the integration and rise of the world's developing economies -- have been taking place at a breakneck pace. Who would have believed 20 years ago that China would become the world's third-largest economy in 2008? Or that so many jobs and, in some cases, whole industries would essentially be shipped from the developed world to countries with low labor costs? Meanwhile, the longer-term solutions have yet to kick in:
- Developing economies have been slow to let their citizens spend their growing wealth. Government decisions to provide only a pittance, if any, of a pension at retirement, restrictions on land rights that prevent farmers from selling their land, and moves to market-based, for-fee education and health care systems have all depressed spending. If you know the future is completely up to you, you put as much as you can under the mattress.
- Developed economies have been slow and, in some cases, actively delusional about addressing the limits of their wealth. Japan, the European Union countries and the United States all offer unsustainably high retirement and health care benefits, for example. The Bush administration's calls to expand the percentage of Americans who own their own homes in a period of stagnant family incomes made political but not financial sense.
- Developing economies have remained wedded to controlled currency exchange rates that slowed the appreciation of their currencies against those of their trading partners. The lessons of the Asian currency crisis of 1997, which nearly bankrupted export-based economies that hadn't put enough in the bank, led to an almost obsessive drive to build up reserves.
For all these reasons and more, the world came to rely more and more on short-term solutions. And as the period that short-term solutions were called upon to fix stretched out further and further, it put increasing strain on the short-term system itself. But to keep the short-term solution working, to keep the global imbalances circulating, that's the proposition that both deficit and surplus nations had to embrace. And they did. The labs of Wall Street turned out the products. First, securities backed by pools of mortgages and commercial loans and buyout loans and credit card debt that paid higher yields than plain old Treasurys but that were supposedly safer than individual mortgages, etc., because they were pooled. The game was to create a new world of AAA-rated investments that paid more than the traditional AAA investments exactly at a time when the supply of actual AAA-rated investments was shrinking as companies and governments piled on debt. It's clear, of course, why the deficit countries and the financial factories that churned out this paper wanted to believe. The alternatives were too hard or too painful -- the long-term mechanisms I've mentioned above inflict economic pain and require short-term sacrifice. What's more intriguing is why the surplus countries bought into this -- well, let's call it what it was -- global Ponzi scheme. It wasn't because the financial experts in these countries were stupid. Many of them clearly saw the scam for what it was. But the surplus countries had as much incentive to believe in the short-term solution as the deficit countries did. Once you hold $500 billion in Treasurys, you aren't inclined to say, "Hey, these are not as safe as I thought." When you need higher yields to feed an underfunded state pension plan, you're not inclined to say, "You know these aren't really suitable for a pension fund." And so, as the risks grew, more-extravagant instruments were needed to keep the money circulating around the globe. And then, one day, the bust in the U.S. housing market, what could have been a relatively small event in a universe with less leverage and less riding on nsustainable guarantees, showed that the system was built on smoke and mirrors. And the money stopped circulating. And the global economy ground slower and slower in a devastating credit crunch. If this is the disease, what's the cure? I think the medicine comes in three parts that are based on a recognition that the huge global challenge of recirculating money from surplus to deficit nations isn't going away soon. And what happens if we don't address these underlying problems? Down the road, five years or seven or 10, we're going to replay this crisis. The global imbalances that brought it into being aren't going away by themselves. Certainly not very quickly.
Capitalism at Ebb Tide Almost everything about Schumpeter's diagnosis rings true, with the glaring exception of his conclusion. American capitalism has flourished despite being subjected to repeated restrictions by disgruntled legislators. Consider the transformation. In 1889, there was no antitrust law (1890), no corporate income tax (1909), no Securities and Exchange Commission (1934) and no Environmental Protection Agency (1970). We have subordinated unrestrained profit-seeking to other values. "We've gradually taken into account the external effects (of business) and brought them under control," says economist Robert Frank of Cornell University. External costs include: worker injuries from industrial accidents; monopoly power; financial manipulation; pollution. Great reform waves often proceed from scandals and hard times. The first discredits business; the second raises a clamor for action. Parallels with the past are eerie. But Schumpeter's question remains. Will capitalism lose its vitality? Successful capitalism presupposes three conditions: first, the legitimacy of the profit motive -- the ability to do well, even fabulously; second, widespread markets that mediate success and failure; and finally, a legal and political system that, aside from establishing property and contractual rights, also creates public acceptance. Note that the last condition modifies the first two, because government can -- through taxes, laws and regulations -- weaken the profit motive and interfere with markets. The central reason Schumpeter's prophecy remains unfulfilled is that U.S. capitalism -- not just companies, but a broader political process -- is enormously adaptable. It adjusts to evolving public values while maintaining adequate private incentives. Meanwhile, the striving character of American society supports an entrepreneurial culture and work ethic -- capitalism's building blocks. As for new regulations, many don't depress profitability because costs are passed along to consumers in higher prices. Still, the present populist backlash may not end well. The parade of big companies to Washington for rescues, as well as the high-profile examples of unvarnished greed, has spawned understandable anger that could veer into destructive retribution.
