Throwing in the towel on policy makers

A post by Edward Harrison.

Earlier today, I had a brief e-mail exchange with Marshall Auerback in which I said that I had basically thrown in the towel on US (and global) policy makers. Early on in this crisis, I had advocated a number of policy paths which I think would have been infinitely superior to the ones actually chosen by the Bush and Obama Administrations, especially in regards to limiting the socialization of losses. I am talking about massive fiscal stimulus, big bank pre-privatization, a move away from the asset-based economy and the accumulation of debt, and a reallocation of resources.

Quite frankly, none of these suggestions have been taken on. As I discussed in March when making a few comments on my harsher tone about the credit crisis, the prevailing view in policy circles seems to be that we are in full recovery mode now, the remedies we put in place having been highly effective. Therefore, we can put in a few minor tweaks to the financial system, use our propaganda machine to tout them as the largest regulatory changes since the Great Depression, and then return to business as usual.

I find this narrative very unsettling and the complacent view it represents as likely to lead to another systemic crisis in short order. But the mindset is fixed. This is the reality of our policy making elite.

And it seems that I am not the only one who has come to this conclusion.  Mark Thoma voiced similar views in a post earlier today.  In a post entitled "Giving Up on Policymakers", Professor Thoma said:

I’ve been pushing hard for more help for labor markets for quite awhile… but it’s probably time for me to give up and accept that we are going to have a slower recovery than we could have had with more aggressive fiscal policy…

The fiscal policy response to the crisis has been disappointing. Monetary policy loses its effectiveness in a recession. There are some things monetary policy can do…But when it comes to providing a big shock to aggregate demand sufficient to turn the economy around and propel it back toward full employment, monetary policy alone isn’t enough. It’s true that monetary policy can lower real interest rates — even at the zero bound for the federal funds rate, it’s still possible to use quantitative easing to nudge long-term interest rates downward — the problem is that all this does is create an incentive for more investment and consumption (mainly of durables), there is nothing to guarantee that people will actually respond…

Because monetary policy loses effectiveness in a deep recession — something I’ve been teaching for decades — I was among the first to call for aggressive fiscal policy. Fiscal policy creates demand directly, it does not rely upon incentives and the hope that people will respond to them. When the crisis hit, we needed fiscal policy right away. Given the lags between changes in policy and actual effects on the economy, which were known to be lengthy, and given that monetary policy was not going to be enough, there was no time to "wait and see" (as many people I respect were calling for). But the reality is that fiscal policy didn’t get put into place until much, much later, far too late to stop the worst of the downturn (and it wasn’t big enough anyway). The way too slow policy process, and the way too small policy that came out of it, was frustrating to watch.

I think we’d be much better off today if we’d done what is necessary right away instead of hoping and hoping that things weren’t going to be so bad, and that we could escape the need for an aggressive policy intervention. This crisis has taught me that policy of that magnitude is nearly impossible to put in place based upon what looks to be happening, i.e. before the recession actually occurs. There must be clear evidence that a severe recession is actually underway before policy will be considered. Unfortunately, by that time it’s too late to prevent the worst part of the downturn.

Now that we are hitting the other side, I’m feeling frustrated again with the lack of action from policymakers. I expect the recovery to proceed at a snail’s pace, labor markets in particular. If employment rebounds quickly, great, but that’s not what I think is going to happen, and that’s not what the evidence suggests. If the recovery is going to be slow, then it’s not too late to provide more help. Instead of getting back to full employment by, say, 2013, we could get there sooner if we act now.

I agree with Professor Thoma. His comment near the end of his post was the one of greatest importance:

But, as I said at the beginning, even though it’s not too late for more help to make a difference, it’s not going to happen.

The question, then, is what is going to happen.  I have made my arguments on this in the past. For example.

I expect the following to occur:

  1. Public pressure to withdraw monetary and fiscal stimulus will work and stimulus will be reduced quicker than many anticipate – beginning sometime in early 2010. The Fed has already said it will stop buying mortgages in March and the Obama Administration is now focused on deficit reduction as evidenced by the paltry jobs bill just passed.
  2. The fiscally weak state and local governments will therefore receive little aid from the federal government. This will result in budget cuts, tax increases, and layoffs by the end of Q2 2010.
  3. At the same time, the inventory cycle’s impact on GDP growth will attenuate. By the second half of 2010, inventories will not add considerably to GDP.
  4. Meanwhile, the reduction of Fed support for the mortgage market will reveal weaknesses there. Mortgage rates may increase, decreasing housing demand.
  5. Employment will be weak in this environment, leading to another spate of defaults and foreclosures.
  6. The foreclosures and weak housing demand will pressure house prices and weaken lender balance sheets, especially because of second-lien exposure. This will in turn reduce credit growth.

I expect the weakness in GDP from this scenario to be evident sometime in the second half of 2010.

The mindset will not change; a depressionary relapse may be coming, Mar 2010

But what about other more bullish views out there? Why can’t the economy be robust enough to withstand these problems? Aren’t banks earning enough to reduce capital constraints to lending? Isn’t consumption growth resuming? Why are munis the next shoe to drop? Couldn’t it be that the rise in asset prices will buoy their revenue streams?  These are all questions I ask myself (probably not publicly since "Is economic boom around the corner?" in Sep 2009). But I fail to see how in a world of the Greek sovereign debt crisis, the disputed Chinese asset bubble and a potential Sino-American trade war that these preconditions do not necessarily lead to economic weakness for the foreseeable future.

