It all starts at the top!
How desperate are things? Well, the “Decider” stepped out yesterday to calm the American people’s fears about the financial system and the economy. Here is a person who has no credibility…a person that has been put in front of the American people time-after-time to build up their confidence and encourage them to stay-the-course…a person who is worn out and has no energy…and we hear from him that things are “OK”. Thank goodness he didn’t call us a bunch of whiners!
It is apparent, however, that his leadership permeates his whole executive team. The result was dramatically seen elsewhere in Washington, D. C. yesterday. U. S. Treasury Secretary Henry Paulson carries little or no weight in the current exercises. (See, for example, http://www.bloomberg.com/apps/news?pid=20601068&sid=aWssvqlta37Q&refer=home#.) The testimony of Federal Reserve Chairman Ben Bernanke was weak and muddled. Who can we turn to?
In my experience the Chief Executive sets the tone for the organization…the culture, if you will. Everything the Chief Executive does, or says, or seems, is reflected in his or her team and the performance of the institution he or she leads. The “Buck Stops” with the Chief Executive, whether or not the Chief Executive accepts this fact or not.
How are things going in the world? Mister leader…you are the captain of the ship…responsibility falls to you!
Secretary Paulson and Chairman Bernanke are honorable men. They are also capable men. But, so is Colin Powell. The performance of the team is always, for better or worse, overshadowed by the boss. If the Chief Executive is a capable leader…if the Chief Executive has good people around and facilitates the use of their talents…if the Chief Executive doesn’t fall victim to the flattery and ego-inflation of some of his team…that Chief Executive can produce extraordinary results. However, if the Chief Executive does not possess these talents…even good, capable people perform way below what is possible.
In my estimation we are beyond specifics when attempting to judge where the economy is and the soundness of the financial system. We have a leadership void and as a consequence we face a situation in which things can only deteriorate further until some form of real leadership is re-established within the United States government. The scary thing is that we seem to be facing a minimum of six months before the possibility of a change can become a reality. Not only do we have the “Gang that couldn’t shoot straight” in office, but the “Gang” is also a “lame duck”!
What needs to be done, in my estimation, is greater than just specific responses to market conditions. We need leadership in the following areas.
· International cooperation and coordination in economic advancement. The United States is still the one super power in the world but it needs to be a part of the development taking place in other nations and areas. The United States may be disliked and resented by others but the United States is still needed by these nations and areas and can still be a facilitator in the development and advancement of the rest of the world. (You might also look at the T. Friedman editorial this morning http://www.nytimes.com/2008/07/16/opinion/16friedman.html?hp.) And, the United States cannot close itself off from other parts of the world as “Reverse Globalization” takes place. Conversation and communication needs to be expanded from just the G-8 to the G-20.
· The United States must get it monetary and fiscal policy “in sync” with the rest of the world. The government must cease to believe that it can continue to operate its economic policy independently of the world. The budget of the United States government must be brought under control and managed with a firm discipline. Monetary policy must be directed to focus on the value of the dollar and possibilities of future inflation. The Federal Reserve must not be burdened with more and more responsibilities that can present it with conflicting goals and objectives. We have seen what difficulties can arise by just having two objectives—inflation and economic growth.
· The United States must develop a “real” energy policy! Enough of band aids. Enough of political posturing. Enough of catering to the financial interests of a small segment of the economy. If T. Boone Pickens can move on this issue…surely others can also move! (http://www.pickensplan.com/)
These, of course, are longer run concerns, but they pertain to the strategic direction of the United States. If we don’t have a vision of what is needed and if we don’t have leaders that can express a vision we can buy into and trust, then the responses and reactions that happen within the short run result in nothing but a ‘random walk’ and we end up with a hodge-podge of consequences that do not serve us well over the longer run.
Yes, I know…in the long run we are all dead. (Keynes) But, we only become desperate for fixes in the short run when there is an absence of leadership and no one seems to know where we are going.
My short run concern is that since participants in domestic and international markets have little or no confidence in the leadership that exists within the United States…in the business and financial community as well as in the political sphere…the drift in the financial markets and the economy will continue to be on the downward side. Economists and other pundits can continue to come up with suggestions and schemes to contain the trouble or dreamscapes to resolve the whole problem…but, that is all they will be until leadership is established once again. Unfortunately, the current players seem to lack this skill.
Wednesday, July 16, 2008
Monday, July 14, 2008
"And, another one bites the dust..."
One more major American company has been acquired by foreign interests. As Anheuser-Busch has agreed to being purchased by InBev, we see the relentless march to foreign ownership proceed. While the turmoil in the financial markets and the ‘bail-out’ of Fannie Mae and Freddie Mac dominate the headlines…reverse globalization takes over the United States.
I call what is happening ‘reverse globalization’ because, for Americans, globalization was a good thing when the United States was dominating the world, spreading into more and more corners of the globe, and investing in more and more foreign companies. Now, the shoe is on the other foot and the question of concern is over American attitudes to world trade…to further globalization.
We see trade agreements are in danger in Congress. We hear Presidential candidates claim that firms that transfer jobs off shore will be punished. And, we see more and more American Companies being purchased or invested in by foreign companies or national wealth pools. The question is how long will the voters in the United States support open trade and world economic evolution?
The problem is that in an inter-dependent world, countries cannot act as if they are isolated from other nations and international financial and economic markets…even if they are the sole remaining superpower. And, as we see in economic affairs, what has been started and supported historically must play itself out. It has taken us a long time to arrive at the situation we are now in and there is plenty of blame that can be passed around to all who have been involved.
The fact is, we are in the situation we are now in and we must deal with it in the best way we can. And, whether we like it or not…we must accept the fact that the current administration in Washington…the “Gang that couldn’t shoot straight”…is going to play a role in how we get to the future. The sad thing to me is that both candidates for the presidency are concentrating on programs that they are going to put into place once they are elected…and fail to recognize that the situation is not one in which they are going to be able to enact any of these programs.
Furthermore, more and more people are beginning to realize that the situation is continuing to unfold…the economy has not felt the full impact of the financial upheavals and the collapse of the housing market…and, that Americans are not just “whiners” who have a mental depression.
The good thing is that things are proceeding and being dealt with. There are going to be more assets written down. There will be more losses. There will be more financial institutions taken over by the regulators. But, situations are being identified and people are moving to resolve the problems. I believe that this will continue, if we can just keep attention-seeking Senators from sending out letters that set off panics at financial institutions.
It seems to me that two major changes in the way the United States does business is needed in the current situation. First, we need to make sure that the world does not dive into a ‘protectionist’ shell. That is, it is best for all to keep trade open, to allow purchases of assets go ‘both ways’, and to facilitate the evolution of world trade integration rather that arrogantly stand above the fray and maintain the superiority of the anyone country.