Editorial: A survival plan for global capitalism J.K. Galbraith wrote that 1929 stood alongside 1066, 1776, 1914, 1945 and 1989 in its importance. The world today was shaped by the efforts of governments to overcome the economic meltdown of the 1930s – and the consequences of their failures. Even if this economic crisis is not as bad as the Great Depression, it will have epoch-moulding consequences. This week the Financial Times starts a series on the Future of Capitalism. Much, however, depends on the success of next month’s meeting of the Group of 20 in London and how successful governments are at ending this worldwide crisis. The intellectual impact of the crisis has already been colossal. The “Greenspanist” doctrine in monetary policy is in retreat. It no longer seems clear that it is easier for central banks to clean up after asset price bubbles burst than to prick them when they are small. Monetary authorities will need to be more concerned both about financial stability and global imbalances which allowed a few countries to build up vast surpluses while a few others ran yawning deficits. Finance has already changed irrevocably. The grand investment banks which once strode alone have either collapsed, or joined the flock of retail banks. Governments are now borrowers, lenders, investors and insurers of last resort for much of the financial system. The future of finance will be determined by their efforts to disentangle themselves from the thickets of guarantees they have been forced to make. The depth of the crisis will determine how easily they manage it. The fiscal cost of this episode is unclear. In some countries, it may be state-busting. Some nations will need to cope with extraordinary fiscal tightenings in the coming years. The domestic impact of government spending – and its geopolitical ramifications – could yet be colossal. Again, much depends on how soon the downturn ends. There is one certainty. While recessions are inevitable, deep depressions or slumps – or whatever you call them – are neither necessary nor welcome. They destroy wealth, sap happiness and crush old certainties. What is more, increasing poverty is a grave threat to world stability and democracy. Revolutions often start as bread riots, and economically-stagnant countries make belligerent neighbours. Growth must be restarted.
...and of Despair, Divergence and Dallying Dilettantes
Perverse Cosmic Myopia You’d think if some tiger were lunging at your neck, your attention would be riveted on the tiger. But that’s apparently not how it works in the age of global A.D.D. As a tiger sinks its teeth into the world’s neck, we focus on the dust bunnies under the bed and the floorboards that need replacing on the deck. We live in the world of Perverse Cosmic Myopia, an inability to focus attention on the most perilous matter at hand. The tiger, of course, is the collapsing world financial system. Americans actually have a falsely mild view of this crisis because the economy is worse abroad. The U.N.’s International Labor Organization projects between 30 million and 50 million job losses worldwide. Central European countries are teetering; Japan’s economy is horrifying; and the Chinese job creation machine is losing the race against its demographic pressures. There have been riots in Greece and China as well as huge protest rallies in Dublin, Paris, London and beyond. So far, the protesters express anger without an agenda, but if the global economy continues to slide through 2010, they’ll discover one. A predictable result is a series of beggar-thy-neighbor exchange-rate policies, followed by rising trade barriers and the degradation of the entire global system. In times like these, you’d expect prudent leaders to prepare for the worst. After all, the pessimists have recently been vindicated by events. But that’s apparently too painful to think about. In normal times, leaders like to focus on the short term at the expense of the long term. But now the short term is really confusing, so leaders take refuge in projects that are years or decades away. The president of the United States has decided to address this crisis while simultaneously tackling the four most complicated problems facing the nation: health care, energy, immigration and education. The Obama administration is at least distracted by important things. The Washington political class has spent the past week going into made-for-TV hysterics over $165 million in A.I.G. bonuses. We’re in the middle of a multitrillion-dollar crisis, and our political masters — always willing to throw themselves into any issue that is understandable on cable television — have decided to risk destroying the entire bank-rescue plan because of bonuses that account for 0.001 percent of the annual G.D.P. Even this is not the most idiotic of the distractions. For that, you have to look abroad. This is a global crisis, and a core lesson of the Great Depression is that a global crisis calls for a global response. As such, Tim Geithner and Larry Summers are preparing for the upcoming G-20 summit with an agenda that has the merit of actually addressing the problem at hand: coordinate global stimulus, strengthen the International Monetary Fund, preserve open trade. But the G-20 process is heading toward global impotence because the Europeans are dismissing this approach. Instead, they want to spend this moment of peril working on a long-term architecture to regulate global finance. The world is in flames and they want directorates and multilateral symposia and vague plans for a powerless “college of supervisors.” This is what Marie Antoinette would be for if she were an annual Davos attendee. Many people used to wonder how the world’s leaders could be so myopic at various points in history — like during the Versailles Treaty or the turmoil of the 1930s. We don’t have to wonder any more. We get to watch the cosmic myopia replay itself in our own times.
