Talk about a fundamentalist preacher! Paul Krugman continues to rely upon his inerrant interpretation of the dogmatic Keynesian worldview as he condemns those “sinners” that have followed another path from the one he draws strength from.
Krugman’s New York Times column on Monday chastises those that take an alternative view: “More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer.” (See “The Pain Caucus”, http://www.nytimes.com/2010/05/31/opinion/31krugman.html.)
He goes on: “What’s the greatest threat to our still-fragile economic recovery? Dangers abound, of course. But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain.”
Amen, brother! Alleluia!
Right out of the creed! When you need to protect your economic doctrine, bring out unemployment and the unemployed. This goes back in history at least to Keynes and the Paris Peace Conference in 1919 when there was a fear about the spread of the Bolshevik revolution throughout Western Europe. (See my book review from October 25, 2009 of “John Maynard Keynes and International Relations”, http://seekingalpha.com/article/167893-john-maynard-keynes-and-international-relations-economic-paths-to-war-and-peace-by-donald-markwell.)
To support his argument, Krugman claims that America would be creating a situation not unlike that of Japan in the 1990s if the United States followed the “conventional wisdom” he disdains. “We are, however, looking more and more like Japan….[Recent data] suggests that we may be heading for a Japan-style lost decade, trapped in a prolonged period of high unemployment and slow growth.” (See the article by William Galston, “the Case Against Keynes (With Some Questions for Krugman, Too)” at http://www.tnr.com/blog/william-galston/75228/the-case-against-keynes-some-questions-krugman-too.)
The problem is that Krugman (and other fundamentalist Keynesians) interprets the Japanese situation—and the current situation in the United States—and the current situation in Europe) as “a rare real-world example of Keynes’s famous ‘liquidity trap’ in which monetary policy loses its effectiveness.” (See the Galston article.) The Keynesian solution to such a dilemma is to engage in “pump-priming” government expenditures that, through a cumulative multiplier effect that substantially increasing private demand, initiates a self-sustaining process of economic recovery.
The difficulty with this is that it does not take into account the huge amounts of debt that may have been accumulated through the earlier credit inflation that caused people and businesses to increase their financial leverage and risk taking. It was this credit inflation that ultimately led to the financial collapse that put the economy into the current situation. The other side of a credit inflation is a debt deflation.
The problem? People and businesses (including commercial banks) may find themselves so in debt with loan and interest payments far in excess of their own cash flows that they stop spending because they must repay or write-off large chunks of debt. They choose to become as liquid as possible because they must continue to live and finance their daily needs as much as they can through any wealth they may have accumulated. They do not become liquid because of they are afraid or unwilling to commit to the purchase of investment goods. They become liquid to survive.
Within such an environment, the Keynesian solution of pump-priming which leads to credit inflation becomes the only real response because it leads to inflation. To Krugman, Galston argues, “The root of the Japanese crisis is deflation, and the only remedy is a credible shift to a long-term inflationary policy.”
Although not stated in the “liquidity preference” arguments for such a policy, inflation reduces the debt burden because it reduces the real value of the debt. Inflation is always a way to get out-of-debt. The problem is, inflation encourages more financial leverage and more financial risk taking. This is what we in the United States have been doing for the last fifty years. And, ultimately it does not prevent the problem of a financial correction, it just postpones it.
Getting ones financial books in order is not necessarily a bad thing. It appears that Ireland is pulling out of its crisis situation after enduring “one of the worst recessions of any developed economy since the Great Depression.” (See the Bloomberg article: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_gxU5nfACkg.)
Also, the United States in the 1990s presents an example fiscal prudence which contributed to a period of sustained economic growth. The Clinton administration pulled off a very successful policy of deficit reduction which was accompanied by the longest post-World War II period of economic expansion on record. So it can be done.
Other countries around the world are showing the fruits of fiscal discipline in the face of the economic slowdown of the past three years. Even with the turmoil in Europe, manufacturing seems to be recovering around the world, in the U. S., in the U. K., in Canada (where the Bank of Canada just raised interest rates yesterday over concerns about its robust economy), and in Australia, Brazil, China, India, and Japan.
The lingering problem connected with the buildup of debt is the “debt overhang” that remains once the peak of the credit cycle has passed. Yes, there may be liquidity problems connected with reversing out of the expanding economy into an economy that is contracting. Any reversal of direction will experience a dislocation of markets. But, the liquidity problem is a short-run phenomenon. Once the short-term problem is eradicated, the issue becomes one of getting the balance sheets of individuals, businesses (including commercial banks) back into a more conservative structure. And this can take time and can hinder the strength of the recovery.
