How to Deal with The Crisis
By Barry Ritholtz - May 24th, 2009, 10:54AM
Nice discussion at the The New York Review of Books on the causes of the crisis and what an appropriate response should be.
Its too long to excerpt fairly, so just start reading . . .
The Crisis and How to Deal with It
By Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, Robin Wells et al.
The New York Review of Books
Volume 56, Number 10 · June 11, 2009http://www.nybooks.com/articles/22756
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May 24th, 2009 at 11:18 am
So who was the first member of the panel to grab hold of a copy of Bailout Nation and call it the definitive source on the fiscal crisis?
May 24th, 2009 at 11:32 am
“Nouriel Roubini: …I would agree that the rate of economic contraction is slowing down. But we’re still contracting at a pretty fast rate. I see the economy contracting all the way through the end of the year, going from minus 6 to minus 2, not plus 2.”
Three observations:
First, the statement of “optimism” above is enough to get you drawn and quartered in the comments sections!
Second, the economic forecast contained in the President’s budget does not assume 2% GDP growth for 2009. It assumes a -1.2% contraction. Is Mr. Roubini trying to imply that anyone is predicting GDP growth this year? Every number I see in the forecast assumes a GDP contraction.
Third, permabear Paul Krugman says the recession will likely be over by August:
http://www.app.com/article/20090522/BUSINESS/90522033/1003/Economist+says+recession+could+end+by+August
May 24th, 2009 at 11:36 am
@Franklin411
Krugman was most likely referring to the 1st recession…
This is likely to pan out to be either a “double dip”, or “triple dip”…
Stick around with us until 2011 – 2012, it be around that time that the ice finally melts and most of the bolggers here will have shifted to the BULL camp…
May 24th, 2009 at 12:10 pm
From the article:
N.F.: “. . .But what else are we going to do? We’re going to print money. Almost limitlessly we’ll print money. That’s going to be fine, too. And when we’re done with that, we’re going to raise taxes.”
and;
N.R.: “. . . But there are only a few ways of resolving that debt problem: either you default on it as countries like Argentina did; or you use the inflation tax to wipe out the real value of the debt; or you have to raise taxes and cut government spending.”
_____________________________
In the end, as I have said for at least 2 years now, we have only two choices (a classic dilemma):
1. Default ( on all public and private debt), or;
2. Inflate.
There are no other options. I believe we will inflate before we default.
May 24th, 2009 at 12:17 pm
An excellent discussion, with the occasional exception of Niall Ferguson who seemed so enamored with his version of the 1920′s “treasury view” (see http://tinyurl.com/7fp7f3 and http://tinyurl.com/ans2un) that he seemed to lose track of what the others were actually saying.
I’ve felt for awhile now that monetary policy had found the sweet spot between a rock and a hard place: On the one hand there is a need for a steep yield curve so the banks can recapitalize but on the other you have to avoid higher mortgage and other long-term financing costs with their negative effects on business and employment so you must buy the long end (quantitative easing) all while rapidly increasing the monetary base (and increasing pressure on the dollar).
Shorter version: We’ll need both monetary and fiscal expansion, and hope that the Fed and administration get the mix basically right, but inflation seems the most likely longer term outcome even if things work well; fingers crossed but this one is really going to be a squeaker IMHO.
May 24th, 2009 at 12:27 pm
There is a third option that includes:
- Massive cut in US Federal spending, particularly on the Foreign Policy front.
– US Corporations are experienced in this process, the Federal government needs to step up
- Massive change in tax policy to encourage savings and investment and discourage consumption and borrowing
– Eliminate income taxes on interest, dividends, and capital gains
– Eliminate personal mortgage tax deductions
- Fix the financial system starting with the problems BB outlines
In the end the options are not mutually exclusive, defaulting will not occur on all, reality is likely to be a blend of all three, evolving with time, politics, and world events.
May 24th, 2009 at 1:09 pm
franklin.
1. you left off the last sentence of Roubini’s statement. Not a surprise you did that though. Here:
Now, compared to that new consensus among macro forecasters, who got it wrong in the past, my views are much more bearish
Is this what you consider “optimistic”? Sorry, but when people jump on you on this board, it’s not b/c you are saying things like that. You are, Captain Green Shoots. That’s why that happens.
Let me give you another example from Roubini, right there in the paper:
Also, the unemployment rate this year is going to be above 10 percent, and is likely to be close to 11 percent next year. Thus, next year is still going to feel like a recession, even if we’re technically out of the recession.
Now, who will spend when, even if the data doesn’t show it, there has been at least the feeling of a three year recession???
2. You’d do well to stop only reading political forecasts on the economy. When he says consensus is for growth he’s talking about Wall Street consensus not the budget proposal.
3. As for Krugman, I hope he’s right. let’s not overlook his political tone though when trying to understand why he says what he says:
Now, the great concern I have is that although we understand these things fairly well, there are thirty-eight Republican senators who say that the answer for the crisis is another round of Bush-style tax cuts that will reduce revenues by $3 trillion over the next decade.
Also:
And yes, there are some green shoots. Things are getting worse more slowly, but we have not managed to head off a crisis that could turn out to be self-reinforcing, and leave us in this trap for many, many years.
See how he says what the green shoots actually are?
Plenty of people thought the depression was over before it actually was.
May 24th, 2009 at 2:41 pm
If I was a gambling man – and I am – I would bet that in spite of lots of hang-wringing, deep thinking and mea-culpas, absolutely nothing substantial will be done to “deal with the crisis” or to prevent it from happening again some day, when everyone alive today has grown old, died and turned back into potting soil.
May 24th, 2009 at 3:44 pm
@some_guy_in_a_cube
On the contrary my friend!
