I have been travelling again, this time to visit my frail and elderly mother in South Africa. I was there for President Zuma’s first ‘State of the Union’ Address, and will write more about the country of my birth in the next post. In the meantime wanted to add this piece – on economic optimism in the US – written last week for the Huff Post, with apologies for the delay in adding it to the site.
9th June 2009.
“As a banker noted recently, there is no constituency for pessimism. Americans, he suggested, believe in optimism as a human right. This bright buoyancy is one of this nation’s greatest strengths, lapped up by jaded Europeans.
But it was optimism that also enabled Americans to max out on credit cards and other forms of borrowing — in the mistaken belief that debts are always payable — sometime in the future.
Such optimism did not help millions of Americans prepare for the shock of losing their job, or for the move into part-time work last year.
Optimism did not prepare investors for the reality check that finally forced Bernard Madoff to admit deluding and defrauding investors. And it probably did not help the shareholders and directors of General Motors prepare for the collapse of auto sales last year — or for the shock of the biggest industrial bankruptcy in American history.
So while optimism is great; reality checks are vital for a balanced outlook. What is the real world economic outlook now? Although we are clearly still in the midst of the ‘Banker’s Recession,’ the stock market is soaring upwards; there is much talk of ‘green shoots’ and of consumer confidence rising. Should we start shopping again? Invest in the stock market? Take the plunge and buy a new house?
These are critical decisions, and the economics profession does little to provide Josephine Public with the kind of straightforward analysis that would assist her in making wise decisions.
So how should we realistically view the economy? I would suggest that we do it by summoning up courage and looking the truly scary in the eye; and by rejecting mere scaremongering. But decisions about what is truly scary and what is merely scaremongering can be, of course, subjective. So I will list mine, and leave you, dear reader, to make your own judgment.
This is what I find scary. First: 23.6 million Americans out of work, or forced into part-time work. That is truly scary. 23.6 million Americans short of cash, unable to pay off debts; and unable to finance mortgages. 23.6 million Americans citizens that do not participate in the nation’s economic life, and are disillusioned and angry. Many will be devastated, prepared to self-medicate with alcohol or drugs, and many thousands will act out their rage and humiliation. These citizens do not pose a threat just to themselves, to their families and to society. They also pose a threat to the finance sector — because they will default on debts. The Mortgage Bankers Association’s report of record increases in delinquencies and foreclosures by those with prime mortgages is but one example of the impact of unemployment on the banks. To all those bankers celebrating their taxpayer-funded profits that must be truly scary.
Second: a 40% rise in business bankruptcy filings in May. Small, medium and large businesses destroyed, economic capacity wasted, hopes destroyed, jobs lost. That’s scary.
Third: a collapse in investment in the first quarter of 2009. According to Global Insight “real spending on equipment and software plummeted 33.8%, the largest percentage drop since the first quarter of 1958.” Green shoots when investment plummets furthest in 50 years? Without investment, there is no future for new economic activity, for green technology, for an end to job losses — for economic hope.
There’s plenty more I find scary, but these three are top of my list. Now for the scaremongering.
The parties guilty of this crime, in my humble view, are once again to be found in the finance sector — in the bond markets. Having forced the US government to nationalize the debts of bankers and financiers — debts racked up during one of the most reckless, frenzied and self-serving financial expansions in history — the finance sector is now warning of Armageddon. Why? Because the government’s rescue programs for the economy and for the finance sector have — unsurprisingly — helped inflate government debt. The talk in all the financial papers and on all the financial blogs is not of unemployment, or insolvencies or the collapse in investment. No, the talk is of the threat of another “wave” of government debt brought on by social programs: of players in the bond markets going on strike and refusing to finance this debt at reasonable, low rates of interest. ”
Ann,
While I agree with you about what is scary, what really scares me is that those in a position to do something, say along
Rooseveltian or Keynesian lines, are doing hardly anything at all. As for strikes in the financial sector, a Reagonite solution is at hand – I
never thought I would ever think this – and it is that since the banks are nationalized, strikes can be prevented through government legislation,
not unlike what Reagan did to the air traffic controllers.
Reagan’s justification was that the action would save lives. It seems to me to
be even truer now. While his justification was weak and the action unnecessary, such action seems to be essential now, as we may be entering
emergency territory. The members of the financial sector may have to be force fed like a goose and not just for Xmas.
Another factor in this mess is the way that the US and UK governments are dealing with the crisis. Because neither seems to want to
admit how large the debt is, they seem be prepared to throw money at it year after year, which is unsustainable. Hoping that the problem will
somehow go away is the response of a child.
I ought to have mentioned that the enactment of emergency legislation is potentially dangerous
because there is the real possibility that what was viewed as a response to an emergency becomes the norm. On the other hand, when it comes to the
financial sector, should we care.