But, unless one is inflating the country out of its debt load, this re-structuring of the balance sheets must take place for the recovery to become a healthy recovery. There will be pain during this time. But, living beyond ones means for fifty years creates a situation that is uncomfortable for some. Unfortunately, the people that are hurt are not generally the people that really profited from the credit inflation that caused the excesses.
Perhaps focusing on longer term financial discipline might be better for workers over time rather than concentrating on every little short-term wiggle in unemployment. Certainly, the countries that are paying more attention to longer-run issues (like China) are going to put a lot more economic pressure on those countries that only focus on the short run (like the United States and Europe). For more on this see “How China is Changing the World” http://seekingalpha.com/article/206830-how-china-is-changing-the-world.
Showing posts with label Krugman. Show all posts
Showing posts with label Krugman. Show all posts
Wednesday, June 2, 2010
Saturday, August 15, 2009
Bank Failures Are Up: Way Up!
On Friday, bank failures for the year reached 77. In January or March of this year people started projecting that we may make 100 by the end of the year. I think that is as sure a bet as you can get these days. Now, we are seeing forecasts of over 200 more bank failures in the next 18 months.
The headlines over the past several days have been eye-catching. On Bloomberg.com, we saw “Toxic Loans Topping 5% May Push 150 Banks to Point of No Return.” On Reuters Blogs, we saw ”Citi’s Dirty Pool of Assets,” which reported that Citigroup had identified $39.5 billion that represented deep problems on its pool of subprime mortgages, of which it has only incurred $5.3 in looses leaving another $34 billion to go. Citi also faces problems in it CDO portfolio some of which it has hedged its exposure with credit default swaps. And, Jonathan Weil, in an article titled “Next Bubble to Burst Is Banks’ Big Loan Values” on Bloomberg.com, argues that the change in mark to market accounting early this year has covered up huge losses on the books of the biggest banks that were reported in the fourth quarter of 2008 but have since disappeared.
The good news in all this is that most of the troubled assets in banks have been identified and the regulatory bodies, particularly the FDIC, are fully aware of the most troubled banks. These individual insolvency cases are being worked out on a case-by-case basis. We got headlines in the newspapers this week because of the sell-off of Colonial BancGroup Inc. which was the largest bank to fail in 2009 and one of the most costly bank failures ever. But, this bank had been identified a long time ago and it has been systematically handled. The other four that failed this week did not claim headlines. This is good because the banking sector is staying relatively quiet. (See my post of August 10 on this http://seekingalpha.com/article/154998-banking-sector-stays-quiet.) Most bank failures over the next year or so will not get major headlines. (Our most optimistic wish is that none of the bank failures coming in the next year or so will warrant headlines.)
We are in the part of the credit or debt cycle where things are relatively calm: we are way past the phase of the cycle where liquidity was the primary issue. The problem now is not that financial institutions need to and want to get rid of assets as quickly as they can. We are in the “work out” phase of the cycle. Historically, the time it takes to “work things out” depends upon the depth of the collapse in asset values. The betting now seems to be that this time around, the “work out” phase of the cycle will be a relatively long one.
If we still have to go through 125 to 150 more bank failures in the next 18 months or so, the banking system as a whole is not going to be too aggressive in putting new loans on its books. And this will not result in a strong economic rebound going forward.
In addition, the amount of debt that is still outstanding in the economic system will remain a major drag on the banking system. The uncertainty pertaining to the future repayment of loans to the banking system, in the areas of commercial real estate loans, of credit cards, and because of another wave of residential loans that will be repricing over the next 12 months or so, is still a concern. This uncertainty will further restrain banks from being too aggressive in making new loans. (See my post of August 12, “The Debt Problem Poses a Two-Sided Threat to the Fed,” at http://maseportfolio.blogspot.com/.)
And, those who have borrowed will be reluctant to spend giving the uncertainties about the state of the economy, unemployment, foreclosures, and other economic dislocations. Even Paul Krugman has recognized the role that debt plays in spending. In a recent lecture Krugman discussed why the Great Depression did not re-start after World War II when almost all economists expected it to do so. He argued in this talk that by the end of World War II the private sector of the economy, households and businesses, had worked off most of the debt that it had taken on in the 1920s, but had not been able to eliminate in the 1930s. The private sector had deleveraged by the 1950s and was now ready to spend. Krugman contends that the private sector will not begin to spend again coming out of the current recession until it has deleveraged itself from the current buildup of debt.