So rather than repeat these points ad nauseam, I am asking you the readers to debate this for me.  What am I missing?

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This entry was posted in Banana republic, Curiousities, Economic fundamentals, Guest Post, Macroeconomic policy on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. purple

    The corruption and intellectual assumptions are so deep it will take a complete collapse to get rid of the dry rot. The same old guys are in charge and proceeding as if nothing happened.

  2. shrek

    There is too much debt at almost all levels of our country. Only true deleveraging will return us to sustainable growth. How can the FED not think that a debt to GDP raio of over 400 percent not be a problem. It was the primary cause of the collapse.

    Policymakers are in denial and creating huge risks

  3. Mannwich

    What are you missing? Not a thing, IMO. Well done. Not well done by the Obama administration. All is well again now that the elite on Wall Street and big corporate America are making even bigger bucks. That’s all that matters. Isn’t it obvious?

  4. Tom Stone

    You are missing strong enough drugs or a large enough personal financial incentive to lie.

  5. Ina Deaver

    The only thing that you are missing is an environment where the ability to get anything done — right or wrong — continues to deteriorate. In an atmosphere of increasing civil disagreement about what distractions are paramount. Increasing bread and circuses, increasing division of the electorate along irrelevant lines.

    Otherwise, I’d say you are dead on.

  6. Glen

    We just have to look at the people that are really setting our current economic policy to see what they think will happen:

    Jamie Diamon JPMorgan CEO: ‘We Have Crises Every Five Or Ten Years’

    So there you go, another even more massive economic implosion is a given.

    Hey, like software engineers says,if it’s not a bug, then it’s a feature! Or as Wall St says, why force the little people to take a haircut when you can have then take a blood bath?

  7. i on the ball patriot

    Good post Ed!

    I threw in the towel on policy makers long ago. What you are missing is that the electoral process that provides the policymakers is as big a scam as the policy makers it provides. Massive election boycotts as a ‘vote’ of ‘no confidence in this government’ are in order.

    Deception is the strongest political force on the planet.

  8. the bankster

    Take the blue pill Ed. Or you’ll go crazy fighting the madness. More analysis or blogging will only ensure that. You don’t want to end up like Cassandra do you? We’re living in dream world, much like Great Britain was after the Munich Agreement. Peace for our time … all over again.

    Alea iacta est. In the meantime, enjoy the nice weather here in New York.

    Enjoyed your presentation today.

  9. blunt

    “None so blind as those who do not see.”

    Thee, Ed, or should I say Cassandra. You don’t seem to be missing anything.

    Strawberries and chocolate and a nice riesling, perhaps. A bit of fiddling while the city burns.

  10. anarkst

    As long as those in power are benefiting from the present system, why change it? It’s that simply. Now you understand how every other country that seemed so incredibly corrupt over the past fifty years, stayed that way until they had to change. It’s just human social nature.

    The American professional class is so incredible weak that barely a few voices can scream louder than the exhaust note of the latest German wundercar that begs its adherents to sell-out…….completely.

  11. kevinearick

    ex: Bernie Sanders VT sends out communiques to every person that ever contacted his office, many of whom were complaining about economic discharge, in one form or another, telling them how well he stole from the rest of the country in the healthcare/education bill, to subsidize the Vermont private economy fiasco, then goes to an elementary school to tell the kids how much he stole for them.

    They just can’t help themselves; that’s the job. The black hole burns internal assets, nexus employment at the periphery, to grow in a pulse, to capture more external assets for incorporation. So long as the external assets captured exceed the internal assets burned, the black hole profits, increasing net nexus employment over time.

    The black hole is getting bigger, fast. Move away while it sheds local nexus jobs, by increasing productivity beyond the scope of the nexus, pause when it pauses, and move closer when the nexus core starts collapsing, allowing a newly elastic locality to recognize and distribute the productive outcome. Sculpt the counterweight by adjusting the gap. Feed it just enough voltage to shape it. Part of surfing is shaping the board, to meet changing wave conditions.

    One of the adaptations, for those who have not yet jumped the gap with a milti-generational family intact, is to form a multi-generational household of unrelated family members, all with variable frequency, variable amplitude minds. The next step for them is to form virtual communities beyond nexus recognition.

    When all else fails, short the nexus, remove all resistance, and let it consume itself to death, like a virus, then replace the exchange mechanism.

    1. MarcoPolo

      When all else fails, short the nexus, remove all resistance, and let it consume itself to death, like a virus, then replace YOUR exchange mechanism and align yourself with others who have done so also.

        1. kevinearick

          the next big push is to tax internet transactions; expect the mirror operators to be under scrutiny.

    2. JeffC

      Sanders also sends those emails to anyone who e-signed his petition not to re-confirm Bernanke, and – I’m shocked! Shocked! – the unsubscribe link does not work.

  12. KnotRP

    Two wolves (Banks, Deadbeat Borrowers) and a Sheep (Savers) just decided on what to have for lunch?

    Baaaahhhh all you want, it was a fair vote.

  13. KnotRP

    If it helps, visualize a fake pig nose with an elastic strap, on the Banking Wolf’s nose, which tends to help the Sheep think they have a one in two chance of not paying for all of this.

