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Talking Our Way Out of the Great Recession

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opednews.com Headlined to H3 11/7/09

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here is a tendency to seek ... and to find ... simple answers to complex questions and situations. We like to be able to wrap our heads around a couple or a very few pithy comments and pretend that they are the summation of truth on a subject, the nub of explanation, the enlightenment that we were desperately short of just before. The economic situation is very much like that, and the ranting you hear about how it's going has major components grounded in simplism.

One of the truly exasperating explanations and commentaries is that Obama and his crew are deer in Wall Street headlights and have caved in completely to the moguls and their kin. As I reported to friends a little while ago, most of that kind of rant are little more than snapshots taken in the middle of a movie, pictures of ravenous beasts munching on the remains of some poor unfortunate impala, proving only that the movie has scenes set on the savannah in Africa, but not one thing about the plot or the main characters.

Here's an explanation that is not simple and not very palatable, so I think it has some merit. The Bush Administration began bailing out the defaulting banks. Secretary of the Treasury Hank Paulson, no less (and quite a bit more) grounded and nurtured in the culture of Wall Street got Bear Stearns covered by JPMorgan Chase when it toppled of its own bad business acumen. Then when Lehman Bros. toppled, a much larger institution, with Merrill Lynch in the background clawing for resources and Citicorp (not to mention Wachovia and Bank of America and several others) also gasping for capital the decision was made to let Lehman go. When this happened the crash came ... just before the election.

What ensued before, during, and after the election, but before the Obama Administration was inaugurated was a rapid deflation of the economy, a virtually total freeze on credit for any purpose, a major contraction of production, sales, all led by the housing industry, which was thought to have a momentum and safety all its own ... a sort of flywheel effect ... but now damaged, out of balance, and spinning out of control, values plummeting.

Some of the credit default swaps and other forms of "derivatives" designed to spread natural credit risk around and thereby attenuate the risk were purchased and traded abroad, particularly in Europe. Soon European banks, including all the banks of Iceland, the Bank of Scotland, and major institutions all over the Continent were gasping for air. The derivatives were just the fuse to ignite panic about other forms of mischief that banks and investment corporations had become accustomed to (and rich beyond their wildest imaginations). The crash in New York spread world wide and soon countries like Russia were seeing two decades of capitalism kick them in the teeth.

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Enter Barack Hussein Obama, inheritor of the worse financial ... and monetary ... situations ever, two wars, and several hot spots threatening to boil into Third World War proportions: Iran and Israel. The question begging for answers was "what should be done first?" The simple answer is that Obama and his advisors recognized that if the situation in the U.S. were allowed to deteriorate much further, the consequences (several) abroad would insure that a world wide depression would occur, bringing with it untold political consequences abroad ... and domestically if it really got bad.

So, job #1 was to stabilize the world financial markets by taking a posture and doing at least the minimum necessary to stabilize Wall Street, the very center and heart of world finance. One should mention at this point something not quite so simple, but just as important. The U.S. dollar is and has been the "reserve currency" of the world since the Breton Woods Agreements during WWII. This means that the U.S. dollar is the denomination of all (significant) financial dealings, with value cross-referenced to the US$. The Breton Woods Agreement called on the U.S. to maintain a trustworthy currency and in exchange all the rest of the world would grant to the U.S. the benefits that accrue to being the financial hub.

Two generations of Americans, and in particular two generations of U.S. corporate and Congressional geniuses, forgot the first part of the Agreement--that the U.S. has the responsibility to maintain a stable currency. The U.S. clearly indicated to the world that this had been forgotten when we inflated our currency after the Vietnam War and in effect shipped a major part of our national debt for that adventure to foreign holders of Treasury bills. They were annoyed, of course, but saw that thirty or forty years downstream they were locked in. This provides them incentive, by the way, to get as rich as possible as fast as possible, richer and faster than U.S. players hopefully, so as to have some kind of leverage over U.S. fiscal policy.

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In the November 5th edition of the New York Review of Books there is an article by Jeff Madrick about Obama's failure to implement timely and sufficient regulations over Wall Street. And, true enough, there are articles all over the place about how Goldman Sachs and others are back to their old business of creating derivatives, making obscene profits, and paying themselves even more obscene salaries and bonuses.

I am sure that Obama does not like this, and he has gone to Wall Street himself and said so. Still, there should be more than just me thinking that Wall Street is playing into the hand of Obama's more vital game abroad. It is essential to the U.S. that we remain for the foreseeable future (ten to twenty years at least) the owner of the planetary reserve currency and all that brings to our vastly over mortgaged domestic economy. The natural excesses of the arbitrageurs of Wall Street are a clear sign to the world that Wall Street is back on its feet ... and also that Wall Street is not the puppet of Washington (to anyone familiar with Plato's Allegory of the Cave).

And, if the explanation of Bernanke's, and Summers's, and Geithner's activities and supposedly weak response to regulation is not convincing, you need only look everywhere else to get a context for "recovery." California is sliding into the Pacific financially, unable to control by line-item-veto or any other means a ruined economy and governance process. 2009's deficit of $7 billion promises to be $15-21 billion in 2010. Next door, Arizona with a trifling economy is $3 billion down the tube with no relief in sight.

Michigan has double digit unemployment matched by several other heavily industrialized states. Unemployment is driving retail sales into the ditch and early signs of the Xmas buying period promise to be not only dismal, but as contagious as swine flu, also having its effect on the nation's economy.

Meanwhile banks in Florida (and elsewhere) are closing (or on Friday evenings being closed by FDIC). The total number of small and medium sized banks topped one hundred a month or two ago, and the rate is accelerating with several hundred banks expected to fail next year.

Foreclosures are up, despite valiant if inadequate efforts to get banks to renegotiate mortgages. It seems that bank officials just do not know where to begin trimming their profit-motivated sails, so they hope they can sail over the reefs and shoals, ... but of course they cannot.

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Then there is the stock market, which took a 2.5% tumble on last Friday from the opening bell. This was not a sell off set off by some bad news somewhere. It was a sell off over due from bad news everywhere, including Pakistan and Afghanistan and Iraq and Somalia and Iran and Main Street. Yet Thursday this week it surged ahead again on erroneously reported unemployment news which was 190,000 not 165,000 as first reported. Which is to say, btw, a medium sized city just went down the tubes.

The 2009 TARP funded at mid-low level by the Congress, a mere $772 billion bail out, seems to have averted a steady plummet into the darkness of a national and worldwide depression, although there are those who are not yet satisfied that this is the case. At least Paul Krugman, an earnest critic of the TARP's low funding and the Administration's weak-kneed application, thinks it probably has been avoided for now although in a more recent article he says that Obama's soft, timid landing on the hostile shore will bite him bad and soon.

The great party game of the day is predicting whether the recovery will be V-shaped, that is down quickly and up quickly ... and highly unlikely ... or L-shaped, that is down quickly and staggering out and up over a long indeterminate period, or W-shaped, with a double dip into the wilds near depression, or some other branding iron shape with multiple recoveries each less satisfying than the last.

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James R. Brett, Ph.D. taught Russian History before (and during) a long stint as an academic administrator in faculty research administration. His academic interests are the modern period of Russian History since Peter the Great, Chinese (more...)
 

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