The financial system and the economic system are working themselves out of their recent problems. Let us hope that things stay quiet. That means, we need to avoid any more surprises. If we don’t have surprises, there is a good chance that the recovery will start and will continue. This doesn’t mean that it won’t take a long time for the banks, households, and businesses to work through their current problems. It will. And, it doesn’t mean that other problems with respect to long term interest rates and the value of the United States dollar may not worsen because of the huge and increasing load of federal debt.
This “quiet” does give us some hope that we are moving in the right direction. There will continue to be bank failures, and foreclosures, and bankruptcies, and more. But, they can be worked through if we don’t get too impatient.
The headlines over the past several days have been eye-catching. On Bloomberg.com, we saw “Toxic Loans Topping 5% May Push 150 Banks to Point of No Return.” On Reuters Blogs, we saw ”Citi’s Dirty Pool of Assets,” which reported that Citigroup had identified $39.5 billion that represented deep problems on its pool of subprime mortgages, of which it has only incurred $5.3 in looses leaving another $34 billion to go. Citi also faces problems in it CDO portfolio some of which it has hedged its exposure with credit default swaps. And, Jonathan Weil, in an article titled “Next Bubble to Burst Is Banks’ Big Loan Values” on Bloomberg.com, argues that the change in mark to market accounting early this year has covered up huge losses on the books of the biggest banks that were reported in the fourth quarter of 2008 but have since disappeared.
The good news in all this is that most of the troubled assets in banks have been identified and the regulatory bodies, particularly the FDIC, are fully aware of the most troubled banks. These individual insolvency cases are being worked out on a case-by-case basis. We got headlines in the newspapers this week because of the sell-off of Colonial BancGroup Inc. which was the largest bank to fail in 2009 and one of the most costly bank failures ever. But, this bank had been identified a long time ago and it has been systematically handled. The other four that failed this week did not claim headlines. This is good because the banking sector is staying relatively quiet. (See my post of August 10 on this http://seekingalpha.com/article/154998-banking-sector-stays-quiet.) Most bank failures over the next year or so will not get major headlines. (Our most optimistic wish is that none of the bank failures coming in the next year or so will warrant headlines.)
We are in the part of the credit or debt cycle where things are relatively calm: we are way past the phase of the cycle where liquidity was the primary issue. The problem now is not that financial institutions need to and want to get rid of assets as quickly as they can. We are in the “work out” phase of the cycle. Historically, the time it takes to “work things out” depends upon the depth of the collapse in asset values. The betting now seems to be that this time around, the “work out” phase of the cycle will be a relatively long one.
If we still have to go through 125 to 150 more bank failures in the next 18 months or so, the banking system as a whole is not going to be too aggressive in putting new loans on its books. And this will not result in a strong economic rebound going forward.
In addition, the amount of debt that is still outstanding in the economic system will remain a major drag on the banking system. The uncertainty pertaining to the future repayment of loans to the banking system, in the areas of commercial real estate loans, of credit cards, and because of another wave of residential loans that will be repricing over the next 12 months or so, is still a concern. This uncertainty will further restrain banks from being too aggressive in making new loans. (See my post of August 12, “The Debt Problem Poses a Two-Sided Threat to the Fed,” at http://maseportfolio.blogspot.com/.)
And, those who have borrowed will be reluctant to spend giving the uncertainties about the state of the economy, unemployment, foreclosures, and other economic dislocations. Even Paul Krugman has recognized the role that debt plays in spending. In a recent lecture Krugman discussed why the Great Depression did not re-start after World War II when almost all economists expected it to do so. He argued in this talk that by the end of World War II the private sector of the economy, households and businesses, had worked off most of the debt that it had taken on in the 1920s, but had not been able to eliminate in the 1930s. The private sector had deleveraged by the 1950s and was now ready to spend. Krugman contends that the private sector will not begin to spend again coming out of the current recession until it has deleveraged itself from the current buildup of debt.
The financial system and the economic system are working themselves out of their recent problems. Let us hope that things stay quiet. That means, we need to avoid any more surprises. If we don’t have surprises, there is a good chance that the recovery will start and will continue. This doesn’t mean that it won’t take a long time for the banks, households, and businesses to work through their current problems. It will. And, it doesn’t mean that other problems with respect to long term interest rates and the value of the United States dollar may not worsen because of the huge and increasing load of federal debt.
This “quiet” does give us some hope that we are moving in the right direction. There will continue to be bank failures, and foreclosures, and bankruptcies, and more. But, they can be worked through if we don’t get too impatient.