    And nobody went to jail or got a clawback this time,
    so you can be sure they’ll bring the BBQ next time.

  14. MarcoPolo

    What are you missing… given the number of links in your post which I haven’t run down, possibly nothing.  But you seem to
    prefer fiscal stimulus to monetary stimulis.  I don’t see much prospect for either.  When we stimulate our economy it creates jobs and investment in China – and the wrong kind of demand.  Our problems are deeper and more structural and I agree there is no hope that policy makers can even understand the real issues let alone work at the level of detail that might provide solutions which would require restructuring investment so that resources are allocated to productive sectors of the economy rather than consumptive sectors or blow another bubble for the rent seekers.  No hope. Nobody gets it. Not even sure about you. Everybody wants the bad old days.  Not stable. Won’t last

  15. Eric L. Prentis

    The financial elite are setting policy, Bush and his economic team, and Obama and his economic team of Summers, Geithner and Bernanke are simply implementers. No amount of superior reasoned inference or logic is effective because “we don’t even know who to talk to.” The financial elite made all the money on the way up, and are making all the money on the way down; they don’t care a fig about the US or its people, they leave that fantasy in the care of their political-media-propaganda machine.

  16. Tayor

    Try this: The bankers own Washington DC and no-one wants to take them on. Those that tried (Dorgan, Kaufman) are quitting. Guess they don’t want to take responsibility for what’s coming. Obama got a scare after the Brown election, but the game plan now appears to be to say the right things about financial reform while hiding behind Dodd’s joke bill.

    Simon Johnson was on FDL on Sunday. He expects another bubble, this time in developing countries, that will temporarily lift the world economy out of recession.

    Then another crash, obviously worse than before, no TARP bailout this time.

    I guess after that, we are all Mad Max.

  17. KnotRP

    MarcoPolo is completely correct — globalized wages are still equalizing (i.e. US wages dropping), so any fiscal stimulus tends to drain out to the lowest wage part of the global labor pool.
    It’s going to get interesting to see if developed world infrastructure can be supported on developing world wage rates.

  18. don

    Once the economic crisis is seen in its structural and global context, then it is clear that state intervention within any one country is insufficient to bring about a solution that by necessity must be structural and global. Consequently, a solution must encompass international cooperation. However, cooperation among competing capitalist economies is very unlikely, at least to the extent needed to bring about structural change.

    I suspect one could argue also that the structural problems (referred to as global imbalances or uneven development – which is built into the very nature of capitalism), cannot be resolved without radical change, which is not something policy makers are able to bring about without being forced to do so by popular will. The later is no where near evident.

    Lastly, and with all due respect, I suspect that your solution of fast and deep fiscal deficits to prop up demand and provide jobs will only delay the crisis by falling back on the current global structural imbalances.

    Better to analyze existing developments and to draw conclusions as to where we are going. Seems to me that states have succeeded in consolidating the political and economic power and wealth of ruling elites.

  19. charcad

    What am I missing?

    The federal deficit in FY 2009 was $1.42 trillion. FY 2010 has numbers like $1.6 trillion being mentioned. That’s $3 trillion in two years. China and Japan put together only have $3.4 trillion in foreign exchange reserves. So a reasonable question is how are these deficits being financed?

    In December 2008 the US 30 yr Treasury bond yield hit a low of 2.5%. Today the 30 yr bond yield is 4.84%. I make this a rise of 194% in 15 months while a $1.4 trillion was being racked up. Is this fast rise completely unconnected with the record federal deficits?

    Hopefully this rate of increase will taper off. But if it stays the same the yield in July 2011 will be around 9.4%. And during the November 2012 elections (if Dictator Petraeus chooses to hold any at that time) it will be 18.25%. On the dark side the rate of increase could accelerate.

    “(A)ggressive policy intervention” For whose benefit? China? Where does anyone imagine half the money will go if it’s pushed to consumers to spend?

  20. Gary Anderson

    Looking at the long term, we have two competing issues. I argue here that we have these two contradictory issues.

    1. The financial elite has a vested interest in seeing house prices stabilize, at overpriced levels.

    2. The financial elite has a vested interest in seeking middle class wages go down, in an effort to make the US more competitive.

    The average Joe is caught in this vice grip. He may have to change his lifestyle and live with extended family. That is the reality.

  21. chas

    I’ve said it before………..

    Until we get rid of the Fed everything else is mumbo jumbo, meaningless esoteric crap. Abolish the Fed. Period. Done. Gone. Forgotten forever.

    Replace it with a senate confirmed, independent body of total economy focused economists & business persons to set monetary policy & as the lender of last resort. And 49 more state banks like the Bank of ND.

    Until we do we’re just pissing in the wind.

    1. NotTimothyGeithner

      “Replace it with a Senate confirmed,”

      Yeah, that will really insure quality.

  22. jonboinAR

    I know this is weak and naive, but, having no economic training at all, I’ll foolishly suggest it. Okay, we have a big world-wide “structural” problem. The entire world’s population has become the industrial labor force, sort of. Meanwhile, the US is still the consumer of choice, mainly. Supply is badly swamping demand, in regards to labor/market-for-finished-products.

    So this is what we do. Tariffs. The “protectionism” boogeyman be damned. If you want to pay your people what we pay ours, and protect your environment at a level commensurate with ours, no “wage tariff” (We’ll cut the developing countries, including China SOME slack. 30% off of our wages, no tariff? Something like that.) Otherwise STIFF tariffs for factories that pay slave-labor wages.

