Riding White Water Economics Without Paddles and Rudder

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dollars x.jpgThis morning I’m sitting in the Coffee Cat in Easton, Maryland. Frederick Douglass was born nine miles from here. The great former US Senator Birch Bayh — who led on Title IX education for women and got 18 year olds the right to vote — lives in town
But my mind this morning is on American complacency about its own economic situation — and the wobbliness of the global economy. Easton is a pleasant place; people are buying coffee and their morning muffins here — and someone is discussing who should invite to a party for a local author. But what would it take for Pleasantville to become modern day Greece — where people are losing all that they have built and the social stress is undermining the solvency of the state?
The fact is that we don’t know. We pretend that US institutions are better than others around the world — and that the massive corruption we saw in the sub-prime loan sector that brought the global economy to the edge of collapse is nonetheless less severe than the books-cooking corruption of the previous Greek government. But the truth is that people in Easton largely trust Ben Bernanke and Tim Geithner and the folks at Goldman Sachs and in the banking sector to govern judiciously and make things work.
That trust no longer exists in Athens. The shock of the September 2009 financial crisis did shake trust in America but not fundamentally — anger is at the edges, among the members of MoveOn and in the Republican-hugging Tea Party movement — but the broad midsection of America is OK, complacent, trusting, and I’m not sure they should be.
I have become a big fan of Rob Johnson, a former music producer and promoter and former chief economist of the Senate Banking Committee, who now runs the George Soros-supported Institute for New Economic Thinking.
Johnson convenes the world’s leading economists now and then; they range from Joe Stiglitz on the visible hand left of the spectrum to the sensible neoclassical sensibilities of Kenneth Rogoff — and even right, though that is an inadequate term, of Rogoff. When one listens to some of Rob Johnson’s court — including Gordon Brown, George Soros, Joseph Stiglitz, Martin Wolf, Laura D’Andrea Tyson, Nouriel Roubini, and even lately Lawrence Summers (who spoke at this year’s assembly at Bretton Woods, NH), one can’t avoid suspecting that a next big thing is coming, a new crisis, one that will wipe out wealth at a scale we haven’t yet seen.
George Soros’ views on economic policy and investing are incredibly transparent, given the books he has written diagnosing the global financial crisis and then his “how he saved his fortune” decisions that he shared while in the middle of the financial meltdown — the ultimate outcome being that he was one of the few who not only preserved his capital after the crisis had begun but came out billions ahead. I value his insights — and he told me that only the most nimble investors with no biases and deep knowledge of all the new tools of modern finance will be able to surf the next economic tsunami. Even in the case of his own funds, he think he will take a large hit — but that as he told me, “there will be something left over.”
Gold and China may be the new bubbles of this era — and as some top economic thinkers told me, during the next economic crisis, there is likely to be no refuge.
That is why the Members of Congress and even those advising President Obama are playing with triggers far more serious than dynamite, or even beyond the nuclear metaphor, when they flirt with capping the debt ceiling. It’s not the silo of America’s portfolio of debt that is the only issue — and the fact as Treasury Secretary Geithner powerfully made at a recent Playbook Breakfast with Mike Allen that these debts were built by previous Republican and Democratic administrations — but it is what will be unintentionally triggered if a debt ceiling deal didn’t come through.
The sub-prime crisis was a big shock — but in the scale of global economic tectonics, it was not the San Andreas. But the sub-prime mess did trigger and expose the massive imbalances between the US and a number of leading surplus nations, particularly China — which depresses its own consumption and supports production and export led growth. That is the true global economic San Andreas fault.
So, the debt ceiling game could turn on the gravity switch for the US economy, end the global trust and reliance on the dollar, raise interest rates for cash-needing Americans and business across the board — it could change everything.
I am generally a fiscal conservative, but of the Hamiltonian sort — and believe in good credit focused at generating high value added, competitive jobs in America. America not only has a budget deficit, in part created by an ideologically driven focus on tax cuts for the wealthy coupled with large scale, unending, unpaid for wars and ongoing military commitments.
But because of past mistakes and a financial crisis hatched by the financial sector with cooperation of many in the federal government, the main street sector and small businesses are still gasping for capital. Big banks are lightly regulated with regulators complicitly allowing a “pretend and extend” game of not recognizing the collapse of value in much of the commercial real estate sector — while small banks which did not gamble on sub-prime are heavily regulated and many well performing loans to small businesses being called in to tighten the loan exposure of these institutions. Backwards — and stupid. This regulatory mess causes more “uncertainty” in the broad business sector than anything President Obama may or may not be doing on health care.
And the obsession now with cutting back spending after one of the largest financial crises in modern American history screams 1937. Read about it.
At Netroots Nation 2011 this past Friday in Minneapolis, I asked Center for Budget and Policy Priorities Senior Fellow Jared Bernstein, former economic adviser to Vice President Biden, whether he worried about 1937-like scenarios, and he said “Of course, I bring up 1937 with everyone in the White House I can.”
Things may seem calm in Easton and wildly scary in Greece. Arbitrage between what is going on here and going on there is not automatic — but the chances that affairs in Pleasantville will be shaken and rolled by something coming that we don’t see at the moment are just too high — and in this environment, high brinksmanship battles over debt ceilings and near term spending may be the trigger that really does shake global trust in American economic leadership and undermine the blind faith that Americans have generally had in their government and private sector economic leaders.
To ride the rapids ahead, we should not be throwing out the paddles and disabling the rudder.
— Steve Clemons is Washington Editor at Large of The Atlantic, editor in chief of AtlanticLIVE, and Founder & Senior Fellow of the American Strategy Program at the New America Foundation. You can follow Steve on Twitter at @SCClemons

