From the Fabius Maximus website. Our Congress is broken and corrupt. If it continues the way it is now, the entire nation will pay with a deep depression and worse anarchy due to greed and selfish service. Fabius Maximus (I really don’t know who he is) is in my novice opinion, one of the most brillian thinkers on the economy and government. Given what I know (I just read a lot, but have no degree in economics), Fabius is spot on. As I keep saying, Where have all the leadergs gone?
The solution is fix a broken political system with a peaceful revolution at the polls. My friend and the brilliant James Fallows has also recently written a piece for the February 2010 issue Atlantic Monthly called How American Can Rise Again http://www.theatlantic.com/doc/201001/american-decline that talks in detail about this. One of the best written articles I have read.
Jim’s synopsis is:
Is America going to hell? After a year of economic calamity that many fear has sent us into irreversible decline, the author finds reassurance in the peculiarly American cycle of crisis and renewal, and in the continuing strength of the forces that have made the country great: our university system, our receptiveness to immigration, our culture of innovation. In most significant ways, the U.S. remains the envy of the world. But here’s the alarming problem: our governing system is old and broken and dysfunctional. Fixing it—without resorting to a constitutional convention or a coup—is the key to securing the nation’s future.
I agree with Jim as well, that our nation can remain strong, that the people can reverse the titantic, but it most be bold, spend some time studying the issues, and then elect leaders and not self serving politicans. Accept the hard truth and its solutions, otherwise, there is no turning back soon, just gloom.
Beginning Fabius blog.
As I have said since the beginning, this downturn is a journey beyond the limits of conventional economic theory. Beyond the known space of modern economic history. This marks the end of the post-WWII era, and the global financial regime which one of its supporting pillars.
To see this, obscured as it is by the confident analysis and forecasts of pundits (almost all of whom were wrong in 2008 or 2009 and 2010), it helps to remember what we know in 2007.
Most of this is directly from or an extrapolation from the work of Richard Koo (see the links at the end).
We faced this downturn with confidence, based on the great success of the past 60 years, and awareness of our strength and wisdom.
Our banking system was strong, perhaps the best shape ever going into a recession.
If we did have a financial crisis, we’d act like men (unlike Japan since its 1989 crash). Weak banks would die and the strong prosper, with FDIC protecting depositors. No Zombie banks for us
If we did have a recession, we’d spend our stimulus wisely (unlike Japan).
Fiscal spending would improve public infrastructure, not channel public money to politically powerful private interests.
If we did have a severe recession, our adaptable and resilient economy would quickly bounce back (unlike Japan). No 20-year rolling recessions for us!
Richard Koo and a few others called these delusions.
The first three facts proved disastrously wrong.
(1) Our banking system proved itself a house of cards, collapsing with incredible swiftness.
(2) In the 1990’s we bravely closed tiny S&L’s, too po0r to have invested in congressmen. The big banks more wisely spent their profits. Their congressional retainers and moles in the Fed and Treasury lavishly rewarded their sponsors: a steep yield curve, cheap loans on easy terms, loosening of the already-lax regulations, and unlimited government guarantees, and a plethora of other programs.
(3) Our stimulus programs would have made a medieval monarch beam with pride by its trickle-down economics. Politically powerful groups feasted on hastily (but carefully) written stimulus programs and bailouts, all falsely justified as for jobs jobs jobs.
Three accurate forecasts does not guarantee that the fourth is wrong, but suggests our confidence about it is unwarranted. Koo forecasts that our economy will remain stuck in sl0w-motion until households and businesses reduce their leverage to manageable levels. Only then will spending and investment return to normal levels. Only then we remove the government’s fiscal and monetary stimulus programs (misnamed, as they only stabilize the economy).
Japan has struggled with this process for 2 decades (combined with other problems, such as its demographic collapse), during which every attempt to reduce fiscal stimulus and raise taxes sent the economy back into recession.