    If you will build a consuming class along with products, at the same time, we’ll do business with you. Otherwise, forget it. If you just want to suck out our factories and then dump our hollowed out carcass like a grasshopper whose insides have been liquified by a spider’s caustic digestive juices, we’ll just hop away.

    I don’t care for the moment if the politics work. I’ll give you that they don’t, for now. How does such an idea play out as policy?

  23. ChuckD

    For the last year or so, we’ve had the recently unemployed find ways to “get by” on their unemployment checks. Originally from the state UI funds, then from the Federal emergency funds, some money kept coming in. Then maybe they abandon the mortgage, and maybe the bank was too busy to do anything about it. Giving up on the housing expense frees up a lot of cash for current consumption, for a while. It feels like recovery.
    But now the Federal UI funds have not been extended again. Expect consumer confidence to plummet, and spending along with it. Even the currently employed will be taking another look at the budget, “just in case”.

  24. sam hamster

    It is religion on this blog that consumption will not recover nor, hit new highs. I know that you have your reasons, but still, they are just beliefs.

    While no one can know the future, I for one can see your religion.

  25. Blurtman

    The USA is a lawless, amoral country. Or I should say, a country where law applies only to the powerless. It’s not just officially sanctioned Wall Street crime. The USA has committed war crimes in Iraq. No one is being prosecuted for this, either. What does this realization do to the avergae citizen?

    We should change the words to our national anthem.

    “And the unmanned drone’s red glare, the cluster bombs bursting in air,
    Gave proof through the night that our occupying force was still there.
    Oh, say! does that Mission Accomplished banner yet wave
    O’er the land of the I’d-rather-not-know and the home of the water boarders?”

  26. Phaedrus

    Where to begin … the debt accumulated by individuals, companies, local, state and federal governments, which was sold by trickery and fraud, is so massive that it cannot be repaid, EVER. The hidden debt, derivatives and off-balance sheet commitments (think Social Security, Medicate, Health Care initiative etc. at the FedGov level) are even more massive (see JPMorgan Chase’s derivatives book). That debt has ballooned assets far beyond the reasonable or supportable, and those valuations will not be sustained, because they are artificial. ALL of that debt is based upon the erroneous assumption that Mr. Middle Class has the ability to pay it, after the corporations that run this country have shipped the high paying jobs overseas – this is not mutually beneficial globalism, this is labor arbitrage and WE WILL LOSE. The banksters are equally or more complicit, having committed massive fraud upon The People and used a portion of that vast proceeds to buy ALL of Washington, D.C. This is not resolvable by anything like “ordinary” (and erroneous) economic or political policy measures. This is an epochal turning point not seen for 100’s of years … IMHO … and the whole world is burning down, and will and must burn down. Buy gold.

    1. carping demon

      For what? Unless the “whole world burns down” to the extent that humans are again(?) enthralled by shiny things, what will you do with gold? And if they do become again(?) so enthralled, what will have been gained? They’ll end up in the same place again.

  27. Phaedrus

    Is this a republic? Does democracy work? Yes, I am angry. I have seen this coming for AT LEAST 5 years and nothing and no one in a position of leadership who could have done something positive has done one thing to stop it. I am not exaggerating. It is now far too late. Our so-called leaders have only rhetoric, they are whores, and I have nothing but contempt for them, ALL of them, Republican or Democrat alike. Look to your family, friends and neighbors, for they are who are going to be important to you as the years pass and the devastation unfolds. I wish it weren’t so and dearly hope I am wrong, but I believe that America is OVER. The days of wine and Hummers are GONE. WE are too far gone.

  28. Andrew Bissell

    The stimulus hasn’t worked because — just like every other time it’s been tried — the government had absolutely no clue what to spend it on, and so resorted to the default decision-making process of handing it to pull peddlers. The idea that we just need to do more of it or get the right Harvard-educated geniuses in charge to make it stick is laughable.

    We’ve had an inventory restocking GDP burst and a fierce bear market rally out of extreme pessimistic lows (in March 09) in the stock market. Since it coincided with some of the government’s stimulus spending, a causative relationship is being asserted with the usual post hoc ergo propter hoc logic.

  29. kensey

    Markets are grinding higher, the bottom is in. Fish hooks on all the charts. Let’s see how this blog holds up as the recovery takes hold. Sitting on the sidelines for *theoretical reasons* is never justified nor wise.


    1. kevinearick

      if you have been reading this blog for some time, you would see many set up to take the market-makers – to take the stimulus, take the market profits, and take the private profits, and move them to more productive outlets.

      the market-makers are selling to each other through the Fed intermediary, April 15 is here, and the herd is being chuted into one big stock yard.

      watch PIM(P)CO’s next trick

      1. kevinearick

        the sharks are eating each other, right up the chain, and the bigger sharks just spent an enormous amount of energy to prime the dead pump again.

    2. Hugh

      Markets unfortunately are not the same as the economy. This is especially true when ZIRP money from the Fed is being used to inflate stock and commodities bubbles in them. I am sorry but what you are engaging in looks just like the thinking that occurred on the upside of the housing bubble. The markets were up then too and then they weren’t, and then there was a collapse. Some of us saw all that coming and the reason that we did is because we looked at the basic math and the fundamentals and knew it wasn’t sustainable. We are doing and saying the same things now. You see that is the thing. We have track records on the housing bubble, the meltdown, the recession, the oil price spikes, the ineffectiveness of current policies to reverse deteriorating economic fundamentals. If you are going to take us on, perhaps you should tell us how your track record is doing.