I’ll hereby offer the notion that when we are all TURNED BACK INTO POTTING soil…Then an “optimal” medium for growth will firmly be in place :-)…
It starts with clover…which pulls nitrogen from the air (instead of needing it from the soil)…the ‘decomposition’ of which creates…
May 24th, 2009 at 4:17 pm
From crisis to crisis until deflation is defeated in nominal dollar terms. From residential housing crisis to banking crisis to state funding crisis to commercial real estate crisis to pension funding crisis to problems in the streets until the fundamental problem is resolved. Over the last 50 years, prices and the economic level of activity have increased on the supply and velocity of money provided by consumer debt. The deflation wave now occurring when the tide turned is overwhelming. Instead of solving the “banking crisis” the government should have been solving the individual citizen’s insolvency crisis in nominal dollar terms by dumping money on the consumer. The consumer would support the economy and the banks and states would be better off. Some of the worst areas would still be bad but other areas would be “growing” in nominal dollar terms providing support. True, inflation is certain areas would be large and living standards would decline but that also happens with deflation and unemployment.
If the government borrows the money to dump on the consumers, interest rates are impacted. In order to keep interest rates under control, the government should create the money, or borrow it from the fed as a perpetual bond with a zero percent interest rate. They could also control the yield curve. Granted, they can only do this at the potential expense of the dollar if other countries do not do the same. Interest rates can be controlled if the dollar is allowed to decline either verses other currencies or verses tangibles or labor at some point.
Advocating dumping money on the consumer does not mean advocating the policies that got the U.S. into this mess, just realizing that the continuation of society is better than the destruction of society for most of the people. The veneer of civilization is thin. Reconstituting order after chaos can be difficult, thus the desire to prevent chaos at all costs – like rewarding those who created this mess. With electronic exchange being so prevalent today versus cash exchanging hands, any systemic crash would be worse than historical crashes.
If all money in the fiat system is basically created out of debt on the other side of the ledger, there is no way that the entire system can grow the net positive value of the system in fiat dollar terms. Every dollar in the bank that you think you have just means someone else owes the bank. But over time, roads, houses and such are built which are the real additions to the positive value of the system. Relating the real addition to the positive value to the idea that there can’t be an increase in nominal value would mean there would be a natural deflationary impulse. To offset this impulse would require an increase in the fiat money supply without a debt component. Possibly, the best way to get this would be zero interest perpetual bonds exchanged only between the FED and the U.S. Treasury.
This may be presented in too simple and in a non-economic manner, just wanted to get the thought on the table for the great thinkers on this exchange. Economics and markets only happen on a stage set by sociology and psychology and there is no claim to expertise on any of them from me.
tw
May 24th, 2009 at 4:32 pm
The veneer of civilization is thin. Reconstituting order after chaos can be difficult, thus the desire to prevent chaos at all costs – like rewarding those who created this mess. With electronic exchange being so prevalent today versus cash exchanging hands, any systemic crash would be worse than historical crashes.
As the Indian guy from short circuit said -bimbo!
May 24th, 2009 at 5:37 pm
@thirdworld
I’ll applaud that thought TW…
If one wants to get all “Tolstoy” about it and focus on a singular thought it’s a VELOCITY issue…
Vt=nT/M
That’s why LIBOR rates have come down to LESS than what they were back in October/November yet under the covers, the world economy is actually in a MORE precarious state than it was then…
Velocity is based on “sentiment”…While the recent numbers may have improved slightly (in Franklin’s world)…I’m still willing to bet that that notion is FRAGILE…
I hope I’m proved wrong…
May 24th, 2009 at 6:11 pm
cvienne-
here’s some words of wisdom from Tolstoy-
“We must not only cease our present desire for the growth of the state, but we must desire its decrease, its ‘weakening.”
amen to that
May 24th, 2009 at 6:24 pm
@ahab
You know? I FORGOT about that…How perfectly stated!
The result of such an endeavor will result in the STRENGTHENING of human will & ingenuity…
May 24th, 2009 at 7:19 pm
@RW 12:17 — see the paper on fed policy by koch elsewhere on this site. the paper demonstrates to me that the fed understands this is going to be a prolonged, ad hoc and empirical slog, and that they have thought through the alternatives to each policy step as well as mere mortals are able.
i thought the article was a nice precis of what each of these authors has said elsewhere at greater length. niall ferguson gets collegially spanked and does not lose his scottish starch; soros gets the point of the delicate timing necessary at the switch from short to long term policy. most of the contributors appear mostly content with the major policy decisions so far.
and back to policy alternatives: what all the contributors (excepting krugman and soros) leave unsaid is that the empirical and theoretical economic and financial analyses and hypotheses are all contingent on political process and political will. that to me is the scary part.
May 24th, 2009 at 7:35 pm
@drollere
BEING THERE, 1979
President “Bobby”: Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President “Bobby”: In the garden.
Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President “Bobby”: Spring and summer.
Chance the Gardener: Yes.
President “Bobby”: Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
President “Bobby”: Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time.
[Benjamin Rand applauds]
President “Bobby”: I admire your good, solid sense. That’s precisely what we lack on Capitol Hill.
May 24th, 2009 at 9:32 pm
@drollere: Aye the technicians seem to be getting it close enough for government work but political discourse and decision-making have been terrible damaged over the past few decades and the chance of bad decisions or, even more to the point, the chance there will be no decisions other than for show remain high.
May 24th, 2009 at 9:46 pm
And in the real universe we have “the crisis and how to NOT deal with It” by Timothy Geithner, Lawrence Summers, Hank Paulson, Alan Greenspan, Robert Rubin et al.