Monday, December 15, 2008
Lessons on How to Beat Deflation Trap
As the United States is gearing up for additional massive efforts in both the areas of monetary and fiscal policy we need to listen to the experience of other nations who have gone through recent periods of economic distress. We need to understand, as well as possible, just how this modern recession/deflation thing works.
There is a very interesting interview with Masaaki Shirakawa, a governor of the Bank of Japan, in the Financial Times today (http://www.ft.com/cms/s/0/18086fba-ca0c-11dd-93e5-000077b07658.html). One of the important things about this interview is the emphasis it puts on understanding what is happening in different sectors of the economy instead of just focusing on aggregate information. This has importance in understanding how recessions begin as well as for understanding the depth and length of recessions.
One of the problems with modern macroeconomics, as discussed in my review of Paul Krugman’s “The Return of Depression Economics and the Crisis of 2008” appearing on Seeking Alpha on December 9, 2008, is that macroeconomists want to focus on aggregates and not what makes up the aggregates. For example, capital is defined by one of the most popular text books on macroeconomics as “the sum of all the machines, plants, and office buildings in the economy.” And, all these component parts are perfectly and costlessly interchangeable.
The difficulty with this is, according to Governor Shirakawa, is that it does not allow for an understanding of the “imbalances” and “dislocations” that evolve during an economic expansion or during asset bubbles. Thus, when the economy is expanding the monetary authority needs to “watch carefully whether the broadly defined imbalances are accumulating or not.”
Furthermore, during these times, risk-taking and financial leverage tend to expand dramatically. It is not just aggregate demand or supply that is important in understanding the evolution of the economy but also what is happening in various sectors of the economy and how the financial structure needs to unwind.
And, experience has shown that these imbalances occur even when things like the consumer price index is behaving well. “Very often in recent decades we experienced a situation in which imbalances are accumulating, despite the fact that the inflation rate is quite subdued.” He continues that “Inflation targeting is one part of a good framework to explain monetary policy. But if inflation targeting creates the social presumption that the central bank can look at consumer price inflation alone, then it might have some unintended effect of helping the creation of a bubble.” That is, asset prices in different markets, housing, stocks, and so forth, must be observed also.
Why is it important to understand this?
We need to understand this because it points to the fact that recessions or periods of deflation cannot be handled by just appeals to pumping up aggregate demand. We need to understand that the previous upswing created imbalances, bubbles, dislocations, over-investment and these previous decisions cannot just be dissolved by assuming that all capital investment is alike and that stimulating aggregate demand is not the only thing that needs to be done.
But, Governor Shirakawa argues, this does not mean that monetary or fiscal policies are not needed in combating deflation and turning the economy around. Both are a part of a sound strategy to get the economy going in the right direction.
What is also important is a focus on the imbalances and dislocations that were created in the previous run-up. The policy makers need to understand how the various sectors are working themselves out and what, if any, bumps in the road lie ahead.
For example, the prime example of the ‘asset bubble’ just experienced is the housing industry. Until the summer of 2006, the housing market was ‘riding high’ with housing prices and housing starts seeming like they would never stop. Yet they did and housing prices have dropped steadily ever since. How far will they drop? Some analysts say that housing prices must drop to at least 50% of their peak value. Also, the picture gets even darker when one observes that there are still two major clouds hanging over the future. Both are related to the ‘financial innovations’ of the 1990s…major amounts of Alt-A mortgages and the Payment-Option ARMS are going to re-price over the next two to three years. The peak in housing foreclosures and personal bankruptcies is not expected to arrive for at least a year from now.
Another example is the financial industry. Tremendous losses have already been taken by banks and others, yet more are expected. The reason for this is that the banks still don’t fully comprehend the extent of the write-downs they are going to have to take on existing assets. Then, there is the fact that the banks have not yet seen the extent of the write downs connected with credit cards, auto loans, high-yield securities, and commercial and industrial loans. And, this doesn’t even consider the possible adjustments that will need to be made in the mortgage area mentioned in the previous paragraph. Mutual funds and hedge funds now are restricting investors who want to get their money back. And, then we are starting to see some of the fraud schemes surface that were a part of the recent credit inflation.
A further example is the auto industry (which also applies to other areas of manufacturing in the United States). I think everyone can agree that there are massive areas of imbalance and dislocation in this industry. Who is at fault? The auto executives? The labor unions? The politicians? The consumer? Everybody else? I don’t believe that any one person or group can be singled out as the cause of the problems in this industry.