Unfortunately, this is going to result in some pain because of the policies and programs that have been instituted in the past. The rest of the world owns a lot of America’s financial assets. With the value of the dollar being so low, it makes sense for these wealth interests to convert their financial assets into United States physical assets. This is something we are going to have to live with. The alternative, too, is painful…a protective world where trade is reduced and trust and cooperation is minimized. I believe that it will benefit more people to reach a balance closer to open trade than it will be to ‘close down the shop’.
Second, international communication and cooperation must be promoted on a greater scale. An article in the Financial Times has argued that the G-8 is really inconsequential any more and that the world stage must be broadened to at least the G-20. The point is that there are many more nations that play a significant enough role in the world that they must be included in any discussions taking place. Things just won’t get done if the circle is not widened.
But, even more important, the arrogance of the United States must be minimized. The United States must play by the rules of inter-dependent nations. The United States must become one among many and cannot appear agreeable to what others want when they are together and then go home and undercut the whole process.
This, too, will be painful. The consequences of the monetary and fiscal policies of the last seven to eight years must be reckoned with and this is going to hurt. But, the United States has to bring itself more into line with the rest of the world. Its policies are already hurting enough countries, countries whose currency is tied to the value of the dollar. And, the United States must accept the fact that because it did not play by the rules in the past that the nations and areas that did work hard to establish discipline and market confidence over these years must not now abandon their efforts in order to help out ‘good old America’.
As I have suggested before…the United States is at a ‘tipping point’. The country that we have known over the past forty years or so is rapidly receding. We are struggling to gain the future.
I have gone through another ‘tipping point’ in my life. My children have asked me over the years…”what was the big deal about Viet Nam?” This, I have found, is a difficult question to answer in a simple way. Perhaps the most relevant thing I have said about this period is that life before the 1960s was quite different from life after the 1960s.
I firmly believe that life after the 2000s will be considerably different than life before the 2000s. How so? No one has an answer for that at this time! But, we all must be flexible in our commitments and return to the principles of sound financial and economic programs and policies and cooperation and openness with others in building the world community.
I call what is happening ‘reverse globalization’ because, for Americans, globalization was a good thing when the United States was dominating the world, spreading into more and more corners of the globe, and investing in more and more foreign companies. Now, the shoe is on the other foot and the question of concern is over American attitudes to world trade…to further globalization.
We see trade agreements are in danger in Congress. We hear Presidential candidates claim that firms that transfer jobs off shore will be punished. And, we see more and more American Companies being purchased or invested in by foreign companies or national wealth pools. The question is how long will the voters in the United States support open trade and world economic evolution?
The problem is that in an inter-dependent world, countries cannot act as if they are isolated from other nations and international financial and economic markets…even if they are the sole remaining superpower. And, as we see in economic affairs, what has been started and supported historically must play itself out. It has taken us a long time to arrive at the situation we are now in and there is plenty of blame that can be passed around to all who have been involved.
The fact is, we are in the situation we are now in and we must deal with it in the best way we can. And, whether we like it or not…we must accept the fact that the current administration in Washington…the “Gang that couldn’t shoot straight”…is going to play a role in how we get to the future. The sad thing to me is that both candidates for the presidency are concentrating on programs that they are going to put into place once they are elected…and fail to recognize that the situation is not one in which they are going to be able to enact any of these programs.
Furthermore, more and more people are beginning to realize that the situation is continuing to unfold…the economy has not felt the full impact of the financial upheavals and the collapse of the housing market…and, that Americans are not just “whiners” who have a mental depression.
The good thing is that things are proceeding and being dealt with. There are going to be more assets written down. There will be more losses. There will be more financial institutions taken over by the regulators. But, situations are being identified and people are moving to resolve the problems. I believe that this will continue, if we can just keep attention-seeking Senators from sending out letters that set off panics at financial institutions.
It seems to me that two major changes in the way the United States does business is needed in the current situation. First, we need to make sure that the world does not dive into a ‘protectionist’ shell. That is, it is best for all to keep trade open, to allow purchases of assets go ‘both ways’, and to facilitate the evolution of world trade integration rather that arrogantly stand above the fray and maintain the superiority of the anyone country.
Unfortunately, this is going to result in some pain because of the policies and programs that have been instituted in the past. The rest of the world owns a lot of America’s financial assets. With the value of the dollar being so low, it makes sense for these wealth interests to convert their financial assets into United States physical assets. This is something we are going to have to live with. The alternative, too, is painful…a protective world where trade is reduced and trust and cooperation is minimized. I believe that it will benefit more people to reach a balance closer to open trade than it will be to ‘close down the shop’.
Second, international communication and cooperation must be promoted on a greater scale. An article in the Financial Times has argued that the G-8 is really inconsequential any more and that the world stage must be broadened to at least the G-20. The point is that there are many more nations that play a significant enough role in the world that they must be included in any discussions taking place. Things just won’t get done if the circle is not widened.
But, even more important, the arrogance of the United States must be minimized. The United States must play by the rules of inter-dependent nations. The United States must become one among many and cannot appear agreeable to what others want when they are together and then go home and undercut the whole process.
This, too, will be painful. The consequences of the monetary and fiscal policies of the last seven to eight years must be reckoned with and this is going to hurt. But, the United States has to bring itself more into line with the rest of the world. Its policies are already hurting enough countries, countries whose currency is tied to the value of the dollar. And, the United States must accept the fact that because it did not play by the rules in the past that the nations and areas that did work hard to establish discipline and market confidence over these years must not now abandon their efforts in order to help out ‘good old America’.
As I have suggested before…the United States is at a ‘tipping point’. The country that we have known over the past forty years or so is rapidly receding. We are struggling to gain the future.
I have gone through another ‘tipping point’ in my life. My children have asked me over the years…”what was the big deal about Viet Nam?” This, I have found, is a difficult question to answer in a simple way. Perhaps the most relevant thing I have said about this period is that life before the 1960s was quite different from life after the 1960s.
I firmly believe that life after the 2000s will be considerably different than life before the 2000s. How so? No one has an answer for that at this time! But, we all must be flexible in our commitments and return to the principles of sound financial and economic programs and policies and cooperation and openness with others in building the world community.
Thursday, July 10, 2008
Yes, Greenspan is to blame!
There has been a lot of discussion recently about who is to blame for the current economic and financial situation. I firmly believe that Alan Greenspan cannot be excluded from those that deserve such blame. There is only one question that needs to be asked: who was the Chairman of the Board of Governors of the Federal Reserve System in the period from 2001 until January 31, 2006? Now look at the chart of the exchange rate between the U. S. Dollar and the Euro during this time. (http://research.stlouisfed.org/fred2/series/EXUSEU?cid=95.)
Need I say more?
By the end of 2006 things were beginning to unravel in the rest of the economy. The rest is history.
