On Doing Nothing When There’s Nothing You Can Do
On the economy the White House Considers Doing Little Or Nothing. The reality is there is nothing they can do. A second look at this from John’s post is worthwhile. And watch the whole thing, you owe it to yourself.
Doctor Doom is Doctor Doom but he has also been right. The reality is there is very little anyone can do because this is not a US problem it is a worldwide financial problem and so there is little Obama or anyone else in the United States can do. If you think Roubini is a pessimist here is Kurt Cobb.
Back in May in response to a question during an interview I suggested that when the sovereign debt of a major nation is finally questioned, it will signal the endgame for the worldwide bull market in just about everything. That moment has arrived, and my thesis will now be tested.
And, I’m not talking about the United States. I’m talking about France. The downgrade of U.S. government debt by one ratings agency was more political theater than careful, cold calculation. U.S. Treasury bonds rallied on the news. But in France it is a different matter. French banks are known to be heavily exposed to the sovereign debt of what are now infamously called the PIIGS, that is, Portugal, Ireland, Italy, Greece and Spain. What changed this week was that market participants began to think that this matters. They think the problem is so big that it could impair the credit of the French government which will ultimately be saddled with cleaning up the mess. And, who wants to stick around for that?
Nicole Foss, part of the duo who write for the popular financial site The Automatic Earth, once explained to me that liquidity and confidence are the same thing. Liquidity means I’m willing to part with my cash to lend it to you or to buy something from you. When my confidence in you is shattered, I won’t lend to you. When my confidence in my own future prospects is shattered, I won’t buy from you because I think I may need the cash later. That, it seems, is where much of the world finds itself today.
But the problem for French banks isn’t necessarily that they are in worse shape than many other banks in the world. It’s that people believe this to be so. And, as that belief spreads, it will become a self-fulfilling prophesy. At first, one, then two, then 10, then 20 banks and so on will refuse to lend to French banks. And, with each withdrawal of a source of funds French banks will become less creditworthy.
But if this loss of confidence isn’t stopped soon, it will spread to non-French banks that have large financial ties to French banks. A cascade of financial ruin will be unleashed. We have built of world of huge financial institutions with heavily incestuous relations. They are like rafts all strapped together which doesn’t help much if all the rafts are sinking.
As Roubini said above the problem is an over leveraged economic system and we are not just talking about governments but individuals and corporations as well. The only way out is to excuse some of the debt. You may find this immoral and perhaps it is. Yes the wealthy will be hurt but they will be hurt even more by a complete collapse of the financial system.
In 2008 I said I couldn’t understand why anyone would want to take on mission impossible -president of the United States. The world economy was too broken to be fixed by any one nation.
19 Responses to “On Doing Nothing When There’s Nothing You Can Do”
Yes, it is immoral. Yes, too, sometimes “restructuring” is necessary.
What not only is immoral but bad policy because it would be deliberate and worst of all if the feds did it is what Robert Reich has suggested, a special kind of bankruptcy for people “underwater” on their mortgages, that would either void the debt completely or (as has been advocated by others) let judges force changes in mortgage terms. Yep — that’s what he said (I saw and heard this myself on, naturally, MSNBC) and you can view it here.
(“declare bankruptcy on their primary residences”)
http://www.wrko.com/blog/todd/robert-reichs-plan-cripple-banks
(Oblique but still related: as I’ve written before, I’m surprised that, as a part of early incremental health care “reform,” federal law had not already been changed to create a new class of bankruptcy, the “medical bankruptcy,” permitting very liberal voiding of debt associated with “excessive” medical expenses or charges.)
I like Robert Reich for his honesty, but his extremism is not only alien to the mainstream, but alarming at times. Interesting, true.
(At least he hasn’t pushed hard for the scary totalitarian idea of having the federal government put up foreclosed homes for rent and become a landlord!)
http://robertreich.org/post/7539909777
Like DLS, I’m not saying that there’s nothing that can be done. We’ve been saying that the traditional stuff isn’t going to work. Those ideas were overused to the point where they built up an unworkable mess. It’s like over-watering a plant — more water isn’t going to help, which is why it hasn’t been working.
Somehow, all of this passed clean over DLS’s head.
It’s not necessarily sovereign Debt, or private debt., but rather public and private confidence. Everybody from top to bottom is afraid of getting hurt, including this fellow Roubini. No captain of industry wants to jump in first without bank lending support, nor any bank without sovereign lending support, ie, government bonds that will not be defaulted on. (Thank you Republicans for almost destroying America)
For Jesse’s sake the man just told you all that ten year treasuries are paying is 2%…that’s only 2 cents on the dollar each year! It would take you 36 years to double your investment at that paltry rate, likewise, 36 years to double the debt!