It'll Take More Than Money to Fix This Crisis Browsing through the Style section of yesterday's Post, I happened upon an article about new Washington "power couples" that made reference to one Jeremy Bernard, a Los Angeles fundraiser for President Obama who recently landed the plum job as White House liaison to the National Endowment for the Humanities. White House liaison to the National Endowment for the Humanities? Let's get this straight: We're up to our necks in the worst global economic crisis since the 1930s, the government is putting trillions of dollars of borrowed money on the line to rescue the financial system and stimulate the economy, tens of trillions of dollars in paper wealth has vaporized, millions of Americans are losing their homes and their jobs, nearly all the top jobs at the Treasury Department are vacant, yet somehow the White House has found the time and the money to hire a liaison to the National Endowment for the Humanities! It's a small point, I realize, and I mean no disrespect either to Mr. Bernard or the humanities. But it highlights what seems to be a glaring problem: There is still way too much business as usual going on in Washington, on Wall Street and in the media. Not so on Main Street. All indications are that in response to the crisis, consumers have embraced a new frugality, paring debt and cutting consumption they know had become excessive. Businesses are moving to cut back on dividends and stock buybacks they can no longer afford, trim frills and reduce prices and capacity to post-bubble realities. Contrast that with the approach to the crisis taken by members of Congress, who as far as I can tell, have changed nothing about how they go about their duties. Same leisurely three-day work week. Same bloated budgets for staff and security. Same unwieldy committees holding the same meaningless hearings. Same partisan posturing and gamesmanship. Same willingness to put narrow special or parochial interests over the national interest. As for Republicans, their stubborn opposition to any increase in government spending in the face of a severe downturn is the economic equivalent of bloodletting. And their determination to paint every initiative of the Obama administration with the broad brush of socialism is the kind of old-fashioned red-baiting that would make Joe McCarthy proud. It's not just Congress, however. Key regulators have also been slow to respond to the unfolding crisis with the kind of urgency the situation demands. The media also deserve some criticism for the way they have recently covered the crisis. The personalizing of policy debates may be great sport during a political campaign, but it can be downright destructive in the middle of a crisis when public and market confidence are so crucial. You'd never know it from the coverage that Treasury secretary Hank Paulson last year almost surely prevented a meltdown of the global financial system. Nor would you imagine from all the negative coverage and commentary that Tim Geithner's now-disqualifying sin is that he took an extra couple of weeks to flush out the details of an innovative scheme to buy up unwanted bank assets and reduce home foreclosures. Too often, the media have accepted uncritically all manner of hyperbole and misinformation peddled by people talking about their trading books, wielding partisan axes or pursuing ideological agendas. While there are plenty of reasons for populist outrage at the behavior of major financial institutions, the titillating focus on bonuses and boondoggles has been way out of proportion. And thanks to the media, much of what now passes for conventional wisdom about the government's response to the crisis amounts to little more than a childish disappointment that officials have been unable to wave a magic wand, throw a couple of hundred billion dollars worth of fairy dust in the air and make the whole thing disappear. What we are facing is the economic equivalent of a war -- a war that caught us by surprise and threatens much of what we have taken for granted. It's a war we can win, but only if we have leaders and opinion makers who commit to difficult sacrifices, a sustained effort and serious changes in the way things are done.
Obama vs. the Dodgers A deep narrative is taking root in the political class, and it goes something like this: Obama is biting off way more than he can chew, "overloading" the system and dealing with all sorts of "side issues," when he should be focusing solely on the broken economy. He is said to be asking Congress to do too much. Note that anyone who makes an argument of this sort is freed from responsibility to mention any of the specific problems Obama is proposing to take on. Insisting the economy trumps everything means you don't have to say a thing about health-care reform, energy, education and taxes. And that's the beauty of this critique. It's far easier to talk about an overloaded system than to tell those without health insurance that they will have to wait a few more years, or to be honest in saying that balancing the budget long-term will require raising taxes. It's much easier to use the economic crisis as an excuse for inaction than to defend the status quo. And the more time that passes from Obama's November victory, the weaker his mandate to pursue his promises will be. By next year, the focus will be on the midterm elections.