Greenspan was an expert on the minutiae pertaining to business cycles. He cut his teeth during the time when understanding short term movements in the economy, independent of what was going on in the rest of the world, was the fashion in economic forecasting. Times changed. Greenspan didn’t.
The result:
Substantial dislocation in world and domestic economic and financial markets;
Substantial commodity price inflation; and
The largest sell-off of American assets in the history of the United States. See “Foreign Investors Pile Up More Pieces of Americana,” http://www.nytimes.com/2008/07/10/business/worldbusiness/10wealth.html?_r=1&oref=slogin.
Certainly monetary policy is not the sole cause of the present unpleasantness. The irresponsible fiscal policy of the period cannot be passed over and the failure of the United States government to develop a sound energy policy must also be included in the picture. But, Greenspan cannot be excused from events because of what was happening in the housing market or some other market. This just diverts attention.
The most important price in an economy is the price of its currency in foreign exchange markets. In watching over this price…Greenspan failed miserably.
Need I say more?
By the end of 2006 things were beginning to unravel in the rest of the economy. The rest is history.
Greenspan was an expert on the minutiae pertaining to business cycles. He cut his teeth during the time when understanding short term movements in the economy, independent of what was going on in the rest of the world, was the fashion in economic forecasting. Times changed. Greenspan didn’t.
The result:
Substantial dislocation in world and domestic economic and financial markets;
Substantial commodity price inflation; and
The largest sell-off of American assets in the history of the United States. See “Foreign Investors Pile Up More Pieces of Americana,” http://www.nytimes.com/2008/07/10/business/worldbusiness/10wealth.html?_r=1&oref=slogin.
Certainly monetary policy is not the sole cause of the present unpleasantness. The irresponsible fiscal policy of the period cannot be passed over and the failure of the United States government to develop a sound energy policy must also be included in the picture. But, Greenspan cannot be excused from events because of what was happening in the housing market or some other market. This just diverts attention.
The most important price in an economy is the price of its currency in foreign exchange markets. In watching over this price…Greenspan failed miserably.
Wednesday, July 2, 2008
The Dollar: the Next Six Months
The last six months was not one of the best for the United States Dollar. The value of the dollar declined by about 7.5% against the Euro; 1.3% against the British Pound; and around 3.5% against an index published by the Federal Reserve System, an index relative to currencies in a broad group of major U. S. trading partners. During this period United States policymakers were focused primarily upon a liquidity crisis that hit full force in March and resulted in an assisted merger transaction and weakness in the domestic economy. The Federal Reserve and the U. S. Treasury Department were continually putting out fires here and there and providing liquidity to securities dealers and investment bankers. The first half of 2008 was not a time these policy makers could pay much attention to the decline in the value of the dollar.
What is the outlook for the next six months?
In my view, the outlook for the value of the United States Dollar over the next six months is not a good one. There are just too many things now in the works that do not favor an emphasis on a strong dollar. The question is, however, whether or not these possibilities are already incorporated in the current value of the dollar? My best guess is that the dollar will remain weak during this time period and will drift lower as more and more information reaches the market concerning the problems the world and the United States are facing.
The first such event on the horizon relates to the possibility that the European Central Bank will raise its base interest rate to combat the inflation that has now spread across Europe and that is twice the level of the ECB’s target rate of inflation. Moving this interest rate will put more pressure on the U. S. Dollar because the Federal Reserve is not expected to raise its target rate of interest due to the weakness of the U. S. economy and it financial institutions. There is also the possibility that central banks throughout the world will be raising their interest rates during the summer or fall months.
This possibility points up a real problem in world financial markets: the ECB, for example, is charged with one objective…to keep inflation under control. Its charter makes it completely independent of the political structure in the European Union. Thus, the ECB can pursue its objective of keeping inflation under control without immediate fear of political consequences.
Due to the independence of the ECB and many other central banks throughout the world, inflation targeting can be the sole focus of these organizations. This contrasts with the goals and objectives of the Federal Reserve System in that the Fed has two objectives it must focus upon…inflation and economic growth. These goals are not always compatible. Furthermore, if nations are “out-of-sync” economically with one another, as the United States seems to be “out-of-sync” with much of the rest of the world, then playing by different rules creates major national conflicts.
The possibility of conflicts, like the current one, is seemingly going to be an issue to be debated in the future. The French president Nicolas Sarkozy has already raised the issue of independent central banks and the problem of focusing on just one goal…inflation. (See the article in the Financial Times, “Elysee attacks ‘misguided’ policy of ECB”, http://www.ft.com/cms/s/0/985c022a-47d1-11dd-93ca-000077b07658.html.) This is the problem that ‘politicians’ always have with independent central banks and it represents the reason why central banks need to be independent of their governments. The current times are going to be ripe for political attacks on this independence. But, any such debate will not be a confidence builder for the support of strong currencies.
There are several other factors that will be hanging over the foreign exchange market over the next six months. Perhaps the most important one is the influence, or, one could argue the lack of influence, the current administration will have on the economy and the financial markets should a crisis arise. There is only one thing, in my view, that the Bush administration can pursue aggressively in the last few months it is in office…it can aggressively move to prevent further financial collapse or economic dislocation. This is the only thing the United States Congress will allow the Bush policy makers to do. Anything of a more positive nature will be postponed…like the efforts of the Treasury Department and the SEC to coordinate and share data collection. The Democratically controlled Congress expects to see a Democratic President seated in January 2009 and also expects to hold greater majorities in both the Senate and the
House. They are not going to allow this administration to initiate anything in its last few months in office.
Administration policymakers are very much in a dilemma. We have recently heard Fed Chairman Bernanke and Treasury Secretary Paulson speak about supporting a strong dollar. Paulson “reaffirmed the importance of a strong dollar” in Europe yesterday. (See “Paulson, in Europe, Finds Misery Loves Company”, http://www.nytimes.com/2008/07/02/business/worldbusiness/02euro.html?ref=business.)
Neither really have the option of doing anything about it at this time except talk. Furthermore, raising interest rates over the next four months and causing greater financial distress and economic misery would only make it more difficult for a Republican to be elected in the fall. So much for central bank independence.
The economy is also going through its adjustments and there are many uncertainties connected with how strong or weak the economy will be. On one hand, the United States economy has stayed stronger than expected through June of this year…but there is plenty of evidence that events over the next six to eighteen months may be rather unpleasant ones, especially for workers and businesses, both large and small. We are only beginning to see the impact that the higher price of oil is going to have on the economy. The auto industry is reeling…airlines are facing huge problems…retail trade is suffering…financial institutions are not out of the clear (there is great concern over the condition of regional and smaller banks for example)…and there is still the housing industry. What this is going to do to labor markets and workers and families is still to be determined. (For an interesting take on this see “Dispelling the Myths of Summer”,
http://www.nytimes.com/2008/07/02/business/02leonhardt.html?ref=business.)