After a year of confusing government-funded stabilization with organic recovery (aka green shoots), the moment of truth approaches. Only a substantial recovery — including job creation — can save the Democratic Party from severe losses in the November elections. Already polls show a large loss of confidence in the Obama Administration and Congress. While the Republicans spin this as public enthusiasm for their policy hobby-horses, it is in fact the American electorate’s long-time practice of voting based on economic performance in the year before the election.
Obama had the misfortune to gain office in the equivalent of 1930, not (like FDR) 1932 — when the Depression had hit bottom. Perhaps large-scale and bold action would have preserved Obama’s reputation, but we now know that bold action does not come naturally to Obama (no matter what lies conservatives circulate to pain him as the second coming of Lenin). So the recovery must appear by March or April, the last opportunity for Congress to enact another round of stimulus programs. If no strong recovery, it will be a depression for Congressmen (in a recession you lose your job; in a depression I lose my job).
But conservatives have convinced a substantial fraction of the American people that stimulus programs do not work. That’s like a stroke victim demanding that his respirator be turned off (or parents refusing to have their children vaccinated). So Congress might be unable to pass a stimulus package.
The Republicans have adopted Lenin’s tactic of the worse, the better. Unless the Democrats in Congress stick together, they’re doomed. For details see Republicans have found a sure-fire path to victory in the November elections).
The bad scenario
That’s the good news. Since we cannot reliably forecast events, we must sketch out scenarios. Such as another leg down in the economy. A double-dip recession (quite common). In the third year of this recession the reserves at all levels are drained — households, businesses, and governments. We are weak, as was the world in a physical sense after WWI – vulnerable to the 1918 influenza. Another downturn might be worse than the first.
Failure to promptly enact another stimulus program might have cataclysmic — even historic — consequences. What about the government’s debt, and the deficits? That’s a problem when the economy recovers. Survival requires handling each problem in turn. Cutting government spending does no good during a downturn, as it weakens the economy — increasing expenditures and reducing revenue (Keynes paradox of thrift). Net: a larger deficit.
Putting America’s idle resources to work during a recession not only mitigates the downturn, but provides an opportunity to rebuild our infrastructure at minimal cost. Everybody looks smart during a boom. A downturn provides a stress test for a nation. Can we pull together, showing wisdom and cohesion, in difficult times.? Japan has failed that test. Now it’s the turn of the US and Europe.
For a deeper understanding of these events, I recommend reading Richard Koo’s work Richard C. Koo is Chief Economist of the Nomura Research Institute, Tokyo. “ ‘Plan B’ for the Global Financial Crisis“, presentation at the Center for Strategic and International Studies, 22 October 2008 — Here is a PDF of his slides. Interview of Koo by Kate Welling, Welling @ Weeden, 11 September 2009 “
Financial markets rocked by ‘Obama shock’”, Richard Koo (Chief Economist), Nomura Research Institute, 26 January 2010 (also on Scribd)
The Holy Grail of Macroeconomics, Revised Edition: Lessons from Japans Great Recession (2009)
For more information from the FM site To read other articles about these things, see the FM reference page on the right side menu bar, including About the FM website page.
Of esp relevance to this topic:
About Financial crisis – what’s happening? how will this end?
Posts about causes of the crisis: The post-WWII geopolitical regime is dying, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
Diagnosing the eagle, chapter I — the housing bust,
6 December 2007 Death of the post-WWII geopolitical regime – death by debt,
8 January 2008 – Origins of the 1982 – 2006 economic expansion; why the down cycle will be so severe. Let us light a candle while we walk, lest we fear what lies ahead,
10 February 2008 – Putting the end of the post-WWII regime in a larger historical context. A vital but widely misunderstood aspect of our financial crisis,
18 September 2008 — Too many homes. A picture of the post-WWII debt supercycle,
26 September 2008 Debt – the core problem of this financial crisis, which also explains how we got in this mess,
22 October 2008 Causes of the financial crisis (no, its not the usual list), 29 October 2008 Government policy errors and the Great Depession,
1 November 2008 Economics is not a morality tale, 14 January 2009 Afterword Please share your comments by posting below. Per the FM site’s Comment Policy , please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling). Also — you can now subscribe, receiving posts by email — see the box on the upper right.