      1. kensey

        Well, Jim Stack is bullish for one. the US Dollar Index bottomed in 2008 and is now higher. I like GOLD simply because it has the healthiest long term chart (multi year) and other markets (stocks, USD, OIL) are heading into zones of resistance that appear troublesome. And yes because of ZIRP bonds offer only risk no reward. Also like Aussi dollar and Loony because commodity producing countries benefit from ZIRP and again have best long term charts.

        My thought is there are many possible outcomes, but it appears that the worst case scenario is not only assumed but concluded; perhaps because many are rightfully pissed off at the massive rip-off of tax payer money and they want that made right. However, overt pessimism might keep people from doing things such as taking advantage of the recent decline in housing and record low interest rates to buy one! Would there be a post here that at least examines that supposition?

  30. Nate

    This is a very insightful post. The policy makers do not seem to be doing the right things.

    In response to “What am I missing?” I would say that the economy will improve only when people believe it will improve. There is no quant statistic that can really measure this ethereal factor. It is possible, that given all kinds of bad news and stats, that the economy will actually improve due merely to people believing that things are getting better. It is the job of the talking heads to convince people that things are getting better regardless of the reality. If they can do that it might become a self fulfilling prophecy.

    However, raising taxes, especially on job creation is disgusting, and hanging the states out to dry while virtually all elected politicians have some agreements with unions (you vote for me and I will support all kinds of unfair practices) make it seem impossible that recovery will be strong and rapid.

    But at the end of the day, if the people believe things are getting better, then they will get better.


    1. eric anderson

      Nate, Monty Python had a sketch about buildings that were erected by hypnosis, and only stayed up as long as tenants believed in them. I suppose there are aspects of economics that mirror this absurdity. But at the end of the day, we can’t control everything with happy thoughts.

      The debts and promises the government has taken on, the debt corporations, businesses, and households have taken on cannot be paid back. Whether people know the details or not, they sense it in their gut. If they know the details, if they read blogs like this and can quote annual deficit figures, if they know the number of jobs that must be created every month simply to sustain a level unemployment number, let alone get U-3 and U-6 to drop, then they have an even greater sense that things will not get better, and the debts cannot be serviced or repaid. If they are paying attention, they see the number on food stamps and extended unemployment increasing.

      The world of faith-based economics cannot win against this sort of non-validation. Inappropriate optimism will only lead to even greater levels of insupportable debt, making the side effects of collapse or endlessly slow growth even worse.

      1. alex black

        Thanks. Every comment section should have a Monty Python sketch thrown in. I’m just now picturing the Treasury Dept. as The Ministry of Funny Walks.

  31. danny

    You are missing the fact that the political elite have the opposite interests to the rest of the nation. The elite need this crisis to perpetuate until all the democratic processes can be annuled and a global autocracy take its place.

    1. Valissa

      Once upon a time I thought ideas like this were merely conspiracy theories, or sour grapes… then at one point in my research I finally grokked just how much (most of) the elite despise the masses and feel no qualms at all about their looting or oppression. While this has been true throughout the history of the world, and in pre-MSM times was very obvious to all in a society, I think our modern ideals about equality have gotten into the way of seeing reality.

  32. Hugh

    This posts reflects a theme I have been hitting for a long time. Our elites, all of them, have failed us and it is not through incompetence but design. We live in a kleptocracy where corporate Republicans vie with corporate Democrats on who will sell out more and secure the first place at the feeding trough of corporate contributions and political corruption. What is going on is not some mistaken over-reliance on monetary policy in a deflationary environment. The reliance on monetary policy has nothing to do with its effectiveness, or rather lack of effectiveness. It is simply a more efficient vehicle for looting. Current monetary policy steers the loot directly into the hands, and purses, of the banksters bypassing the real economy altogether.

    Like Ed, I had been kicking reform and policy ideas around for a while before I finally sat down and compiled my first list of them back in December 2008. I still add to it from time to time as events warrant, but I can’t think of one that has been enacted or put in place.

    But that is hardly surprising. We live in a Catch-22. To reform the financial sector and stimulate the real economy, we need first to reform our political system and its elites. But this is not going to happen until the financial sector with its ability to buy politicians is reformed.

    And although it sounds far-fetched now to talk about such things, we are in a pre-revolutionary state. Sorry to repeat myself on this. Basically, we have a system which is unsustainable and in which reform has been locked out, by all concerned, our political, financial, economic, academic, and media elites. This is the very definition of a pre-revolutionary state. It can’t last and it can’t change. We have actually experienced many such periods in our history, despite the hype of our “stability”: Jackson and the banks, Lincoln and the Civil War, the labor movement and Teddy Roosevelt’s trust busting, FDR and the Depression, Johnson and Vietnam and civil rights, and now our current mess. We have, in fact, had such periods in our history every 30-40 years. Our system has always been much more unstable than it has been portrayed. What distinguishes our present situation from those in the past, however, is that there is no alterative on the horizon, no reform movement to siphon off the pressures that are building in our society. Democrats have shown themselves to be every bit as bad as Republicans. Both are capable only of looting. Both have failed completely at governance.