The uncertainty with respect to how the economy is going to evolve connected with the inability of the “lame duck” administration to do much of anything leaves the candidates for president in an awkward position. The state of the economy is certainly going to have an impact on the election, but the issue is, what approach to projected policies should the candidates take? Right now the candidates are presenting programs representing what they would do if they are elected president…and the economy were not a problem. We are hearing nothing about what they would do if the economy is not in very good shape…or if the economy is “in the tank.” We have no idea who they would install as cabinet members or advisors. As a consequence, we have no idea about how either candidate would respond to the issues now facing the financial world over the value of the dollar.
Thus, the outlook for the dollar over the next six months is for little or no support to come from the United States government. And, with no insight as to how a next presidential administration would respond to the dollar situation there can be little or no confidence as to whether the dollar would be supported in the future. I don’t see how one can attach any confidence at this time to a sustained near term recovery in the value of the dollar.
What is the outlook for the next six months?
In my view, the outlook for the value of the United States Dollar over the next six months is not a good one. There are just too many things now in the works that do not favor an emphasis on a strong dollar. The question is, however, whether or not these possibilities are already incorporated in the current value of the dollar? My best guess is that the dollar will remain weak during this time period and will drift lower as more and more information reaches the market concerning the problems the world and the United States are facing.
The first such event on the horizon relates to the possibility that the European Central Bank will raise its base interest rate to combat the inflation that has now spread across Europe and that is twice the level of the ECB’s target rate of inflation. Moving this interest rate will put more pressure on the U. S. Dollar because the Federal Reserve is not expected to raise its target rate of interest due to the weakness of the U. S. economy and it financial institutions. There is also the possibility that central banks throughout the world will be raising their interest rates during the summer or fall months.
This possibility points up a real problem in world financial markets: the ECB, for example, is charged with one objective…to keep inflation under control. Its charter makes it completely independent of the political structure in the European Union. Thus, the ECB can pursue its objective of keeping inflation under control without immediate fear of political consequences.
Due to the independence of the ECB and many other central banks throughout the world, inflation targeting can be the sole focus of these organizations. This contrasts with the goals and objectives of the Federal Reserve System in that the Fed has two objectives it must focus upon…inflation and economic growth. These goals are not always compatible. Furthermore, if nations are “out-of-sync” economically with one another, as the United States seems to be “out-of-sync” with much of the rest of the world, then playing by different rules creates major national conflicts.
The possibility of conflicts, like the current one, is seemingly going to be an issue to be debated in the future. The French president Nicolas Sarkozy has already raised the issue of independent central banks and the problem of focusing on just one goal…inflation. (See the article in the Financial Times, “Elysee attacks ‘misguided’ policy of ECB”, http://www.ft.com/cms/s/0/985c022a-47d1-11dd-93ca-000077b07658.html.) This is the problem that ‘politicians’ always have with independent central banks and it represents the reason why central banks need to be independent of their governments. The current times are going to be ripe for political attacks on this independence. But, any such debate will not be a confidence builder for the support of strong currencies.
There are several other factors that will be hanging over the foreign exchange market over the next six months. Perhaps the most important one is the influence, or, one could argue the lack of influence, the current administration will have on the economy and the financial markets should a crisis arise. There is only one thing, in my view, that the Bush administration can pursue aggressively in the last few months it is in office…it can aggressively move to prevent further financial collapse or economic dislocation. This is the only thing the United States Congress will allow the Bush policy makers to do. Anything of a more positive nature will be postponed…like the efforts of the Treasury Department and the SEC to coordinate and share data collection. The Democratically controlled Congress expects to see a Democratic President seated in January 2009 and also expects to hold greater majorities in both the Senate and the
House. They are not going to allow this administration to initiate anything in its last few months in office.
Administration policymakers are very much in a dilemma. We have recently heard Fed Chairman Bernanke and Treasury Secretary Paulson speak about supporting a strong dollar. Paulson “reaffirmed the importance of a strong dollar” in Europe yesterday. (See “Paulson, in Europe, Finds Misery Loves Company”, http://www.nytimes.com/2008/07/02/business/worldbusiness/02euro.html?ref=business.)
Neither really have the option of doing anything about it at this time except talk. Furthermore, raising interest rates over the next four months and causing greater financial distress and economic misery would only make it more difficult for a Republican to be elected in the fall. So much for central bank independence.
The economy is also going through its adjustments and there are many uncertainties connected with how strong or weak the economy will be. On one hand, the United States economy has stayed stronger than expected through June of this year…but there is plenty of evidence that events over the next six to eighteen months may be rather unpleasant ones, especially for workers and businesses, both large and small. We are only beginning to see the impact that the higher price of oil is going to have on the economy. The auto industry is reeling…airlines are facing huge problems…retail trade is suffering…financial institutions are not out of the clear (there is great concern over the condition of regional and smaller banks for example)…and there is still the housing industry. What this is going to do to labor markets and workers and families is still to be determined. (For an interesting take on this see “Dispelling the Myths of Summer”,
http://www.nytimes.com/2008/07/02/business/02leonhardt.html?ref=business.)
The uncertainty with respect to how the economy is going to evolve connected with the inability of the “lame duck” administration to do much of anything leaves the candidates for president in an awkward position. The state of the economy is certainly going to have an impact on the election, but the issue is, what approach to projected policies should the candidates take? Right now the candidates are presenting programs representing what they would do if they are elected president…and the economy were not a problem. We are hearing nothing about what they would do if the economy is not in very good shape…or if the economy is “in the tank.” We have no idea who they would install as cabinet members or advisors. As a consequence, we have no idea about how either candidate would respond to the issues now facing the financial world over the value of the dollar.
Thus, the outlook for the dollar over the next six months is for little or no support to come from the United States government. And, with no insight as to how a next presidential administration would respond to the dollar situation there can be little or no confidence as to whether the dollar would be supported in the future. I don’t see how one can attach any confidence at this time to a sustained near term recovery in the value of the dollar.
Sunday, June 29, 2008
Economics and the Regulation of the Housing Market
One of the more difficult aspects of understanding economics is the fact that in many cases it takes a long time for the full affects of economic policies to work themselves through the economy. As a consequence of this it can be difficult for people to identify cause and effect.
This allows those responsible for the economic policies to avoid blame because what they started…and continued…began a long time ago and it is difficult for people to specifically identify these policy makers as the culprits for what is currently taking place. In my estimation, one has to go back six or seven years to find the beginnings of the monetary and fiscal policies that have resulted in the present dilemma. One has to go back even further than that to find the beginnings of the United States energy policy that we are finally having to pay the price for.