Much better to have minor austerity cuts like defense, and, raise taxes on the wealthy, add a little inflation by paying out 3% on bonds then work our way to slower spending, with budget cuts, as growth picks up! Also the Australian government is paying well on bonds are yielding 4.5%, so maybe a few of our captains of industry could make a few loans and expand that way.
http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/
The problem is that business is afraid to take any risk by borrowing to expand, as they would normally do, which creates growth. They are afraid because sovereign debt has suddenly been put into “questioned” by the Republican party trying to default on that debt. In other words, refuse to buy back bonds.
It has far, far, less to do with domestic Mortgages and much more to do with fear and lack of confidence among those in business and government power.
One thing is absolutely clear. The average individual must not be placed inside the austerity/recovery equation by more than just a very small amount. Their retail turn over is vital, but not near enough to save us if we can’t get industry off their butts.
tsk, tsk…Allen, tsk, tsk…
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I’m surprised nobody has been doing much complaining (often hypocritically) about the zero interest rate policy that’s being extended until after the 2012 elections. Liberals love cheap money, but they often join the elderly who rely often on CDs in decrying low interest paid on savings accounts and CDs by banks when there is a low-interest-rate policy by the Fed.
Prof: There’s also the over-fertilization metaphor, although in the 2009-2010 case the “stimulus” fertilizer wasn’t that, but was more like poison or something else toxic, frequently.
Our problem now is that we’re out of water (or fertilizer).
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For those who don’t view and listen to the interview, Roubini has some interesting things to say. He states that we’re experiencing the Keynesian “macro problem” where sound individual choices about spending and prudence are harmful collectively, i.e., to the economy as a whole (the paradox of thrift). He used provocative language in saying this, that “Marx was right,” that “capitalism could destroy itself.” This has naturally been leapt upon by the Left, including the extreme Left, which is happy to report it.
The following Canadian extreme Left (truly extreme — radical) site seized on Roubini’s remark about Marx and capitalism:
http://www.globalresearch.ca/index.php?context=va&aid=26020
Here is a mainstream site that provides several remarks of his:
http://www.ibtimes.com/articles/197468/20110813/roubini-nouriel-roubini-dr-doom-financial-crisis-debt-crisis-europe.htm
We don’t have the money for another big stimulus (maybe even if we ended our three wars right now and downsized the military promptly), and inflation’s no good, and we don’t have good growth, and we know we have debt problems galore; perhaps a debt “restructuring” would be in order, though I have no more faith in our current “leaders” doing this than a stimulus.
Of course!!!!
We have a really lovely, stable situation, but the evil Republicans are once again fooling people into thinking that there’s something wrong! Bad Republicans! No PAC money for you.
Confidence has roots in reality. It’s not a perfect match (I would rate European debt lower than US debt in the short term, while S&P did the opposite), but it’s not just a sales job. And you can bet your bottom dollar that when Europe goes down, the US will be close behind, or vice versa.
@DLS
Yes, Marx was right … and so was Jefferson. Lots of people with different ideologies understand the dangers of letting business make the laws. The difference was in their solutions. Marx proposed putting the government in charge before the capitalists took over. Jefferson proposed keeping the government so limited that it wouldn’t make any difference, and let the competition of the states discourage excessive abuse.
Both failed. Marx simply short-circuited the path to a corrupt oligarchy. People will push for a more intrusive government, or at least allow it, when crises come along.
What we need is a way to rid of problems after they form.
Prof. Elwood wrote:
However, that’s what Obama appears to believe not only about his P.T. Barnum sucker campaign speeches and appearances, but also arguably about the Presidency, that he merely look good and say the right things. (As I’ve called it, be a good figurehead.)
Yes, Jefferson also “failed,” but not because of his doing; it was no failure on his part, actually, but of others’, who grew a much larger and more powerful federal government, making the states effectively just provinces or even mere large districts with next to nothing left of relative importance any longer.
(It’s true that leaving the private sector fully alone to police itself is anarchy, and there’s a risk, highly exaggerated by modern liberals, that coming too close to anarchy — regulating and policing less than truly necessary or essential — effectively welcomes or encourages business and others’ wrongdoings.)
@DLS: “Yes, Jefferson also “failed,” but not because of his doing;”
Well, Marx never ran a government either. In fact, Jefferson failed MORE than Marx, because he was president, and violated his own rules.
They were both trying to envision a system that would resist the unceasing force of corporatism. I don’t even know if that’s possible, according to history, but it did last longer than other modern governments. I don’t see how to stop unneeded intervention without stopping needed intervention.
That’s why I’m proposing that the next best course might be to force lawmakers into stating the purpose for a law, and automatically sticking the law on the chopping block if it fails. During a crisis, people just don’t care what the rules are.
I wouldn’t quite say that ‘there’s nothing you can do’ but for quite a while it’s been apparent to me that the conventional ‘things you can do’ are no longer available to us as options. It’s not only the balance sheets of households and corporations that have been overleveraged, but also govt policy (fiscal and monetary policy.)