    If you take this political dimension into account, you can see why there will be no reform, why policy responses have been so ineffective, why the next crash is inevitable, and why the political explosion that follows it is likely to be so large and destructive. This is why too I have been pushing for alternatives to the two parties, to direct populist anger into creative and solution-oriented channels. It is to this end that I think all progressively-minded people should direct their energies.

    Nor do I expect you to believe me. What I invite you to do is run your own economic and financial analyses out factoring in a continued absence of financial and economic leadership by our elites, and see where that takes you.

  33. Edward Lowe

    Thanks for an impassioned update, Edward.

    I am not convinced that the policy making elite want the same outcome that you do. I think it is as simple as that. Moreover, I am not yet convinced that they do not believe that they have in fact succeeded in avoiding financial armageddon and that this recovery is real and will “take hold” as the propaganda machine reports on a daily basis.

    In any case, let’s face it, these guys are probably employing people as smart as you and Marshall Auerbach are, so they see the same downside of the status quo as you do. They simply see the cost/benefits from a different angle than you two do, I suppose. I believe that their position is one of pure self-interest or class interest rather than the public good, as you seem to be advocating.

    1. Hugh

      I think we need some other definition of smart. Wall Street employed a bunch of brilliant mathematicians who were unable to see the inherent, and blatantly obvious, weaknesses in their models, and that they would lead to a collapse. Same thing at the Fed. Remember Greenspan’s painful testimony where he praised the Fed for having the best financial analysts in the world, even though they saw neither the housing bubble or the financial meltdown coming. Smart to me implies having a basic understanding of a problem and how to solve it. Yours seems more applicable to what were once called idiots savants.

      I agree though that we need to accept that our elites have other priorities than the public good, i.e. looting government and markets for themselves and their cronies.

      1. jonboinAR

        He’s saying that they could see the end but didn’t care; they were getting theirs.

  34. Practical Realist

    What is missing —

    The view, from both Americans and, especially, abroad that we are a country of laws — equally enforced without respect to personal position, wealth and power.

    That capital and property rights are protected on a level playing field with individual rights.

    Without bold leadership, from either the Executive branch or Congress, that belief is placed under siege, and eventually diminished. That loss is not just at the national level, but with regional and localized communities — It’s the bond that once strengthened and saw us through the most difficult times — will one day no longer hold and, ultimately, the center fails.

    America ceases to become the place of individual opportunity and endless hope — we become just like the rest of the world — corrupt, hollowed, and living a memory of what we once were.

    The greatest military the world has ever known will not hold back the internal tides of suspicion, resentment and fear of the unknown. We will have ultimately defeated ourselves before the struggle has been joined.

    Richard Nixon’s greatest contribution to this country was not opening China, but was the fact that he could leave office in the middle of his term, that power changed hands peacefully without a shot fired.

    The Kennedy Assasination, The Challenger and 9/11 catastrophes unified American’s common grief and cemented a united resolve.

    Unfortunately, In the past 18 months, TBTF and specialized interests have carried the day — Nothing has changed — No one has paid the penalty because of politically and powerfully connections.

    I’m afraid, and in the not too distant future, we will learn how the French felt after Dien Bien Phu. This will be Pres. Bush and Obama’s lackluster, mis-shapen, and unfortunate legacy.

    With Greatest Admiration for your time and writings…

  35. attempter

    Therefore, we can put in a few minor tweaks to the financial system, use our propaganda machine to tout them as the largest regulatory changes since the Great Depression, and then return to business as usual.

    That’s clearly what they’re gearing up to do with this finance bill. Krugman will lead the “independent” propaganda blitz.

    It’s be health “reform” redux.

  36. Fifty Gallows

    Ben Franklin, at the signing of the Declaration of Independence:

    “We must all hang together, or assuredly we shall all hang separately.”

    Sincerest Regards,

  37. Chris

    So let me ge this straight, the criticism is, that we didn’t use ENOUGH fiscal policy [to stimulate demand directly] and that what little was employed was TOO LATE?

    What bunk, that is the tired old Keynesian rehash that has gotten us into this mess in the first place. How many examples of that failed body of thought do you need before you come to realize that IT is causing this mess, not fixing it?

    Maybe that is the way people on this blog think, then sorry, you won’t understand with the blinders on, keep reading Krugman.

    But if I misunderstood, then sorry, if you were saying, we have already done WAY too much, that’s a different story.

  38. Richard Kline

    So Ed, I’m sorry that this realization is hitting you and Mark and the other more-9r-less liberals so hard and so late. The idea that our policy makers ‘care’ and are willing and able to act in the public interest _is_ deeply ingrained, isn’t it? That society ‘works.’ Especially that in a crisis ‘we’ll all pull together.’ Tough to find out that that’s all rot, sold by the insiders to keep bright folks bought in along with the hoi poloi who don’t have much of a choice.

    For us on the radical end of the spectrum, it’s been clear that we live in a one party system which only works for the top 10% in the good times. Kind o’ shocking even so to see that ‘the system’ only works for the top _1%_ in the bad times even for us out here, but the fact that the system doesn’t work for the public interest is the oldest news there is.

    —Awright, we are so done with that: now what? Time to realize that if we want change and the equitable sharing of burdens we’ll have to _fight_ for that. Simply calling for ‘good government’ is a fool’s exercise, since government is about POWER. You want good government, build a power base and start pushing.