But, I think that we can all agree that the problems are massive. These problems have to do with technology, innovation, out-of-date facilities, inappropriate pricing of resources, and other excesses that have been built into the structure over many years. Regardless of whether or not there is a bailout of this industry, it is going to take many years for the auto industry (and, I would argue many other areas of manufacturing in the United States) to really join the 21st century. Obviously, aggregate demand policies are not going to take care of the restructuring that is needed here.
Shirakawa summarizes: “Based on our experience, the world economy or the US economy needs the elimination of excesses. Of course the exact excesses vary from country to country…In today’s US for instance, housing is excessive; household debt is also excessive—I don’t know by how much, but anyways ‘excessive’ is there.”
“Negative feedback is now at work and I cannot give you a precise answer (to how long the global crisis is to run). What is crucial is to avoid a situation in which the adjustment leads to a serious downturn in the economy.”
In conclusion, there is no quick fix. The ‘excesses’, ‘imbalances’ and ‘dislocations’ in each sector must work themselves out. Monetary and fiscal policy may be able to soothe the pain…but they will not eliminate it. I tend to agree with Governor Shirakawa
There is a very interesting interview with Masaaki Shirakawa, a governor of the Bank of Japan, in the Financial Times today (http://www.ft.com/cms/s/0/18086fba-ca0c-11dd-93e5-000077b07658.html). One of the important things about this interview is the emphasis it puts on understanding what is happening in different sectors of the economy instead of just focusing on aggregate information. This has importance in understanding how recessions begin as well as for understanding the depth and length of recessions.
One of the problems with modern macroeconomics, as discussed in my review of Paul Krugman’s “The Return of Depression Economics and the Crisis of 2008” appearing on Seeking Alpha on December 9, 2008, is that macroeconomists want to focus on aggregates and not what makes up the aggregates. For example, capital is defined by one of the most popular text books on macroeconomics as “the sum of all the machines, plants, and office buildings in the economy.” And, all these component parts are perfectly and costlessly interchangeable.
The difficulty with this is, according to Governor Shirakawa, is that it does not allow for an understanding of the “imbalances” and “dislocations” that evolve during an economic expansion or during asset bubbles. Thus, when the economy is expanding the monetary authority needs to “watch carefully whether the broadly defined imbalances are accumulating or not.”
Furthermore, during these times, risk-taking and financial leverage tend to expand dramatically. It is not just aggregate demand or supply that is important in understanding the evolution of the economy but also what is happening in various sectors of the economy and how the financial structure needs to unwind.
And, experience has shown that these imbalances occur even when things like the consumer price index is behaving well. “Very often in recent decades we experienced a situation in which imbalances are accumulating, despite the fact that the inflation rate is quite subdued.” He continues that “Inflation targeting is one part of a good framework to explain monetary policy. But if inflation targeting creates the social presumption that the central bank can look at consumer price inflation alone, then it might have some unintended effect of helping the creation of a bubble.” That is, asset prices in different markets, housing, stocks, and so forth, must be observed also.
Why is it important to understand this?
We need to understand this because it points to the fact that recessions or periods of deflation cannot be handled by just appeals to pumping up aggregate demand. We need to understand that the previous upswing created imbalances, bubbles, dislocations, over-investment and these previous decisions cannot just be dissolved by assuming that all capital investment is alike and that stimulating aggregate demand is not the only thing that needs to be done.
But, Governor Shirakawa argues, this does not mean that monetary or fiscal policies are not needed in combating deflation and turning the economy around. Both are a part of a sound strategy to get the economy going in the right direction.
What is also important is a focus on the imbalances and dislocations that were created in the previous run-up. The policy makers need to understand how the various sectors are working themselves out and what, if any, bumps in the road lie ahead.
For example, the prime example of the ‘asset bubble’ just experienced is the housing industry. Until the summer of 2006, the housing market was ‘riding high’ with housing prices and housing starts seeming like they would never stop. Yet they did and housing prices have dropped steadily ever since. How far will they drop? Some analysts say that housing prices must drop to at least 50% of their peak value. Also, the picture gets even darker when one observes that there are still two major clouds hanging over the future. Both are related to the ‘financial innovations’ of the 1990s…major amounts of Alt-A mortgages and the Payment-Option ARMS are going to re-price over the next two to three years. The peak in housing foreclosures and personal bankruptcies is not expected to arrive for at least a year from now.
Another example is the financial industry. Tremendous losses have already been taken by banks and others, yet more are expected. The reason for this is that the banks still don’t fully comprehend the extent of the write-downs they are going to have to take on existing assets. Then, there is the fact that the banks have not yet seen the extent of the write downs connected with credit cards, auto loans, high-yield securities, and commercial and industrial loans. And, this doesn’t even consider the possible adjustments that will need to be made in the mortgage area mentioned in the previous paragraph. Mutual funds and hedge funds now are restricting investors who want to get their money back. And, then we are starting to see some of the fraud schemes surface that were a part of the recent credit inflation.
