Things Could Get Ugly Fast
Global Research E-Newsletter
By Mike Whitney
URL of this article: www.globalresearch.ca/index.php?context=va&aid=16177
Global Research, November 19, 2009
Things could get ugly fast. With the Democrats backing-off on a
second round of stimulus, the Fed signaling an end to quantitative
easing, and Obama moaning about rising deficits; there's a good
chance that the stumbling recovery could turn into another sharp
plunge. Bank lending is shrinking, consumers spending is off, housing
prices are falling, unemployment is soaring and the wholesale credit
markets are in a shambles. This isn't the time to slash government
support in the name of "fiscal responsibility". Obama needs to
ignore the gloomsters and alarmists and pay attention to the Nobel
laureates like Joe Stiglitz and Paul Krugman. They're the guys who
know how to steer the ship to safe water.
But there are troubling signs that Obama has joined the ranks of
the deficit hawks and is planning a policy-reversal that will pitch
the economy into a nosedive. Here's what he said on his tour through
Asia:
"I think it is important to recognize if we keep on adding to the
debt, even in the midst of this recovery, that at some point, people
could lose confidence in the U.S. economy in a way that could
actually lead to a double-dip recession."
So it's true. Obama has aligned himself with the faux-prophets and
dollar demagogues who think that the end is nigh. But trimming the
deficits now (when they should be expanding) will lead to a viscous
cycle of debt deflation that will push-down asset prices, increase
defaults, force more layoffs, slow consumer spending, lower earnings
and send the economy into a downward spiral.
The president is paving the way to a double-dip recession, a slump
that could be worse than the first.
Has Obama perused the jobless figures lately? Has he noticed the
Fed shoving more than a $1 trillion under the collapsing housing
market with no sign of improvement? Has anyone told our blinkered
accountant-in-chief that the entire financial system is propped-up
with $11.4 trillion of dodgy scaffolding that could buckle in the
first big gust?
Obama has either taken leave of his senses or he's spending too
much time listening to the cheerless Jeremiahs on the Internet. He
needs break their spell and seek the counsel of the experts who get
paid to crunch the numbers---real economists. Cutting government
spending and raising taxes--the two ways that deficits are paid
off--is the fast-track to disaster. Don't go there.
If Obama needs more proof that the economy is still flatlining, he
should thumb through Fed chair Ben Bernanke's speech to the Economic
Club of New York which was delivered on Tuesday. The presentation
was a sobering snapshot of lingering depression with precious few
glimmers of light. Here's an excerpt:
"The flow of credit remains constrained, economic activity weak,
and unemployment much too high. Future setbacks are possible....How
the economy will evolve in 2010 and beyond is less certain....
Access to credit remains strained for borrowers who are particularly
dependent on banks, such as households and small businesses. Bank
lending has contracted sharply this year, and the Federal Reserve's
Senior Loan Officers Opinion Survey shows that banks continue to
tighten the terms on which they extend credit for most kinds of
loans...
Household debt has declined in recent quarters for the first time
since 1951. For their part, many small businesses have seen their
bank credit lines reduced or eliminated, or they have been able to
obtain credit only on significantly more restrictive terms. The
fraction of small businesses reporting difficulty in obtaining
credit is near a record high, and many of these businesses expect
credit conditions to tighten further.
The demand for credit also has fallen significantly....Because of
weakened balance sheets, fewer potential borrowers are creditworthy,
even if they are willing to take on more debt. Also, write-downs
of bad debt show up on bank balance sheets as reductions in credit
outstanding. Nevertheless, it appears that, since the outbreak of
the financial crisis, banks have tightened lending standards by
more than would have been predicted by the decline in economic
activity alone.
Many securitization markets remain impaired, reducing an important
source of funding for bank loans. In addition, changes to accounting
rules at the beginning of next year will require banks to move a
large volume of securitized assets back onto their balance sheets.
Unfortunately, reduced bank lending may well slow the recovery by
damping consumer spending, especially on durable goods, and by
restricting the ability of some firms to finance their operations.
　
The best thing we can say about the labor market right now is that
it may be getting worse more slowly. (Fed Chairman Ben Bernanke
Speech Before Economic Club of New York)
Is this really Bernanke speaking, or is the Fed chief channeling
Roubini?
Okay, so credit is tight. Consumers aren't borrowing and banks
aren't lending.
Unemployment is rising and deflation is pushing down asset prices
while the burden of personal debt is rising in real terms. Bleak,
bleak, bleak. The only sign of improvement is that "things are
getting worse more slowly". Now that's encouraging.
What the economy needs is a hefty dose of stimulus aimed at job
creation and strengthening demand. Only the government can provide
sufficient resources to rev up economic activity and put people
back to work. Unfortunately, the TARP bailout soured the public on
deficit spending due to the shabby (and possibly criminal) way it
was handled. That will make it harder to do what is necessary. The
political support for more stimulus on Capital Hill has vanished.
But, without it, another hard landing is certain.
Despite rumors in the media, stimulus works. It speeds up recovery,
minimizes unemployment and stops asset prices from overshooting on
the downside. Here's an excerpt from "The effectiveness of fiscal
and monetary stimulus in depressions" a scholarly analysis of
stimulus by economist-authors Miguel Almunia, Agustin S. Benetrix,
Barry eichengreen, Kevin O' Rourke, and Gisela Rua: 　
"Where tried, fiscal policy was effective in the 1930s....The details
of the results differ, but the overall conclusions do not. They
show that where fiscal policy was tried, it was effective.
Our estimates of its short-run effects are at the upper end of those
estimated recently with modern data....This is, in fact, what one
should expect if one believes that the effectiveness of fiscal
policy is greatest when interest rates are at the zero bound, leading
to little crowding out of private spending. It is what one should
expect when households are credit constrained by a dysfunctional
banking system. Given similar circumstances in 2008, this underscores
the advantages of using 1930s data as a source of evidence on the
effects of current policy." (The effectiveness of fiscal and monetary
stimulus in depressions" by Miguel Almunia, Agustin S. Benetrix,
Barry eEchengreen, Kevin O' Rourke, and Gisela Rua, 18 November
2009 vox)
Stimulus works in multiple ways. It also helps increase inflation
expectations which is necessary to get people spending again. In a
deflationary environment, consumers shut-down and stop spending.
The Fed tries to spur economic activity by convincing people that
the dollars they hold will be worth less tomorrow. That's why
Bernanke keeps pointing out that the Fed will keep rates at zero
indefinitely. Regrettably, only the goldbugs take him seriously,
which is why gold prices have zoomed to the stratosphere. Personal
savings rates are still rising. There's been a sharp drop-off in
consumption.
Bernanke's psychological experiment has flopped. The masses still
believe we're in recession. Without a gigantic fiscal expansion to
jolt the economy out of its lethargy, the severe contraction could
drag on for a decade or more. We're becoming Japan. 　
Obama's deficit cutting plan is madness. It offers no hope at all.
It draws from the half-baked theories of amateur economists on the
Net who think that massive liquidation and years of bitter retrenchment
and high-unemployment are the path to recovery. They're wrong.
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Copyright Mike Whitney , Global Research, 2009
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