  39. Psycheco

    Ed, I think your analysis of the crisis, and the ones of your colleagues like Simon Johnson, Mark Thoma et al., are right, as so far proven by the dismal state of unemployment and housing etc. And a far worse financial crisis will hit rather sooner than later. But what we all don’t take into consideration enough, and what makes us gasp at the completely wrongheaded utterances by your power elite, like Larry Summers, is, that this whole drama also has a very important psychological component (I know you economists don’t like such argument, but I’m a psychoanalyst as well as having done economics, and I think this is important to keep in mind): The guys in power, Summers, Bernanke, Geithner et al. have built their whole careers on ‘free market ideology’, and although this has proven completely and catastrophically faulty, they are unable to this reality. Their narcissistic personalities are so frail that they cannot face the truth. They – as witnessed by us currently – rather let a country go down, with massive suffering by most, but not them, than admit that they were wrong. So they go on making their public speeches which let us speechless, because they are so glaringly at odds with reality in the US.

  40. Claire

    A couple of thoughts.

    1. “Meanwhile, the reduction of Fed support for the mortgage market will reveal weaknesses there. Mortgage rates may increase, decreasing housing demand.”

    Is the Fed needed now? Can’t Fannie and Freddie do this on their own now without the Fed supporting the market directly? In any case, is maintaining historically unsustainable housing demand the best way to spend limited resources?

    2. “I find this narrative very unsettling and the complacent view it represents as likely to lead to another systemic crisis in short order.”

    (My personal view–it could be off) I think that maybe you are placing too much faith in government’s powers. It too has constraints, and maybe after spending all the trillions that they did, the powers that be have finally realized that they can’t prevent a severe recession/depression/whatever, and so have given up trying.

    3. Re: a potentially bullish case–perhaps problems in Euroland and in Asia (or the local governments’ reactions to those problems) will encourage enough money to come to the US and create some economic strength. I don’t really believe this (nor can I see how the mechanics would work), but am just throwing it out as a long-shot (absurd?) possibility.

    BTW, I really like your posts, and I find your track record (at least since I started reading) to be pretty remarkable.

  41. Jib

    I think you are missing the timing. I think it is a question of scale. We have never seen anything like the scale of this crisis. A global debt driven deflationary spiral occurring at the end of a 60 year mega debt cycle.

    The scale of the crisis and the govt response is so large that that everything gets stretched out. So the bump before the double dip lasts longer and is stronger than normal.

    And if that bump lasts long enough and is strong enough then maybe it is not a double dip, it is two recessions separated by a weak recovery. But that is just nomenclature.

    It is possible that with a fiat currency and a modern electronic banking system (it is all just bits in a computer, nothing ever really changes hands, not even paper currency) that the govt can issue enormous debt for an extended period of time and not have it blow up in the end. It would take luck and some skill and the theory would have to be right. I do not advocate this and I dont think it will happen but they could spend the next 10 to 20 years keeping things about where they are, slow deleverage with the economy proped up by govt spending. Slowly reduce the deficit as the economy recovers. Monetize some of the debt through the fed and let the slowly growing economy soak up the rest.

    I know but Japan did it although they never exited and it looks like the final crisis is upon them. I dont think it will happen and I dont want it to happen but it is possible.

  42. Brick

    Well I don’t think things will quite work out as you expect. Firstly I expect the Fed will be forced to continue to dabble in buying agency debt, since blackrock has already fired a warning shot that things need to change for them to re-enter the market.Second local governments will receive aid, but it will be via the backdoor and accounting rule changes. None of this really matters in my view and to understand this I would ask you to consider what is the criteria that will be used to show that the economy is recovering.
    The measurement of success that will be used in my opinion will be GDP, inflation and Tax receipts and we will see evidence of improvement. Notice I don’t mention employment and I think this might be a bit of a blind spot for the treasury and FED who might be late realising this is a critical factor (as opposed to important). The key for me is what business plans to do over the next few years and here I am hearing the same tale from large businesses. Namely squeeze out small competitors, increase turnover, improve efficiency utilizing things like automation, reduce costs and cut payroll. If they succeed they will make more money (GDP, tax receipts), reduce costs (inflation low) and reduce payroll (employment). We are now in an environment where business does not always increase employment when it expands, hence the prospect of a jobless recovery. This is the new normal where recession promotes efficiency improvement, to the longer term detriment of employment.
    The political problem faced is one of momentum and dogma where politics is like a big old barge, being very slow to turn.Politics could target jobs, but here I am concerned that we end up with bridges to nowhere, rather than a complete restruturing of government expenditure to target building the education,businesses and economics of the future. Should we be investing in the re-education of those who have lost their jobs, should the government be sharing the risks with the banks in providing loans for new technologies,research and automation? You just get the feeling that everything is a bit of a muddle through rather than having a vision of the future with clearly identified steps on how to get there.

  43. Edward Harrison Post author

    Thanks for all the comments. Very helpful. Here are a few of my own.

    Right now, the Obama Administration is running a victory lap. They are still cautious enough to couch their verbiage in terms which recognize the ongoing struggle of many. However, it’s pretty clear from the last employment report that they are saying, “we did it.”

    As many of you already know, my throwing in the towel is more of a ‘rhetorical’ throwing in the towel, meaning I had given up on this lot long ago (think of my posts like the Fake Recovery from this time last year). But, I think it is important to document now what was said and what was done so that when events actually do turn out as I suspect they will, there will be little room for the propaganda and hackneyed “who coulda knowed” routine.

