We face a prolonged economic slowdown, high unemployment and financial pain. Phin Upham discusses some of the reasons.
The current popular debate among the Federati in Washington and the Literati in newsprint is over whether the world will end in fire or ice – whether the US is headed toward hyperinflation or a continued downward spiral of asset deflation.
In the current crisis “unexpected” events keep popping up and requiring immediate government intervention. This happened again and again and the crisis continues to grow larger as each intervention fails. US governments efforts clear in the recent budget delates in Washington far are largely addressing the symptoms not the causes and certainly not the underlying structural causes of the financial crisis. Indeed, the idea that this situation can be “fixed” by more of the same (lending, liquidity, leverage, risk) and we can have a recovery very soon is deeply misguided, even dangerous.Indeed, this recession will be long and painful for the US and the outcome is not at all certain.
There are lots of symptoms: People think the problem is leverage, not a symptom. People think the problem is a lack of savings, rather than a symptom. People think the problem is finance industry is broken, not a symptom. All illustrate the desperation of the true problem – recent economic stagnation, high unemployment and lack of real productivity inducing innovation in the US.
Government action has been fundamentally unsuccessful and not even clearly helpful. The fear of “inflation” has limited action and led to a rally in gold, but in fact it isn’t even clear if government action is leading to inflation. Government buying FNM and FRE and treasuries instead of China doesn’t add capital to system, government giving money to banks and letting it sit on balance sheet doesn’t add liquidity. Everywhere the government buys, instead of creating the feeling of safety lower down in the capital structure but just causes a bubble in these highest tranches and reduced rest to sludge (i.e. govt. buying AA assets should, but doesn’t, lead to investors buying BB assets, its not working like it did in Japan).
Small stopgap government action only delays day of reckoning, a lame-duck Bush did not have the political will or vision to understand the problem as it built or help to solve it once it began.Obama has been more conservative than many feared, but in as far as big government solutions have been implemented they have failed to restart growth or reduce unemployment.
Why is this crisis worse than 2000?
o The FIRE (Finance, Insurance, Real Estate) economy has build up more misaligned resources more deeply into all aspects of the economy (leverage, derivatives, stocks), has led to more asset specific skills which cannot be redirected to legitimate enterprises as easily (web programmers could find other jobs), and banks cannot be allowed to fail without systemic risk. Tech was isolated in one area of economy, largely in one geography, and had less misdirection of human capital and economic material.
o The policy response this time around isn’t as simple or as quick.Internet bubble could be “solved” (or redirected) through a general stimulus which sopped up resources being misdirected (i.e. created jobs) and the destroyed capital was largely just paper money from IPO’s.
We are mislead by the relatively benign recessions of the last few decades. This slowdown may prove to be harder to recover from and in many ways the worse than those since 1980.
Samuel Phineas Upham has a PhD in Applied Economics from the Wharton School (University of Pennsylvania). Phin is a Term Member of the Council on Foreign Relations. He can be reached at phin@phinupham.com
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