We are at a weird moment of mass hysteria among the governing classes. A different Democratic president might have challenged the deficit fixation and explained why it reflects backward economics, and gives up on the one sure means (deficit spending) the government has to stimulate the economy and aid millions in deep distress. Barack Obama instead goes along with the conservative fearmongering, promising to be more delicate in cutting people than Republican butchers would be.
"Brave" politicians in both parties want to cut healthcare and Social Security to save the country from wrathful judgment by Standard & Poor’s. What a hoot.
In the foreclosure scandal, the crooks are still calling the shots.
What’s especially weird is the cross-dressing by the Federal Reserve. Normally the central bank acts as a conservative brake on big-spending politicians. This time the pols are playing fiscal scold while the Fed, virtually alone, has been trying to do something for the economy. Since last fall the central bank has pumped an additional $600 billion into the banking system, hoping this would stimulate lending and investment. On the whole, it didn’t work. The Fed’s balance sheet swelled to $1.3 trillion, but the new funding mostly sits idle as a huge surplus in bank reserves. Neither lenders nor borrowers have done much business with each other. The velocity of money—the rate at which the money supply turns over in transactions—is also slowing, a sure sign of sagging economic energies.
What the latest Fed infusion has mainly produced are some ominous new price bubbles in the stock market and in commodities like oil and copper. Remember how previous bubbles ended—in collapse, with sometimes violent consequences. This risk poses a new dilemma for the Fed. Its salvage efforts, known as “quantitative easing,” were widely criticized and misunderstood, so the Fed may just decide to let the program expire in June, as scheduled. Quantitative easing did not accomplish much for the real economy, but what happens when it ends? Most likely, stock markets will lose altitude, and commodity prices may fall too, assuming the dollar stops declining in value.
In a perverse way, bad news for Wall Street might turn into good news for the economy if—big if—it blows away Washington’s delusional obsession with budget deficits, and if it compels the Obama administration to drop its happy talk about recovery and refocus on economic stimulus. The president has been hostage to the Party of No, but he could gain respect and sympathy by trying to break the Republicans’ hold and do something to help people in need.
That shift sounds improbable, but veteran Wall Street forecaster A. Gary Shilling thinks events might lead politicians back to fiscal stimulus once they realize the economy is stuck in a long era of weak growth. Shilling thinks both left and right misunderstand the nature of the predicament and therefore argue over the wrong questions. Obama, for one, has governed on the assumption that the economy can promptly regain its old vigor if government does the right things. He assumed further that restoring the banks would lead inevitably to restoring the real economy. (Wrong on both.)
Shilling has a darker view. The United States has entered “the age of deleveraging,” as he titled his latest book. That means we’re in for a much longer and tougher slog, as people and businesses unwind their excesses and gradually absorb inescapable losses. Returning to long-accepted limits—or accepting that those limits have been lowered by massive losses of wealth and productive capabilities—is unavoidable, in Shilling’s view, regardless of what government does or fails to do.
“What it suggests to me is the economy is going to be sluggish, around 2 percent growth or less, through the next decade,” he explains. Politicians naturally resist that analysis, since it sounds bereft of hope. But Shilling makes an additional point that seems closer to liberal activism. The more rapid the adjustment, “the harder it is for people,” he argues. The foreclosure crisis is a scandalous example of his point; the Obama administration has never made a serious effort to intervene and reduce the wreckage, presumably because it thinks that would injure the banks or slow the pace of deleveraging. Shilling suggests that slowing this painful adjustment process is the right thing to do, not simply out of human sympathy but because it can limit the destruction. “If we accept that the economy is going to continue to deleverage until it returns to mean, then you would want that to take longer, because that would be less hard on people,” he says.
If Shilling is right, the country has a different policy choice to consider. Government intervention may or may not be sufficient to generate a robust recovery. But it can soften the blows of deleveraging without trying to evade inevitable costs. Helping people get through these hard times is good politics but also smarter economics. Without such an approach, the inequities will be grossly exaggerated, and Americans will be in for a very painful decade.
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Err, "fox", not wolves.
Wolf, yup, the wolves are guarding the henhouse.
2. posted by: aznative at 04/30/2011 @ 9:05pm Report abusive | Ignore This User
The middle class on down to the poor have been deleveraging for years, who knows in a few more years, we might have deleveraging down. __________________________________________________________________________________________
How about undeleveraging? lol What kills me about all this is that they try to make it sound like it's just so hard to keep track of what is going on is so complicated that the government can't find people qualified to keep wall street and banker crooks in check.
A bigger line of B.S. never existed. The truth of the matter is that the banks and wall street have inside guys in the government and for Chirst's sake, the fed is made up of the banks and that same fed supposedly adjusts the interest rates for the benefit of the country? ha...Anyone see a problem with this?
Sarcasm off.
The middle class on down to the poor have been deleveraging for years, who knows in a few more years, we might have deleveraging down.
Wolf@11:44am, The only deleveraging is in the middle class on down to the poor.
The $600B Q Easing was a purchase of bank held govt bonds. Any purchase requires a willing buyer and a willing seller. If it weren't a good deal for the banks they wouldn't have sold. Where did they get the money and why did they purchase the bonds. My guess is they borrowed from the fed at zero or just above and purchased bonds at 3% or so. From their standpoint there was nothing profitable and also productive to use the money for so that money, after more leveraging went into the stock market and commodity futures. When I purchased a bond ($100,000) years ago I was paid the interest up front. So the banks had already made their profit from the bonds and then sold them at or close to face value which essentially increased their profit on the bonds and so this whole scheme financed by us and now paid for by us through higher prices is wonderful for the banks. We have been taken by at least four different ways right in front of our eyes and no one is pointing it out.
I think we have plenty of evidence that the Federal Government's intervention in the economy just makes things worse. How about we try the opposite aapproach and see what happens. I would bet my life savings, which BTW has seen its purchasing power go down, that we would all be better off.
Hey, how about we elect folks who aren't in the pocket of Wall St., The Pentagon, and AARP.
Could we be entering a Japan-style stagnation, with endless stimulation failing to do anything but increase the national debt?
Oh, and I enjoyed reading in this article that President Obama has foregone the use of deficit spending. So a balanced budget in 2013 or 2014?
Deleveraging my ass. I don't see Exxon deleveraging or the banks or the wealthy deleveraging any wealth. The only deleveraging going on here is the middle and poor class while the wealthy have the lever end of the fulcrum are gaining more and more leverage. Let's call things the way they really are shall we?! This is the beginning of the end for this country. Those with the power are stripping as much wealth as they can via both parties and are making out like bandits while our Congress, White House and Supreme Court help them out.
They argue over abortions and Planned Parenthood while the wealthy steal all of the wealth via the slipping dollar all the while telling us to keep our money invested in 401k's, IRA's and all that. Ya, people that are starving are going to leave money invested so investment firms can get rich and keep the wheels of Wall Street grinding away on top of them.
All the more reason to Impeach Obama now!
Mr. Shilling's opinions are one point of view. Another equally valid view is the longer you put off the pain, the more pain you ultimately suffer in the end. Perhaps Andrew Mellon was right. Let the economy purge the excesses, and the quicker it does the better for all of us in the long run.
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