And, since it is much easier to place the blame on something that people are doing now rather than on what people did a while ago, our leaders can point their finger at speculators, at dishonest real estate brokers and lenders, and at foreigners as the perpetrators of our current problems. Furthermore, if our leaders can shift the blame to these villains then they can escape from dealing with the hard problem of correcting the economic policies that really did create the situation. (See the piece by Paul Krugman in the June 27 New York Times, “Fuels on the Hill”, http://www.nytimes.com/2008/06/27/opinion/27krugman.html.)
The ultimate problem that results from a situation like this is that policy makers usually end up facing a real dilemma. Let’s pretend we are the Chairman of the Board of Governors of the Federal Reserve System. What is the dilemma we are in, if we are the Chairman of the Board? The value of the dollar has been declining for over six years. People are saying that the fall in value has helped to fuel the increases in the price of commodities worldwide, especially that of oil. They are also saying that this decline in value has resulted in a flood of United States wealth flowing into other countries…to the Middle East, to China, to Russia, to India, to Brazil…and this is going to come back to bite us. And, now, other central banks around the world are considering raising their interest rates which will only exacerbate the situation. We should raise our target interest rate to help strengthen the value of the dollar…or at least protect it from declining more.
But, if we raise interest rates that will only cause further economic distress and dislocation here in the United States and our financial institutions are not that strong…some forecasters are saying that some banks are going to have to write off another $65.0 billion in assets. Unemployment is increasing…home foreclosures continue to rise and housing prices continue to fall…the auto industry is in the tank…and so on and so on…
This is the problem of mismanagement…of getting away from fundamentals…of letting ideology dominate reality. Bad management results in situations in which there are no good or easy choices available. Something is going to have to be done about the value of the dollar…but what price are we going to have to pay to strengthen the value of the dollar? We can continue to postpone the day of reckoning…but the longer we postpone that day…the larger the cost will be!
Another rule in economics is that the day of reckoning does ultimately arrive!
One of the short run responses to the current situation is to change regulations…to create programs that alleviate the problems created by the economic distress being experienced. An example of this is the effort to produce a housing bill that will help people who face the possibility of losing their home…and most or all of their wealth. People want to help those in dire straits. There is no question that this is a worthy cause. However, are legislators want “results”!
Short run solutions always focus on “results”. One can understand that politicians want programs that create “results” so that can justify the expenditure of large amounts of money. Individual personal problems are a great help to politicians in generating a rationale for the legislation they want to enact. And, individual personal success stories are a great help to politicians who are explaining to voters why they should be re-elected. But, programs that are based upon the achievement of “results” hardly even come close to achieving what is needed or what is hoped for. “Results” are based on idealistic goals and objectives and seldom have any relationship to the reality of the situation.
Furthermore, “results” based legislation sets up rules and procedures that people can take advantage of. The writers of the Housing Bill seem to be aware of this and are concerned about how the bill will be administrated. Still, “results” orientated programs are taken advantage of because there always seems to be many individuals that find ways to circumvent the rules and procedures to their own benefit.
One final point on this issue relates to the organization that is going to administer the new Housing Bill. The designated institution in this case…the Federal Housing Administration. This is an institution that already has many problems and has rightly been criticized for its weaknesses. The others to be involved? Fanny Mae…and Freddie Mac. Oh, boy…where is FEMA when you need it?
There is another issue to consider in the creation of legislation and additional regulatory oversight. This is the issue of time. One of the big problems that regulators have in today’s environment is that things change so rapidly. Let’s just look at the housing market that the congressional leadership is attempting to help. Earlier this year it was estimated that the number of homeowners having financial troubles with respect to paying their mortgages was around 2.6 million. The figure is currently said to be around 3.0 million. Within the next year or so analysts are forecasting that another one to two million will be added to this total. And the Housing Bill…it is aimed to help around 400,000. The response to this shortfall? Legislators say that more housing bills will have to be enacted.
The other side to this is that legislation and regulation always tends to fight the last war. That is, legislators are responding to the behavior of individuals and the market instruments they believe got us into the current situation. My experience leads me to believe that while the legislators are responding to these historical issues there are already some people, somewhere in the markets thinking about what can be done in the future. Legislation and regulation will not be created to deal with these “new things” until sometime after they have been introduced and seem to need some kind of oversight.
Leaders in the United States have some hard decisions to face. The question is whether or not they will deal with them in the near term, or, will they, in whatever way that they can, postpone the hard decisions to some undefined time period in the future. What is sad to me is that the leaders seem to be postponing the hard decisions once again. This is why I believe that there is a growing discussion around the world about the credibility of those guiding the country at this time. Can you imagine China questioning the credibility of our economic policy makers?
This allows those responsible for the economic policies to avoid blame because what they started…and continued…began a long time ago and it is difficult for people to specifically identify these policy makers as the culprits for what is currently taking place. In my estimation, one has to go back six or seven years to find the beginnings of the monetary and fiscal policies that have resulted in the present dilemma. One has to go back even further than that to find the beginnings of the United States energy policy that we are finally having to pay the price for.
And, since it is much easier to place the blame on something that people are doing now rather than on what people did a while ago, our leaders can point their finger at speculators, at dishonest real estate brokers and lenders, and at foreigners as the perpetrators of our current problems. Furthermore, if our leaders can shift the blame to these villains then they can escape from dealing with the hard problem of correcting the economic policies that really did create the situation. (See the piece by Paul Krugman in the June 27 New York Times, “Fuels on the Hill”, http://www.nytimes.com/2008/06/27/opinion/27krugman.html.)
The ultimate problem that results from a situation like this is that policy makers usually end up facing a real dilemma. Let’s pretend we are the Chairman of the Board of Governors of the Federal Reserve System. What is the dilemma we are in, if we are the Chairman of the Board? The value of the dollar has been declining for over six years. People are saying that the fall in value has helped to fuel the increases in the price of commodities worldwide, especially that of oil. They are also saying that this decline in value has resulted in a flood of United States wealth flowing into other countries…to the Middle East, to China, to Russia, to India, to Brazil…and this is going to come back to bite us. And, now, other central banks around the world are considering raising their interest rates which will only exacerbate the situation. We should raise our target interest rate to help strengthen the value of the dollar…or at least protect it from declining more.
But, if we raise interest rates that will only cause further economic distress and dislocation here in the United States and our financial institutions are not that strong…some forecasters are saying that some banks are going to have to write off another $65.0 billion in assets. Unemployment is increasing…home foreclosures continue to rise and housing prices continue to fall…the auto industry is in the tank…and so on and so on…
This is the problem of mismanagement…of getting away from fundamentals…of letting ideology dominate reality. Bad management results in situations in which there are no good or easy choices available. Something is going to have to be done about the value of the dollar…but what price are we going to have to pay to strengthen the value of the dollar? We can continue to postpone the day of reckoning…but the longer we postpone that day…the larger the cost will be!