Comments

14 comments on “Riding White Water Economics Without Paddles and Rudder

  1. Bernard says:

    these debts were built by previous Republican and Democratic
    administrations —
    this is an outright lie. the Republicans made the debts. as everyone
    says, Clinton left a deficit. Obama has helped, but Obama didn’t
    built them. Such a Republican lie.
    so why should i believe what you write when you don’t tell the
    truth. oh and i won’t vote for Obama anyway. so, i’m not pro Obama
    either.

    Reply

  2. Don Bacon says:

    I’ll go with Metzler. It’s insane to increase spending when 43 cents of every spent dollar must be borrowed.
    And we must stop calling this a recession when it’s a permanent economic downturn, long overdue. It’s wrong for Americans (or anybody) to continue consuming and polluting at former rates.

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  3. rc says:

    “… the Greek people need government expenditures that exceed what they can fund with tax collections is sheer nonsense. Fortunately most of America has not yet descending to such levels of insanity.” (Warren Metzler, Jun 20 2011, 2:58PM)
    Sorry but, scale aside, Greek and US dynamics are very similar in the fundamental issues of living beyond the natural limits.
    The Greeks borrow from the French and German banks which are desperate enough to loan out their surplus in order to avoid their own domestic inflation etc. The US prints money as the world’s reserve currency (and hence Monopoly game banker) and relies on the Saudi oil business to soak up and ‘disappear’ it. What else is all this noise about extending the borrowing cap up from $14 trillion about then if all was well and balanced in the US economy?

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  4. David says:

    Well put, and commentary that is going to help me in conversation with a very dear friend for whom much of economic commentary is “Greek,” but who wants to better understand what is going on. She operates from the kitchen-table perspective of cutting back and tightening belts. She also asked me Why can’t Obama do what Clinton did? Any thoughts from some of the other commenters? This is one of those too-few blogs where insight does crop up.

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  5. Kathleen Grasso Andersen says:

    Our Democracy has morhphed into a serial monarchy..Repugs work consistently to amass power in the Execituve branch, upsetting the balance of power between the three branches and stacking the Supreme Court to perpetuate their urge to absolute power….they also work to shift the wealth of this country upwards into the hands of very few at the top….not yet willing to use the word “King”, they are content to have a very select few take turns being King for a term or two….can serfdom be far behind? Soon they’ll be buying back the Newport mansions… Politics, like Polo is a rich man’s game…only the ultra wealthy need apply….maybe we’ll get lucky and someone will channel FDR on taxes and public works…the answer is so simple, now as it was in 1937.

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  6. JohnH says:

    More gloom and doom about the economy. If Obama wants to find someone to blame, he needn’t look far.
    The ill-conceived, illegal war on Libya drove a spike in oil prices, destroying consumer confidence. It was the final nail in the coffin of the stillborn recovery.
    As if Obama didn’t know? Bush I’s reelection was prevented by a recession caused by a gigantic spike in oil prices resulting from–you guessed it!–the war on Iraq.
    The second war on Iraq also drove a spike in oil prices, causing an anemic recovery, which Bush II managed to survive with special measures in Ohio to seal his election victory.
    Sad to say, whenever the imperatives of the military conflict with those of the economy, it’s the military that wins.