A further example is the auto industry (which also applies to other areas of manufacturing in the United States). I think everyone can agree that there are massive areas of imbalance and dislocation in this industry. Who is at fault? The auto executives? The labor unions? The politicians? The consumer? Everybody else? I don’t believe that any one person or group can be singled out as the cause of the problems in this industry.
But, I think that we can all agree that the problems are massive. These problems have to do with technology, innovation, out-of-date facilities, inappropriate pricing of resources, and other excesses that have been built into the structure over many years. Regardless of whether or not there is a bailout of this industry, it is going to take many years for the auto industry (and, I would argue many other areas of manufacturing in the United States) to really join the 21st century. Obviously, aggregate demand policies are not going to take care of the restructuring that is needed here.
Shirakawa summarizes: “Based on our experience, the world economy or the US economy needs the elimination of excesses. Of course the exact excesses vary from country to country…In today’s US for instance, housing is excessive; household debt is also excessive—I don’t know by how much, but anyways ‘excessive’ is there.”
“Negative feedback is now at work and I cannot give you a precise answer (to how long the global crisis is to run). What is crucial is to avoid a situation in which the adjustment leads to a serious downturn in the economy.”
In conclusion, there is no quick fix. The ‘excesses’, ‘imbalances’ and ‘dislocations’ in each sector must work themselves out. Monetary and fiscal policy may be able to soothe the pain…but they will not eliminate it. I tend to agree with Governor Shirakawa
Monday, August 18, 2008
The Candidates and Economic Leadership
I have just returned from two weeks of vacation in the mountains and lakes of New England. More than enough rain…but a magnificent two weeks of vacation, anyway.
Catching up is always the price one pays for taking some time off and with two weeks off, the price is quite high. But, it was hopeful to see the decline in the price of oil, the price of gold, and the strength in the dollar. I see that even Barack Obama took some time off in Hawaii, proving that he is human as well.
I have found in the past that it is always helpful in beginning to write again to discuss something that is more general in nature so as to attempt to gain a focus that might be lost if one starts out with something very specific. (I know, one commentator has stated that my perspective is one of 40,000 feet above the fray anyway.) Therefore, I would like to write about two major issues that I believe are going to provide the background for economic activity, not only in the near term, but also for the foreseeable future. These issues both have to do with Presidential leadership.
As many readers of this blog know, I am very interested in leadership…political leadership, business leadership, social leadership, cultural leadership…. Leadership is important because the leader defines the cultural of his or her administration, the world view and the operating procedure that lies behind all that the leader hopes to achieve. I have found that it is imperative that the leader of an organization reflect this culture in everything that he or she does or says or breathes. Only in this way can the leader galvanize his or her troops to accomplish what is being attempted.
The first issue that strikes me in getting back to the “real world” is that neither candidate for the presidency seems to be presenting us with their world view when it comes to the economic and financial affairs of the country. (The ‘operating policies’ of the candidates are another story…maybe for another time.) Returning to the battle I see little beyond vague generalities on the one hand and the facts and figures of ‘policy wonks’ on the other. In terms of Obama I see vague claims that he is moving toward “Rubinomics” (http://www.bloomberg.com/apps/news?pid=20601070&sid=aJ.pKsYB_DfU&refer=home) and other claims that he lacks “passion” when it comes to presenting his program (http://www.nytimes.com/2008/08/18/opinion/18krugman.html?hp). In terms of McCain, Ben Stein has been particularly brutal in claiming that McCain has no systematic thinking at all behind his statements about economic policy. According to a New York Times article this past week, McCain’s campaign leadership attempts to keep McCain off his cell-phone because many of his statements tend to reflect the last person he has talked with.
In my estimation, both candidates are currently lacking in leadership when it comes to the realm of economic policy. The United States…and the world…are facing some very serious economic problems…problems that will carry over for many years to come. And, we have little or no idea about what the economic ‘culture’ would be forthcoming from either candidate.
Robert Rubin states that Obama is focusing on “competitiveness and economic growth on the one hand, and distribution and fairness on the other.” (See the Bloomberg article cited above.) But, what does this mean?
The value of the dollar has declined for the last six years or so. Inflation seems to be picking up. Although commodity prices have declined recently, many see this as just a pause. What about the financial system and regulatory reform? Just what is the world view that Obama is presenting.