Another rule in economics is that the day of reckoning does ultimately arrive!
One of the short run responses to the current situation is to change regulations…to create programs that alleviate the problems created by the economic distress being experienced. An example of this is the effort to produce a housing bill that will help people who face the possibility of losing their home…and most or all of their wealth. People want to help those in dire straits. There is no question that this is a worthy cause. However, are legislators want “results”!
Short run solutions always focus on “results”. One can understand that politicians want programs that create “results” so that can justify the expenditure of large amounts of money. Individual personal problems are a great help to politicians in generating a rationale for the legislation they want to enact. And, individual personal success stories are a great help to politicians who are explaining to voters why they should be re-elected. But, programs that are based upon the achievement of “results” hardly even come close to achieving what is needed or what is hoped for. “Results” are based on idealistic goals and objectives and seldom have any relationship to the reality of the situation.
Furthermore, “results” based legislation sets up rules and procedures that people can take advantage of. The writers of the Housing Bill seem to be aware of this and are concerned about how the bill will be administrated. Still, “results” orientated programs are taken advantage of because there always seems to be many individuals that find ways to circumvent the rules and procedures to their own benefit.
One final point on this issue relates to the organization that is going to administer the new Housing Bill. The designated institution in this case…the Federal Housing Administration. This is an institution that already has many problems and has rightly been criticized for its weaknesses. The others to be involved? Fanny Mae…and Freddie Mac. Oh, boy…where is FEMA when you need it?
There is another issue to consider in the creation of legislation and additional regulatory oversight. This is the issue of time. One of the big problems that regulators have in today’s environment is that things change so rapidly. Let’s just look at the housing market that the congressional leadership is attempting to help. Earlier this year it was estimated that the number of homeowners having financial troubles with respect to paying their mortgages was around 2.6 million. The figure is currently said to be around 3.0 million. Within the next year or so analysts are forecasting that another one to two million will be added to this total. And the Housing Bill…it is aimed to help around 400,000. The response to this shortfall? Legislators say that more housing bills will have to be enacted.
The other side to this is that legislation and regulation always tends to fight the last war. That is, legislators are responding to the behavior of individuals and the market instruments they believe got us into the current situation. My experience leads me to believe that while the legislators are responding to these historical issues there are already some people, somewhere in the markets thinking about what can be done in the future. Legislation and regulation will not be created to deal with these “new things” until sometime after they have been introduced and seem to need some kind of oversight.
Leaders in the United States have some hard decisions to face. The question is whether or not they will deal with them in the near term, or, will they, in whatever way that they can, postpone the hard decisions to some undefined time period in the future. What is sad to me is that the leaders seem to be postponing the hard decisions once again. This is why I believe that there is a growing discussion around the world about the credibility of those guiding the country at this time. Can you imagine China questioning the credibility of our economic policy makers?
Friday, June 27, 2008
Credibility--Two
Donald Kohn, Vice-Chairman of the Board of Governors of the Federal Reserve System gave a speech yesterday at the International Research Forum on Monetary Policy in Frankfurt, Germany. (See http://www.federalreserve.gov/newsevents/speech/kohn20080626a.htm.) In that speech, Mr. Kohn spoke about “Global Economic Integration and Decoupling.” Decoupling, according to Kohn, “refers to apparent divergences in economic performance among different regions of the world economy.”
Kohn references three different aspects of this. First, “the business cycles of the United States and other industrial economies are becoming less synchronized…” Second, “economic growth in the emerging market economies is holding up, even as growth slows substantially in the United States and, to a lesser extent, elsewhere in the industrial world.” Third, “even as the financial markets of many industrial countries have been roiled by turmoil that emerged last August, conditions in the traditionally volatile financial markets of emerging market economies have proved surprisingly resilient.”
To me, this speech misses the point and represents one of the major reasons why the Federal Reserve and the leaders of the Federal Reserve are facing a real crisis of credibility. (See my post on “Credibility” of June 23, 2007, http://maseportfolio.blogspot.com/.) The Federal Reserve is ignoring any role it has played in the decline in the value of the dollar over the past six years and the dislocations in world markets that this has caused. By continuing to ignore the role it has played in the decline in the value of the dollar it is undermining any remaining trust that might exist in its leadership.
And, the Fed is ignoring the role it is playing in the current financial turmoil. Concern over the behavior of the Federal Reserve is being expressed around the world. See for example the editorial comment in the Wall Street Journal, “The Fed at Ease”, http://online.wsj.com/article/SB121443727459905199.html?mod=todays_us_opinion. Also see the editorial comment in the Financial Times, “Fed cannot ignore global inflation”, http://www.ft.com/cms/s/0/d5cd50c4-42e4-11dd-81d0-0000779fd2ac.html. Yet, policymakers in the United States seem to turn their eyes elsewhere.
The Federal Reserve Open Market Committee met on Tuesday. It presented the results of that meeting Tuesday afternoon and the statement made was, if anything bland and tepid. The statement basically said…we really aren’t in the mood to do anything at this time.
That was sure a confidence builder!
This Federal Reserve leadership has introduced more innovation into the world monetary system than any before it. It has broadened the scope of financial oversight tremendously, even assisting in the Bear Stearns takeover, and is seeking more and more responsibilities. It is now looking at opening up the banking sector to private equity investment.
We are walking in new territory…never before explored. For example, we don’t know what all the new innovations mean for the future. We have been told that many of the actions taken will be removed in the future when the need for them recedes. Yet we see that there exists $150 billion in Term Auction Credit outstanding, $64 billion in “Other Credit Extensions” which includes swaps to central banks in Europe, $8.5 billion credit extension on the “Primary dealer credit facility” and $111 billion in securities lent to dealers in through the “term facility” window. What do all these billions mean for the financial institutions and financial markets? How will they be removed?
We don’t know what these innovations mean. We have nothing to compare them with!
And, then we seem to have leaders that are doing little or nothing to help their credibility in world financial circles! Where should the confidence come from?
Let me just say that if this attention on the credibility of Fed leadership is getting into the newspapers then we need to be concerned. In my experience, newspapers tend to be a lagging indicator of how participants in the market feel. If the newspapers are expressing concern over the credibility of the leadership of the Federal Reserve, then the rest of the world must be really concerned!
Kohn references three different aspects of this. First, “the business cycles of the United States and other industrial economies are becoming less synchronized…” Second, “economic growth in the emerging market economies is holding up, even as growth slows substantially in the United States and, to a lesser extent, elsewhere in the industrial world.” Third, “even as the financial markets of many industrial countries have been roiled by turmoil that emerged last August, conditions in the traditionally volatile financial markets of emerging market economies have proved surprisingly resilient.”