Political Economy of Policy (Prior Posts)
First Things: Financial Crisis, Economy and Barry Otto, Furst von Bismarch, was not only a great statesman but an experienced, wise and witty politician; author of the "Sausage Factory" epigram we keep re-using. He had another, actually several but this one sticks, that when a crisis goes by grab its' coattails and ride for all it's worth. In this case we're facing multiple inter-lacing policy crisis that have been accumulating for decades, which nobody was willing to tackle to the can kept getting kicked in the ditch until it put itself back on the road and, worse, we actually knew what to do about all the cans. The thing about a crisis is that it not only represents danger but opportunity since it's likely that the will to change and do what is NOW clearly necessary can be mustered instead of continuing in denials. We're so much in that position that many on the inside of things are actually excited to finally get a chance to do what they've known needed doing for a long time. So much so that my alternative title was Economic Crisis=Opportunity, Danger and Change. While we're in the midst of the worst financial crisis since the '30s and the most serious economic downturn since the early '70s the cartoon is still more black humor than reality; but if we don't seize this opportunity it'll be more truth than anything. Fortunately not only is Barry picking the best economic team since Bretton Woods or the Marshall Plan with outstanding people in the right jobs (Hit the Decks aRunnin...Git 'er Done Barry) but he and they are moving with speed, urgency, accuracy and skill. He's already made more progress that's the right kind than the last three Presidents did in their first 18 months. Amazing and startling but to establish why we're going to have to take rather deep dive on the subject of economic policy by poking at the nature of business cycles and fiscal stimulus.
To Boldly Go Where We Must: Speech, Budget and Dr. Noes Judging from the readership indicators we can move on to the next discussions but judging from the cartoons, talking heads and agitated feedback from my network we need to stay with the "Political Economy" of the Stimulus/Budget/Rescue efforts, so we will. Just in case you were on vacation last week it was one of the most momentous in post-war American history ioho - particularly for the speed, size and complexities of what was done. Mo saw the signing of a giant stimulus package, Tu a major national "suck-it-up" address that's largely gotten plaudits from almost all sides with the exception of diehard Rips, We saw the Phase 2 announcement of TARP II and Th the tabling of the most ambitious budget proposals we've seen in a very long time. Not to mention Chairman Bernanke's testimony that "yes a recovery was possible if everything went right AND we repaired the financial system". Any one of those things, or actually a subset of line items, would have been as much major news as we've been used to getting in a month in the last 8-12 years. Barry's striking while the iron is hot indeed.
Back in the US: Economic Realities vs Partisan Posturings We're going to circle back to the US and take up the state of the economy, economic policy, policy vs. politics and partisan political posturings and try and braid them together into a single rope of investigation. At the same time we are NOT leaving the topic of the state and outlook of the world because, as we argued in the first foreign affairs post in this series the US's role in maintaining and re-developing a new international system is critical and indispensable. And central to that role is the success of economic policy without which both the US and the world will face severe difficulties. In the readings we cover a lot of ground, as usual admittedly, starting with a survey of the state of the economy and real nature of proposed economic policy instead of what the headlines, pundits and partisans are telling you. If you read nothing else click thru and download Paul Kasriel's two essays on what did work in fact in the Great Depression (The Great Depression – Just the Facts, Ma’am) and on what role savings and investment will play in future growth (Paradox Squared). Then we shift to what the real challeng is - IMPLEMENTATION ! Then we segue to the partisan catfights where old shibboleths of the '80s are being revived to counter these policies when the facts on the ground have changed ("when the facts change I change my mind. what do you do ?"). Finally we finish up with some readings on re-imagining what the new world could/should look and why a return to fundamental values revived in new clothes are essential to making this all work ! To summarize our main points however we'd say: 1) the economic situation is very serious but fixable and we have strong historical evidence, 2) the biggest challenges are implementation AND laying future foundations. On the latter the Administration is doing many right things on the former it's early to say. However, 3) partisanship is proving to be a poisonous legacy, 4) the American people still haven't grasped the Administration's direction at a fundamental (gut) level and 5) the biggest danger is the knife-edge balances between impatience for what will take time, effort and perseverance against the all to real risks of backlashes, anger and a radicalization of American politics. Then all bets are off. We take our socio-political stabilities for granted but what happens if they aren't a self-renewing gift from past generations ? Then we're in for the same kinds of troubles that are threatening other nations !
Ali Babacan, Syed Yousuf Raza Gillani, Bernard Kouchner, Abdul Rahim Wardak with Richard N. Haass