The only ‘things that can be done’ would need to either be the usual remedies done in an incredibly amplified way (the huge or repetitive stimuli advocated by Krugman and here by Roubini, for instance) or some new, out of the box type of intervention to help everyone deleverage.
In the first case- unprecedented levels of stimulus in an already overleveraged system- no one really knows what the unintended consequences would be (intuitively we’d have to end up debasing our currency since we no longer have growth in the foreseeable future to borrow against.)
The second case, trying things in uncharted territory, we’d likely be dealing with crisis based policies that would give the federal govt new powers (ostensibly on a temporary basis of course) and again we’d have no way of knowing if the policies would work or what the potential downsides would be. Here I’m talking about ideas like an infrastructure bank or Uncle Sam as landlord of foreclosed properties.
And in either case, the potential solutions are so consequential that the public would be taking a huge leap of faith to support them. That would require politicians who have earned the public trust with a track record of wielding tremendous power for the public good without partisan or self interest, and I’d be hard pressed to name a single elected official who fits that criteria.
@Allen
Other than your stated belief system, you remind me a lot of previous commenter here.
DLS-
Zero interest what? It sure as hell ain’t bond issues!
…and it was quite predictable that you would focus on something as stupidly benign as “Marx was right”. Because Marx was right about some things and Adam Smith was wrong about some things. Unfortunately your head is locked up in that stupid ancient propaganda that American Liberals are closeted commies.
Your knowledge of economics has been totally discredited. Keynesian economics is world wide, not American, world wide. Associating the international economic model with Joe six-pack’s paying his light bill is just about as stupid as stupid gets….when it comes to economics.
Prof. Elwood wrote:
Don’t forget the sunset provision, so laws don’t last forever on autopilot.
And I’d add that there can no longer be amendments or riders to bills in Congress; the practice is so bad I’d like to be entertained, legally hopeless as it is, for Presidents to assert veto power over such riders and amendments, stating that if they weren’t germane to the bill’s (body’s) subjects or objects, they constitute effective separate, additional bills and can thus be vetoed separately. (A much better solution is the line-item veto, of course, or if not, at least a limited veto pertaining to amendments and other changes to original bills.)
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Allen, fortunately for you, you’re a source for laughs often rather than irritation or worse, because you’ve been so incompetent so often. But keep trying — you always can have Hope for Change.
Not at all like conservatives’ hysterical fearmongering of Big Government=Tyranny!, right DLS? =P
@DLS
The Indiana constitution states that every bill shall cover only one subject. Unfortunately, it doesn’t provide an explicit enforcement for it. A lawsuit can only be raised if a party has been harmed enough. To my knowledge, it’s never been successfully enforced.
Germaneness laws like that are nearly impossible to enforce because one can always simply raise the level of generality used to describe what the “one subject” is.
Admittedly, “germaneness” is endlessly subject to argumentation, particularly by lawyers, whose job is to argue the law as well as make it — for who mostly are legislators as well as, for example, judges?
Allen, I gave you time to research and reply (and repent — ha), so as you haven’t:
“Zero interest rate policy” means that the Fed keeps interest rates at or near zero per cent (interest rates cannot go negative — it takes more creativity than usual to achieve the equivalent). It’s one half of his cheap and easy money policy to try to keep the economy going, at the risk of inflation (the same is true for his massive issuance of new money, the “quantitative easing”).
(Note that zero interest rate policy should continue beyond the 2012 elections.)
http://online.wsj.com/article/SB10001424053111904480904576498732989695972.html
It’s not so much that “Helicopter Ben*” Bernanke is an inflationist, but commonly known that he has studied the Great Depression in great detail and at great length, and the last thing he wants is to have the equivalent happen again while he is able to combat it; in the here and how, he’s trying to assist the recovery from the slump of 2008-2009 and fears its return if he doesn’t fight this, and people such as Roubini (below) anticipate more such “easing.”
http://business.financialpost.com/2011/08/12/roubini-says-more-than-50-chance-of-global-recession/
His many critics have valid criticisms about such loose big money, primarily right now with the quantitative easing (an inflation risk).
Interest rates (lowered to boost economic activity) can’t go below zero, and too much inflation is unacceptable, particularly after fighting it for ages until the 1980s; nobody sane wants a return to such inflation. The Experts are running out of weapons to use.
http://www.washingtonpost.com/business/economy/geithner-bernanke-have-little-in-arsenal-to-fight-new-crisis/2011/08/12/gIQAFuFvFJ_story.html
* “Helicopter Ben”: Inflation can be and has been described artfully as flying above the nation in a helicopter and dropping vast amounts of money from the helicopter (enlarging the money supply). Helicopter Ben has favored “quantitative easing” to fight deflation and the return of the slump.