Unfortunately, I see nothing on the McCain side that can lead to any specific comments. Here I don’t know when I have seen such inconsistency in what has been presented.
This leadership void bothers me because it does not allow those of us that must operate in the economy any sense of direction. (Mason’s Rule # 5 is that markets hate uncertainty!) Even if we disagree with the world vision that a leader presents, we have something to go on by which we can make decisions. All decisions are based upon our forecast of possible future outcomes. A leadership void implies that the distribution of future outcomes is larger than it would be if there was a better idea of what policies might be implemented. A greater distribution of future outcomes portends greater volatility in business and financial markets. That is, it implies that the future will be quite risky!
So, the first thing that concerns me upon returning to civilization is that no economic leadership currently exists in Washington, D. C. and that the presidential candidates are not stepping up to the plate and providing a vision of economic leadership for when they are elected. This is bad for economic and financial markets because volatility is not conducive to either “competitiveness and economic growth” or to “distribution and fairness.” It is downright horrible for innovation and productivity.
The second issue of concern derives from the recent unpleasantness created by Russia and Georgia. It is not often that I quote Paul Krugman twice in something I write, but he has presented a viewpoint that I think must be taken very seriously. His column on August 15 (http://www.nytimes.com/2008/08/15/opinion/15krugman.html) discusses the possibility that we could be entering an age in which the world becomes more fragmented, economically as well as politically, leading to greater political and economic instability, slower economic growth, and more war. Krugman points out that into the 1910s the world seemed to be approaching a time of real global interconnectivity and peace. There was real optimism that this could be achieved. And, this collapsed into a lengthy period of revolution, war, and depression.
The question that the Russia-Georgia conflict raises along with the world wide battle against terrorism is whether or not we are now at the crest of another period when world connectivity seems possible and globalization seems ready to make us all world citizens. Could this edifice all come crashing down in another round of regionalism, protectionism, isolation, and war? Krugman presents us with this possibility.
This possibility directs me to another subplot in the upcoming election. This is the stance that organized labor is taking with respect to global trade, government regulation, and sound economic policies. We see this stance presented in the article “Obama Tilt Toward Rubinomics Stirs Warning From Organized Labor” (http://www.bloomberg.com/apps/news?pid=20601070&sid=aJ.pKsYB_DfU&refer=home). To me the worst economic scenario for labor is one in which globalization collapses, a world in which nations cut themselves off from other nations, where economic growth is dismal, and where war and terrorism are a part of daily lives. To me, organized labor is taking a stance that it believes will help the ordinary worker in the United States but is, at a minimum, very, very shortsighted.
Organized labor in the United States is in a bad way. Over the past forty years or so it has become mostly irrelevant and, as a consequence, has lost a lot of its power. It is now attempting to exert itself once again. However, the more power it regains, the less well off will be the worker it is trying to help. Certainly the American worker needs an advocate. That advocate is not currently organized labor.
Here again, leadership is needed on a national scale. The world must avoid a return to protectionism, isolationism, and turmoil. The United States President must support globalization, integration, and inter-connectivity. The United States President must promote communication, education, mutual respect, and worldwide economic growth. Here again, it is time for one candidate or the other to step up to the task and present us with a vision we can buy on to.
Catching up is always the price one pays for taking some time off and with two weeks off, the price is quite high. But, it was hopeful to see the decline in the price of oil, the price of gold, and the strength in the dollar. I see that even Barack Obama took some time off in Hawaii, proving that he is human as well.
I have found in the past that it is always helpful in beginning to write again to discuss something that is more general in nature so as to attempt to gain a focus that might be lost if one starts out with something very specific. (I know, one commentator has stated that my perspective is one of 40,000 feet above the fray anyway.) Therefore, I would like to write about two major issues that I believe are going to provide the background for economic activity, not only in the near term, but also for the foreseeable future. These issues both have to do with Presidential leadership.
As many readers of this blog know, I am very interested in leadership…political leadership, business leadership, social leadership, cultural leadership…. Leadership is important because the leader defines the cultural of his or her administration, the world view and the operating procedure that lies behind all that the leader hopes to achieve. I have found that it is imperative that the leader of an organization reflect this culture in everything that he or she does or says or breathes. Only in this way can the leader galvanize his or her troops to accomplish what is being attempted.