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  7. JohnH says:

    “We pretend that US institutions are better, but no high profile investment bankers, defense contractors, CIA torturers, or drug kingpins are ever brought to justice.
    The first step to restoring trust in government and faith in the economy is to reestablish the rule of law…

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  8. Warren Metzler says:

    I have a major problem with Steve’s analysis. Take the statement “The great former US Senator Birch Bayh”. That man was a total prostitute, having a wife collecting huge fees from companies that would have been significantly affected by legislation on which Bayh was voting. Are you capable of believing one isn’t influencing the other? I am not. I am clear that the wife of no senator is required to take jobs with companies that are significantly impacted by her husband’s work to pay for the groceries. Any such action has a foundation of pure immoral greed. No man is great who has a foundation of significant immoral greed.
    Then there is “George Soros … after the crisis … came out billions ahead.” How is it that intelligent people believe you can be involved in financial transactions that makes you billions while you produce not a single product, and have a clue, or any interest at all, in what is valuable work efforts. Authentic work involves you producing something that others can beneficially use, and they give you money in return. And every person who works and doesn’t work in this manner has internal discomforts that progressively increase in intensity as long as that work continues.
    Virtually nothing that Soros does work wise is authentic work. And that people see him as a fount of economic and life wisdom I find shocking. I propose that almost nothing he presents has the slightest possibility of moving Americans, or any person, toward successful and rewarding living.
    Next there is “And the obsession now with cutting back spending after one of the largest financial crises in modern American history screams 1937.” I am repeatedly amazed at how intelligent people can know about 1937 and remain Keynesian. Because to act as such is to be truly insane. What happened in 1937? FDR was convinced that after 4 years of stimulus it was time to balance the budget. And what occurred? The economy collapsed; gdp dropped like a tank, and unemployment dramatically rose. What did this prove? Not as the progressives like to claim, that the stimulus didn’t go long enough. If some action doesn’t produce a beneficial outcome after four years it is insane to claim it worked. No, it proved that the entire economic “success” of the 1932 Keynesian experiment was artificial; built on government spending, that was financed by borrowing, just from common sense an unsustainable approach. Therefore, Keynesian stimulation of an economy is a delusion that should be abandoned and never resurrected.
    And then there is the Greece / Pleasantville comparison. Which I consider unreasonable. Read about Greece, and you will find out that it is the epitome of a dysfunctional nation. Where the people want the government to provide them with all sorts of goodies, while at the same time not pay taxes (giving the excuse “we don’t trust the government”; which is prudent, because why trust a government that gives into such nonsense); and the government borrows far more money then it knows it can pay with the revenue stream they know is realistic to expect. It is an earlier example of the mindset that was at the base of our recent financial crisis.
    When the EU leaders see the solution for this is to lend the Greek government more money, it is clear sign they are fundamentally insane. The only solution for financial profligacy is to learn to live within your means; to establish expenditures that fit within what you know is reasonable to expect to receive in income. God made the world to work. And the idea that the Greek people need government expenditures that exceed what they can fund with tax collections is sheer nonsense. Fortunately most of America has not yet descending to such levels of insanity.

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  9. P.S. Mueller says:

    Thoughtful, well-considered comments across the board,
    beginning with Steve’s overview. As a resident of Wisconsin, the
    state that produced both Joe McCarthy and Russ Feingold, I have a
    ringside seat to real class warfare, and the sad end product is hate.
    Hate is the fool’s gold of politics in that it sets things in motion that
    ALWAYS spin out of control, ultimately producing ghastly
    unintended consequences. Hate is much like spiraling debt — there
    are always people who believe they can manage it to their own
    ends.
    I’ll go back to being silly now at http://www.howdyland.com.

    Reply

  10. erichwwk says:

    Nice Post.
    Steve Clemons may have more who listen than Jared Bernstein, so I am grateful that he echos Jared’s “remember 1937”.
    Gar Alperovitz take on the New-Economy Movement is here:
    http://www.thenation.com/print/article/160949/new-economy-movement

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  11. rc says:

    I’ll add, perhaps Wisconsin is ahead of the Pleasantville pack?
    The Battle Continues in Wisconsin
    Protest continues against Supreme Court ruling in favor of controversial bill as recall campaign intensifies.
    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=6936

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  12. Dan Kervick says:

    Interest rates certainly aren’t the problem. They are quite low already. What “cash-needing Americans” need is more employment and more ordinary income for the employment they already have, not more credit. There is a clear and obvious way to do that: use the taxing and regulatory powers of government to shift wealth on a permanent basis down the economic ladder: higher marginal tax rates, maximum wage and wage-ratio laws, corporate governance reforms, carrots and sticks that provide the incentives for corporate owners to plow revenue back into employee salaries, a government-administered full employment program, enhanced worker protections.
    Unfortunately, all of the mainstream liberal economists and pundits – insulated as they are from the struggles of people outside the ivory tower and the professional class, and religiously and obstinately devoted to pet macroeconomic theories and practices no matter how obvious the evidence of the inadequacies of these models – are fixated on monetary policy and interest rates.
    It’s not about the rates. It’s about opportunity. Businesses will not invest in a serious way in new production and new jobs until the American consumer comes back. But right now, it looks like much of that consumption is gone for good, and the compromised and bought political class has no serious interest in rebuilding the enduring purchasing power of Americans. There is not much money to be made out in the real economy, and we are headed toward a new equilibrium based on lower levels of economic activity among permanently poorer Americans. We have spent the past couple of decades stagnating and driving down the income of a large proportion of ordinary Americans, and shifting wealth to the apex of the economic pyramid. And now we are all paying the price. America and Europe have descended into a savage round of class warfare, with creditors, investors and owners lined up against debtors and workers, and the wealthy and the somewhat well-off organizing themselves in predatory fashion to dismantle, privatize and buy up the remains of social democracy.
    But the comfortable are only digging their own graves in the end, because their comfort has been based for many years on the affluence of a broad and deep middle class and a floor under incomes for those at the bottom. Something about the self-destructive contradictions of capitalism and “the rope to hang themselves …” comes to mind.
    Either the mercenary Obama administration is irredeemably corrupt and in bed with the looters, or Obama and his team just have their heads deeply up their asses. Either way, it’s pretty obvious now that they don’t really care about unemployment, inequality and the income crisis, and people can’t look to the present administration for deep structural changes in the predator state that Obama inherited from the decades of neoliberal rule.
    The folks in Pleasantville who encouraged Obama to pivot toward deficit reduction and debt hawkishness in the midst of 9% to 10% official unemployment, with real unemployment much higher, might be forced at last to pay the political and economic price for their callous and obtuse politics. Where were these folks when Obama was touting his ridiculous Deficit Reduction Commission and hugging Pete Peterson and the other budget hawks?

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  13. jonst says:

    This is a very dangerous business, sorta like using radiation in a cancer treatment….but as Ian Walsh has noted, ‘wake me up when the Greeks start rioting in the wealthy neighborhoods. Because then, and only then, you are gonna know for sure the shit has really hit fan.

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  14. rc says:

    Thought provoking. I especially like the contrast between Pleasantville with Greekville.
    I also think Soros is justified in his anxiety — the scenario is likely, although the timing is almost impossible to predict. It may take a ‘perfect storm’ combination of several seemingly unrelated events to trigger the massive systemic failure and loss of confidence needed. We certainly have left the ‘rational economics’ filed far behind.
    But the big players are moving quietly and carefully so as not to scare the horses (and complicate their own self preservation strategies).
    For example, here (below) is a relatively small but highly symbolic announcement which reflects the growing concern of many large net credit holders about having sufficient diversity in their currency basket.
    The uncertainty in the Euro may also be a factor in this shift.

    RUSSIANS SHOW INTEREST IN AUSTRALIAN DOLLAR
    The Central Bank of Russia is set to invest up to US$5 billion ($4.7 billion) in the Australian dollar, as more central banks lose confidence in US currency.
    The first deputy chairman of Russia’s central bank, Alexey Ulyukaev , told the St Petersburg International Economic Forum on Wednesday the bank would hold Australian dollars for up to 1 percent of its US$528 billion ($498 billion) reserves, the Australian reported.
    “They will place funds on deposit and buy securities [in Australian dollars],” he said.
    Russia will in turn lower its US debt holdings further from the US$125 billion ($118 billion) it currently holds. This was already reduced in April from US$176 billion ($166 billion).
    Russia is not alone in its interest in Australian currency, with the dollar reportedly proving attractive to other central banks. This has helped to power the Aussie’s surge beyond parity with the US dollar.
    “We are seeing a lot of interest in the Australian dollar’s rise from parity with the US dollar earlier this year,” HSBC chief economist Paul Bloxham told the Australian.
    http://finance.ninemsn.com.au/newsbusiness/aap/8263130/russians-show-interest-in-australian-dollar

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