To me, this speech misses the point and represents one of the major reasons why the Federal Reserve and the leaders of the Federal Reserve are facing a real crisis of credibility. (See my post on “Credibility” of June 23, 2007, http://maseportfolio.blogspot.com/.) The Federal Reserve is ignoring any role it has played in the decline in the value of the dollar over the past six years and the dislocations in world markets that this has caused. By continuing to ignore the role it has played in the decline in the value of the dollar it is undermining any remaining trust that might exist in its leadership.
And, the Fed is ignoring the role it is playing in the current financial turmoil. Concern over the behavior of the Federal Reserve is being expressed around the world. See for example the editorial comment in the Wall Street Journal, “The Fed at Ease”, http://online.wsj.com/article/SB121443727459905199.html?mod=todays_us_opinion. Also see the editorial comment in the Financial Times, “Fed cannot ignore global inflation”, http://www.ft.com/cms/s/0/d5cd50c4-42e4-11dd-81d0-0000779fd2ac.html. Yet, policymakers in the United States seem to turn their eyes elsewhere.
The Federal Reserve Open Market Committee met on Tuesday. It presented the results of that meeting Tuesday afternoon and the statement made was, if anything bland and tepid. The statement basically said…we really aren’t in the mood to do anything at this time.
That was sure a confidence builder!
This Federal Reserve leadership has introduced more innovation into the world monetary system than any before it. It has broadened the scope of financial oversight tremendously, even assisting in the Bear Stearns takeover, and is seeking more and more responsibilities. It is now looking at opening up the banking sector to private equity investment.
We are walking in new territory…never before explored. For example, we don’t know what all the new innovations mean for the future. We have been told that many of the actions taken will be removed in the future when the need for them recedes. Yet we see that there exists $150 billion in Term Auction Credit outstanding, $64 billion in “Other Credit Extensions” which includes swaps to central banks in Europe, $8.5 billion credit extension on the “Primary dealer credit facility” and $111 billion in securities lent to dealers in through the “term facility” window. What do all these billions mean for the financial institutions and financial markets? How will they be removed?
We don’t know what these innovations mean. We have nothing to compare them with!
And, then we seem to have leaders that are doing little or nothing to help their credibility in world financial circles! Where should the confidence come from?
Let me just say that if this attention on the credibility of Fed leadership is getting into the newspapers then we need to be concerned. In my experience, newspapers tend to be a lagging indicator of how participants in the market feel. If the newspapers are expressing concern over the credibility of the leadership of the Federal Reserve, then the rest of the world must be really concerned!
Wednesday, June 25, 2008
A Time of Transitions
Let’s start with the bad news first. I believe that we are in for an extended period of economic adjustment. This will take time for we are at a point where the foundation for the world economy has to be restructured so as to bring us to the start of a new era.
The good news is that the adjustment is taking place in a relatively orderly fashion. Yes, there still remains a lot of work to be done on repositioning portfolios and on the structure of industries. Yes, there will still be some surprises along the way. But, people are systematically working things out. People have, by-and-large, stopped hiding things and are finding out that within the current environment it is best to identify problems, disclose them, and then get to work on them. It just seems that the issues are deep and broad and will take an extended period of time to fully accommodate them.
In the United States, and some other developed countries, a lot of wealth has been lost. Layoffs are taking place or will take place in many major industries…I’m thinking of financial services and motor vehicles as starters. The housing industry is depressed and some experts think that house sales and the decline in housing prices may continue in and through 2009. Prices for oil and other commodities continue to rise. Consumer confidence has reached a 16-year low. This is a time of transition.
Perhaps the greatest transition underway is that in the field of energy. Transitions always hurt a lot of people. Major transitions are just that much worse. Yet, many agree…this transition has to take place…sooner or later. The United States, and much of the world, has done almost everything it can to postpone the day of reckoning, have band-aided the existing system here and there, and have protected the current economic structure as much as it could. Maybe that day is here.
Transitions hurt. Did I say that before? It is going to hurt many, many people to move on to the new way to power the world but maybe it is time for the United States, and others, to deal with the energy problem seriously and encourage the transition. Humans are problem solvers. Humans are great innovators. Look what has happened in terms of Information Technology over the past 50 years! Look what has happened in terms of the biological and physical sciences over the past 50 years! We can only be optimistic about what humans can do to solve problems.
Yet, over the last 50 years, politicians have provided incentives to the energy industry to maintain existing energy platforms. In doing so, they raised the “switching costs” of moving on to other energy platforms because the incentives have been structured away from innovation and change. Sure, the day would come when new sources of energy would be forthcoming, but the politicians creed is to keep getting re-elected in the current environment…the transition to these new sources and the disruption accompanying the transition will come on someone else’s watch.
Maybe we should celebrate oil selling for $135 per barrel. Maybe we should celebrate gas at the pump selling in excess of $4.00 per gallon. Maybe we should hope that prices go even higher! The transition is here! Let it happen!
My concern is that efforts will be made to alleviate the short run pain of the energy problem and drug the world once again so as to maintain the status quo for a little longer. It seems that the United States, and the world, only move on issues like this when there is a crisis. It seems as if times like this are the only times when pain is sufficiently wide-spread to gain the attention of politicians and others in positions of leadership. Do we really want to provide another narcotic release from the pain and postpone attacking the real problem? Drugs are addictive but if health is to be achieved the addiction must somehow, sometime be broken.
The new energy platform…whatever that platform will be…will result in a substantial change in the way people live their lives. I can’t predict what the new platform will look like. I don’t believe that anyone can predict what the new energy platform will look like. As an economist all I can say is that relative prices will change, incentives will be altered, and innovation will take place. What exactly this will mean for life on this planet is currently a mystery.
Individuals, as early as the 18th century talked about computing machines. But, who predicted the changes in life that the mainframe computer brought about in the 1950s and 1960s? Who predicted the creation of the personal computer and how it would alter how people worked in the 1980s? Who predicted the development of the Internet and how it would change how people lived and worked in the 1990s and beyond? And so on, and so on…
This adjustment will take time and the transition will be painful for individuals, for businesses, for industries, and for governments. I talked about a 50-year periods in terms of other transition cycles. Maybe…just maybe…we need to bite-the-bullet and move on into the future.
There is another transition that needs to take place and this is as good a time as any to accept the need for it and move forward with it. This is the transition the United States must make to become a full economic partner of other nations in the world of the 21st century. Other nations have gone through the transition the United States must go through and it is painful. But, why should the people of the United States postpone this adjustment if it can be accomplished from where we are now? Why can’t the United States move from where it is and change its way of conducting economic policy?
