Sunday Funnies and More Economy
What is on everybody’s mind, the Economy, was the focal point of discussion this Sunday morning, but the discussion was more political than policy based. On Meet the Press we had Lindsey Graham and Chuck Schumer laying out familiar political positions. Yawn. The round table discussion was a little more interesting in that they included Liaquat Ahamed, the author of Lords of Finance, who raised the issued that back in the 1920’s the failure of a major European bank was really the beginning of the Great Depression. He raised the issue of the collapse of the Eastern Europe Economies and the fact that while we are looking inward, this is a global crisis and focusing on saving us may not save us even if we do all the right things.
On GPS we had an eclectic group led by Niall Ferguson (Assent of Money) who was arguing that our expanding of the deficit to solve the slow down in our own country will actually exacerbate the problem as it robs capital from the rest of the world. What they didn’t tell us was that if that is the case, what is the way forward. David Frum was trying to make the point that this wasn’t the Republican’s fault. I do think they made a very valid point that the real problem is global, but decisions on how to solve it, whether in China or America, is political and thus locally focused. Meanwhile John McCain is railing against the earmarks in the budget (less than 3%) as though this is our problem.
Reliable Sources took on the real issue of whether the press and CNBC were trying to use instantaneous market fluctuations as unfair evaluations of the President’s policies. The answers were sadly predictable based upon the pundit’s political persuasion. The automaton from the Washington Times (conservative Washingtown voice) thought it was just fine, while the rest of the pundits thought we may need to step back and wait and see. She (the Washington Times blogger) even tried to play down the Jon Stewart satire of CNBC’s financial predictions that went bust (See Two Pieces of Wisdom from Jon Stewart). Sad that politics blinds us to our own failures in logic, myself excluded of course.
So what have learned? Not much. Apparently most Americans are looking for a quick fix in America for a global problem that will probably get much worse before it bottoms out. What we really need is to understand just how serious the problem is, that the problem and the solution are global, and a general agreement on the way forward. The political arguments we are having are the cart before the horse when we should first listen to dueling economists and historians so we understand the problem. What we are getting now is moderate steps in one direction, amid political arguments that we are all tired of. When the Sunday shows start bringing in historians and economists, maybe then the political babble will end and we can have a rational discussion about the way forward.
For what it is worth here is my two bits: Ignore the Republicans. Doing what Herbert Hoover did in 1929 is not a way forward. They are locked in their political ideology and their ideas, or lack thereof, are a result of mental constipation. It is a global problem, but I am not sure that the U.S., even if we knew the correct solution, could bring the EU and China along. The one example we have of getting out of this is the Keynesian solution, which is deficit spending. When we did massive borrowing to run World War II, we did it all internally by borrowing from our own citizens. The conventional wisdom is that we will be borrowing from the Chinese this time and they may redirect their money to their own problem, forcing us to raise interest rates to get the required cash. Unless you haven’t noticed things are getting very bad in China and unrest is quite possible.
Having said that, we could always print money which causes inflation, which if things get bad enough, may not be such a bad idea since inflation forces people to buy things since they need to spend their money before it is devalued. At any rate I think we need to proceed with the Obama solution which has three legs; stimulus, banks, and housing, only much more aggressively. As Tom Friedman wrote in one of his columns when he described the scene in Jaws where one of the major characters (Richard Dryfus) sees the shark for the first time and tells the boat captain, “we need a bigger boat”. Well, we need a bigger stimulus package.
The next stimulus package will be about the size of the last one, but forget the tax cuts and focus on investments that will create jobs that will be about the economy of the future. That would be infrastructure, education, energy, and climate. We need to get that in place right now and the only infrastructure spending would be either repairing what has to be repaired or new green transportation systems. Continuing to build transportation systems that are petroleum centric is counterproductive.
For the banking system, ditherating is not an answer. The fear of a domino effect must be overcome (or ameliorated) and we have to identify and remove the bad debts out of the system (along with the present management structure). Investors, bondholders, and taxpayers must all share in this burden (read pain). Whether this is some form of the bad bank/good bank scenario or nationalization, it must be done quickly. One aside here: One guest on GPS raised the issue of class anger in the United States. We let the rich get richer because we believe the lie that we would all profit and they squandered everything. It will be imperative that those who profited from our downfall are seen to pay dearly in fixing the system or there will be rioting in the streets.
Finally the same medicine is going to have to happen in the mortgage industry. Decide on a reasonable interest rate for all loans, say 4%-5% and establish it. Then re-evaluate the market worth today of the property and reset the principle balances. Use a liberal value assuming some middle ground between the present principle balance and a realistic actual worth. Those that can qualify for these new loans, then fine. Those that can’t get foreclosed on. Waiting for the marketplace to do this under foreclosures just extends our problems. Note that this is almost a double-edged sword because once this is done, much of the banking problem settles at what those toxic assets are really worth and what the federal government should insure them for. This not only settles the worth of the Collateral Debt Obligations (CDOs) but the Credit Default Swaps (CDSs) and allows us to estimate the real worth of these investments.
Okay, maybe these ideas are a little naïve considering the complexity of the problems, the interconnectiveness of our economies, and the impact of global problems, but why aren’t we having this discussion instead of endless discussion about what is politically possible instead of what needs to be done and making it politically possible?
As much as I see this as a global crisis, and although we need to stay engaged and try to work with the EU and China to solve the problems, the real place where our actions can make a difference is at home. The critical issue is that this must be our focus and we need to get on with it, aggressively. Any other delay or Republican obstructionism, and we are doomed. Note there is a bright side. If we have a global depression, Iran won’t be able to afford nukes, North Korea will starve, and Al-Qaeda will be broke. This says to me it is really time to start solving our own problems instead of saving Iraq and Afghanistan from themselves by emptying out our treasury.