    I am pretty much of the liquidationist bent by nature (malinvestment and all that)(which for someone who commented on politics earlier means I probably couldn’t be labelled ‘liberal.’ I certainly wouldn’t like the label ‘conservative.’) As I see it, the aggregate private debt levels in the U.S., Britain, Australia are too high to be dealt with via stimulus/forbearance alone. So it’s somewhat incongruous with that to talk about massive amounts of stimulus as a ‘solution’ to what ails us. The problem with a pure ‘liquidationist’ approach is what I voiced in December of 2008:

    “This would mean liquidating General Motors, bankrupting Royal Bank of Scotland and Citigroup or allowing Iceland, Hungary and Pakistan to fend for themselves. In theory, each of these measures seem prudent. But, in practice, these measures would result in huge job loses, would induce further deleveraging and asset price declines, would deplete capital from an already fragile global baking system, and would lead to a probable depression of unimaginable severity. It is in such a bleak environment that dangerous despots and dictators like Hitler and Mussolini rose to power, taking advantage of the natural human need for ’strong’ leader in a time of chaos and uncertainty. Could we expect any different today?”

    I think we can see the answer to this question even now based on the strife within the EU, between China and the US and the already significant problems elsewhere. In a worse economic climate, these problems would be an order of magnitude greater. The fact is a military solution to problems is always going to be inviting to some leaders when the entire world economy is in Depression.

    Obviously, there are not a lot of policy options out there. But, it’s not my role to say, “All of this stimulus is a waste of time because the politicians are too corrupt and will just waste. Moreover, the political process is so broken, only a Depression can galvanize an adequate political response to the crony capitalism controlling the system. Eventually we’re headed for collapse and only then will true reform come. Let’s just hope we don’t get World War 3 in the process.”

    Is that helpful? Would that change anything? No. Is it true? It is a plausible outcome and I certainly believe much of this. It might feel good to say stuff like this. But it is a pretty bleak point of view. However, I want to focus on more positive outcomes. I want to prevent worst case scenarios. So I write from that point of view. And I know for a fact that policy makers read what I and Yves and others in the blogosphere write and react to it.

    In the back of your mind, remember that we have already reached what I consider the limit of our present monetary, economic and political system’s ability to handle crisis. What we should be looking to do is to pull us back from the precipice and hope that, in so doing, we will(miraculously) understand the present calamity to be the extreme warning which it is that we are on the wrong path.

    I hope this makes some sense.

  44. Bruce Krasting

    There is a lot of “Mo”in the economy today. So for me it is unlikely we will slip back to a recession in 2010. But the points you make are all valid. There can be very little expectation of a sustained growth path of 3% at any time in the next three or four years.

    We are not going to die, but we will be sick for a long time.

  45. Pheadrus

    “This would mean liquidating General Motors, bankrupting Royal Bank of Scotland and Citigroup or allowing Iceland, Hungary and Pakistan to fend for themselves. In theory, each of these measures seem prudent. But, in practice, these measures would result in huge job loses, would induce further deleveraging and asset price declines, would deplete capital from an already fragile global baking system, and would lead to a probable depression of unimaginable severity. It is in such a bleak environment that dangerous despots and dictators like Hitler and Mussolini rose to power, taking advantage of the natural human need for ’strong’ leader in a time of chaos and uncertainty. Could we expect any different today?”

    You are making sense. My opinion … the only “real” question is whether this occurs voluntarily or involuntarily. It is now happening slowly but involuntarily, and by political design. The “other” real question is whether this can continue without a blow-up. Well, I don’t think so. You describe where we’re going, a slow motion train wreck, with slow motion becoming swift as Black Swan events intrude. Brave New Messed Up World …

  46. Phaedrus

    I even wonder why I bother to write, it has become clear to me that the PTB/Political Class is completely unwilling to acknowledge even that there IS a problem. Well, we are going to live the result. Words really do not matter.

    Democracy does not work. A benevolent dictatorship would work better. Problem is, our new benevolent dictator would likely turn out be be Stalin On Steroids. I have no answers, but I DO see the future and it ain’t pretty …

  47. AK

    (Some criticism:)

    A hysteric article … Everything will be OK and America becomes prosperous again …

    Not right away though … Possible in 5 years or so … I hope …

  48. steelhead23

    Dr. Harrison, Others have noticed the same perspective in your lament – that fiscal policy, presumably greater government spending, is key to economic recovery. Many of us would disagree with that perspective, not because we’re cold-hearted banksters who enjoy watching people beg on the streets, but because it places the cost of recovery on us, not those who caused the crash. I might in fact, come to agree with you with one predicate – public evisceration of the criminals who forced this outcome. OK, we cannot flay Dimon and Blankfein, at least not while respecting due process and the rule of law – but we could dethrone them and leave them begging in the streets. Clearing away the analogies and metaphors, here is my predicate for further fiscal action: investigate, indict, and prosecute all forms of fraud, including any CEOs who signed fraudulent financial reports. Until there is retribution, I will stand against any more of my money going to the banksters. With folks like me on one side and the banksters graft on the other, politicos ride the horns of one helluva dilema. So far, they ain’t siding with me. And as you have seen, the truth is taking a beating.

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