The period of the liquidity crises has been passed in this policy cycle. It appears that further adjustment of portfolios and expectations are proceeding in an orderly fashion. However, the full adjustment back to robust economic health is expected to be slow and painful. The United States government must not disrupt this transition back to health. But, it must act in a way that allows this adjustment to take place while bringing discipline back into its operations. The value of the dollar must be protected and supported, especially during this time when other central banks throughout the world will probably be raising their short term interest rates. Thus, the Federal Reserve must walk a fine line between not further disrupting the economic re-alignment going on and fully supporting the value of the United States dollar. Trust must be re-established in international financial markets that the Federal Reserve is fully cognizant of its responsibilities with respect to its currency and will fight the good fight against inflationary pressures. The relatively weak economy should help in this fight although the battle against worldwide commodity inflation will make the adjustment just that much more difficult.
The new President and his administration must also bring fiscal discipline back to the government. Again, this will be difficult and cannot be fully achieved in the near term. It is hard to see how the Bush tax cuts can be rescinded within the current environment. It is hard to see how other tax cuts can be implemented anytime soon. New programs? Well, prudence must rule the day. Any new president is going to be limited in what can be accomplished in the near term if this fiscal discipline is going to be achieved. If the transition is going to be made, however, it should be done now and not postponed indefinitely.
The reality of the situation is one in which the United States is going to have to work with others in the world. It cannot act independently of other nations in either energy policy or in terms of economic policy. Our period of transition is here…in many areas. The past is no guide at this time and we must not try to hold onto it. We must be open to the future while helping people through the pain of change.
The good news is that the adjustment is taking place in a relatively orderly fashion. Yes, there still remains a lot of work to be done on repositioning portfolios and on the structure of industries. Yes, there will still be some surprises along the way. But, people are systematically working things out. People have, by-and-large, stopped hiding things and are finding out that within the current environment it is best to identify problems, disclose them, and then get to work on them. It just seems that the issues are deep and broad and will take an extended period of time to fully accommodate them.
In the United States, and some other developed countries, a lot of wealth has been lost. Layoffs are taking place or will take place in many major industries…I’m thinking of financial services and motor vehicles as starters. The housing industry is depressed and some experts think that house sales and the decline in housing prices may continue in and through 2009. Prices for oil and other commodities continue to rise. Consumer confidence has reached a 16-year low. This is a time of transition.
Perhaps the greatest transition underway is that in the field of energy. Transitions always hurt a lot of people. Major transitions are just that much worse. Yet, many agree…this transition has to take place…sooner or later. The United States, and much of the world, has done almost everything it can to postpone the day of reckoning, have band-aided the existing system here and there, and have protected the current economic structure as much as it could. Maybe that day is here.
Transitions hurt. Did I say that before? It is going to hurt many, many people to move on to the new way to power the world but maybe it is time for the United States, and others, to deal with the energy problem seriously and encourage the transition. Humans are problem solvers. Humans are great innovators. Look what has happened in terms of Information Technology over the past 50 years! Look what has happened in terms of the biological and physical sciences over the past 50 years! We can only be optimistic about what humans can do to solve problems.
Yet, over the last 50 years, politicians have provided incentives to the energy industry to maintain existing energy platforms. In doing so, they raised the “switching costs” of moving on to other energy platforms because the incentives have been structured away from innovation and change. Sure, the day would come when new sources of energy would be forthcoming, but the politicians creed is to keep getting re-elected in the current environment…the transition to these new sources and the disruption accompanying the transition will come on someone else’s watch.
Maybe we should celebrate oil selling for $135 per barrel. Maybe we should celebrate gas at the pump selling in excess of $4.00 per gallon. Maybe we should hope that prices go even higher! The transition is here! Let it happen!
My concern is that efforts will be made to alleviate the short run pain of the energy problem and drug the world once again so as to maintain the status quo for a little longer. It seems that the United States, and the world, only move on issues like this when there is a crisis. It seems as if times like this are the only times when pain is sufficiently wide-spread to gain the attention of politicians and others in positions of leadership. Do we really want to provide another narcotic release from the pain and postpone attacking the real problem? Drugs are addictive but if health is to be achieved the addiction must somehow, sometime be broken.
The new energy platform…whatever that platform will be…will result in a substantial change in the way people live their lives. I can’t predict what the new platform will look like. I don’t believe that anyone can predict what the new energy platform will look like. As an economist all I can say is that relative prices will change, incentives will be altered, and innovation will take place. What exactly this will mean for life on this planet is currently a mystery.
Individuals, as early as the 18th century talked about computing machines. But, who predicted the changes in life that the mainframe computer brought about in the 1950s and 1960s? Who predicted the creation of the personal computer and how it would alter how people worked in the 1980s? Who predicted the development of the Internet and how it would change how people lived and worked in the 1990s and beyond? And so on, and so on…
This adjustment will take time and the transition will be painful for individuals, for businesses, for industries, and for governments. I talked about a 50-year periods in terms of other transition cycles. Maybe…just maybe…we need to bite-the-bullet and move on into the future.
There is another transition that needs to take place and this is as good a time as any to accept the need for it and move forward with it. This is the transition the United States must make to become a full economic partner of other nations in the world of the 21st century. Other nations have gone through the transition the United States must go through and it is painful. But, why should the people of the United States postpone this adjustment if it can be accomplished from where we are now? Why can’t the United States move from where it is and change its way of conducting economic policy?
The period of the liquidity crises has been passed in this policy cycle. It appears that further adjustment of portfolios and expectations are proceeding in an orderly fashion. However, the full adjustment back to robust economic health is expected to be slow and painful. The United States government must not disrupt this transition back to health. But, it must act in a way that allows this adjustment to take place while bringing discipline back into its operations. The value of the dollar must be protected and supported, especially during this time when other central banks throughout the world will probably be raising their short term interest rates. Thus, the Federal Reserve must walk a fine line between not further disrupting the economic re-alignment going on and fully supporting the value of the United States dollar. Trust must be re-established in international financial markets that the Federal Reserve is fully cognizant of its responsibilities with respect to its currency and will fight the good fight against inflationary pressures. The relatively weak economy should help in this fight although the battle against worldwide commodity inflation will make the adjustment just that much more difficult.
The new President and his administration must also bring fiscal discipline back to the government. Again, this will be difficult and cannot be fully achieved in the near term. It is hard to see how the Bush tax cuts can be rescinded within the current environment. It is hard to see how other tax cuts can be implemented anytime soon. New programs? Well, prudence must rule the day. Any new president is going to be limited in what can be accomplished in the near term if this fiscal discipline is going to be achieved. If the transition is going to be made, however, it should be done now and not postponed indefinitely.
The reality of the situation is one in which the United States is going to have to work with others in the world. It cannot act independently of other nations in either energy policy or in terms of economic policy. Our period of transition is here…in many areas. The past is no guide at this time and we must not try to hold onto it. We must be open to the future while helping people through the pain of change.
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