The first issue that strikes me in getting back to the “real world” is that neither candidate for the presidency seems to be presenting us with their world view when it comes to the economic and financial affairs of the country. (The ‘operating policies’ of the candidates are another story…maybe for another time.) Returning to the battle I see little beyond vague generalities on the one hand and the facts and figures of ‘policy wonks’ on the other. In terms of Obama I see vague claims that he is moving toward “Rubinomics” (http://www.bloomberg.com/apps/news?pid=20601070&sid=aJ.pKsYB_DfU&refer=home) and other claims that he lacks “passion” when it comes to presenting his program (http://www.nytimes.com/2008/08/18/opinion/18krugman.html?hp). In terms of McCain, Ben Stein has been particularly brutal in claiming that McCain has no systematic thinking at all behind his statements about economic policy. According to a New York Times article this past week, McCain’s campaign leadership attempts to keep McCain off his cell-phone because many of his statements tend to reflect the last person he has talked with.
In my estimation, both candidates are currently lacking in leadership when it comes to the realm of economic policy. The United States…and the world…are facing some very serious economic problems…problems that will carry over for many years to come. And, we have little or no idea about what the economic ‘culture’ would be forthcoming from either candidate.
Robert Rubin states that Obama is focusing on “competitiveness and economic growth on the one hand, and distribution and fairness on the other.” (See the Bloomberg article cited above.) But, what does this mean?
The value of the dollar has declined for the last six years or so. Inflation seems to be picking up. Although commodity prices have declined recently, many see this as just a pause. What about the financial system and regulatory reform? Just what is the world view that Obama is presenting.
Unfortunately, I see nothing on the McCain side that can lead to any specific comments. Here I don’t know when I have seen such inconsistency in what has been presented.
This leadership void bothers me because it does not allow those of us that must operate in the economy any sense of direction. (Mason’s Rule # 5 is that markets hate uncertainty!) Even if we disagree with the world vision that a leader presents, we have something to go on by which we can make decisions. All decisions are based upon our forecast of possible future outcomes. A leadership void implies that the distribution of future outcomes is larger than it would be if there was a better idea of what policies might be implemented. A greater distribution of future outcomes portends greater volatility in business and financial markets. That is, it implies that the future will be quite risky!
So, the first thing that concerns me upon returning to civilization is that no economic leadership currently exists in Washington, D. C. and that the presidential candidates are not stepping up to the plate and providing a vision of economic leadership for when they are elected. This is bad for economic and financial markets because volatility is not conducive to either “competitiveness and economic growth” or to “distribution and fairness.” It is downright horrible for innovation and productivity.
The second issue of concern derives from the recent unpleasantness created by Russia and Georgia. It is not often that I quote Paul Krugman twice in something I write, but he has presented a viewpoint that I think must be taken very seriously. His column on August 15 (http://www.nytimes.com/2008/08/15/opinion/15krugman.html) discusses the possibility that we could be entering an age in which the world becomes more fragmented, economically as well as politically, leading to greater political and economic instability, slower economic growth, and more war. Krugman points out that into the 1910s the world seemed to be approaching a time of real global interconnectivity and peace. There was real optimism that this could be achieved. And, this collapsed into a lengthy period of revolution, war, and depression.
The question that the Russia-Georgia conflict raises along with the world wide battle against terrorism is whether or not we are now at the crest of another period when world connectivity seems possible and globalization seems ready to make us all world citizens. Could this edifice all come crashing down in another round of regionalism, protectionism, isolation, and war? Krugman presents us with this possibility.
This possibility directs me to another subplot in the upcoming election. This is the stance that organized labor is taking with respect to global trade, government regulation, and sound economic policies. We see this stance presented in the article “Obama Tilt Toward Rubinomics Stirs Warning From Organized Labor” (http://www.bloomberg.com/apps/news?pid=20601070&sid=aJ.pKsYB_DfU&refer=home). To me the worst economic scenario for labor is one in which globalization collapses, a world in which nations cut themselves off from other nations, where economic growth is dismal, and where war and terrorism are a part of daily lives. To me, organized labor is taking a stance that it believes will help the ordinary worker in the United States but is, at a minimum, very, very shortsighted.
Organized labor in the United States is in a bad way. Over the past forty years or so it has become mostly irrelevant and, as a consequence, has lost a lot of its power. It is now attempting to exert itself once again. However, the more power it regains, the less well off will be the worker it is trying to help. Certainly the American worker needs an advocate. That advocate is not currently organized labor.
Here again, leadership is needed on a national scale. The world must avoid a return to protectionism, isolationism, and turmoil. The United States President must support globalization, integration, and inter-connectivity. The United States President must promote communication, education, mutual respect, and worldwide economic growth. Here again, it is time for one candidate or the other to step up to the task and present us with a vision we can buy on to.
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