Three years ago, the last time we experienced the stomach-churning spectacle of stock markets swiftly annihilating trillions of dollars in household wealth, the unknowns were at the center of the fear. Thanks to a lengthy experiment in radical deregulation, no one really knew the size of the wagers that Wall Street's leading financial institutions had constructed out of home mortgages, or what would happen to their balance sheets as large numbers of homeowners fell into delinquency.
But this time, as stock markets again lurch wildly and panic circumnavigates the globe, what we do know is at the center of our problems: The global economy is weak and still weakening, while policymakers seem unable or unwilling to marshal a reassuring response. From the United States to Europe to Japan, economies are stagnating, and governments are tightening the straits by cutting back on spending, urged on by the same credit ratings agencies that played leading roles in getting us here.
Tuesday afternoon's pledge by the Federal Reserve to keep interest rates low for at least another two years is merely an acknowledgement of this disheartening reality and does not alter it.
The catalogue of knowns offers little in the way of comfort. The American economy appears increasingly vulnerable to falling into another recession, yet leaders in Washington are missing in action. The Republicans are content to watch fiscal and economic troubles of their own making burgeon into a conflagration, betting that an unsophisticated electorate will blame the current occupant of the White House come 2012. A President famous for his oratorical powers now seems like a mute caricature of his former self, recycling marginal policies while lamely insisting that forces beyond the government's control are responsible for the storm.
"There is something of a leadership failure," Martin N. Baily, a former chairman of the Council of Economic Advisers in the Clinton administration, and now a senior fellow at the Brookings Institution in Washington, pronounced in an interview on Tuesday. "We need someone, whether like a Franklin Roosevelt or a Ronald Reagan, who can inspire confidence."
We know that another recession would hit at a time of 9 percent-plus unemployment, and with the social safety net ravaged by cuts.
We know that the United States is effectively in a box following the downgrade of the federal government's credit rating by Standard & Poor's late last week. The government cannot spend money to stimulate the economy without increasing the likelihood of further credit downgrades, which would invite new destabilizing consequences. Yet without some form of government intervention, the markets are left to take in the unobstructed view of an economy lacking any momentum.
We have hit a fork in the road, and both routes lead somewhere we do not wish to travel. The road we are on now -- Austerity Avenue -- heads out for many years to an unchanging scenery of high unemployment, slow growth, diminishing wealth and social strife. The other, Stimulation Lane, runs smack into Downgrade Ditch, a messy place from which escape is not certain, a place where interest rates could spike throughout the economy and we could quickly wind up back in recession.
The ironies here run in the cruel variety: Standard & Poor's and its credit rating brethren, Moody's and Fitch, played starring roles in creating the last financial crisis. They advised investment banks on how to turn lousy mortgages into complex securities that could garner their top ratings, collecting handsome fees in the process. Now that Uncle Sam needs fresh credit to tend to the economic mess that has resulted, the ratings agencies have become sticklers for financial details.
These are merely the unfortunate things we know here in the United States, yet we also know that financial strain is a global problem. European authorities have twice rescued Greece from the prospect of default on its outsized debts. And still no one seems to believe that the Greeks -- forced to swallow sharp spending cuts as a condition of aid -- can possibly grow enough to keep current on what they owe.
We know that similar worries dog Spain and Italy, where interest rates have been soaring, prompting theEuropean Central Bank to step forward on Monday and start buying up their bonds in a campaign to instill confidence. That move sent interest rates down a tad, but not enough to dislodge the sense of crisis. Few expect the European Central Bank to play backstop for the duration. The bank has long expressed reluctance to step directly into the fray, preferring that the continent rely on a special bailout fund established to shore up the finances of flagging members. And the market grasps clearly that the fund is stocked with 440 billion Euros -- a large amount of money, to be sure, yet not nearly enough to rescue Italy and Spain, were a default scenario to present itself.
"We are skeptical that this intervention tactic can end well, or even last very long," said Carl B. Weinberg, chief economist of High Frequency Economics, a research firm, in a note to clients Tuesday morning.
As Weinberg quickly added, the arsenal available to the Europeans in event of a rescue is really just a sideshow. The thing the market sees most clearly is a simple story with no good ending in sight: lots of debt, no apparent path to economic growth and a tendency toward higher interest rates, which intensifies the pressure.
"We see a broad credit crunch corseting many economies at once," Weinberg said. "Central banks have been unable to make money or credit grow since 2008. To be sure, potentially catastrophic hits to the balance sheets of bond-holding Euroland banks will not encourage them to lend more. So maybe the global equity market slide is not without reason. For without money or credit, there can be no economic growth."
The same observation applies to the United States. Ever since the financial crisis arrived in 2008, the Fed has kept interest rates near zero, operating on the established theory that, when money is free, it is more likely to be lent and borrowed, boosting economic activity and job growth. Only this time, would-be employers are focused on another known: their would-be customers have lost spending power and appetite for risk, limiting sales.
So the economy stagnates, unemployment remains high and the government declines to boost demand for goods and services with fresh spending, fearing the reprimand of the credit rating agencies. This is a state of play that could last a long while.
"The tools of monetary policy and fiscal policy seem to be powerless," said Baily, the Clinton administration economic adviser.
The only thing lacking in the unraveling underway is a sense of mystery. That, and a sense of urgency from our elected leaders, for whom the unemployment epidemic has apparently become a known factor, already priced into their political calculations.
Follow Peter S. Goodman on Twitter: www.twitter.com/petersgoodman
WWII launched the highest GDP to debt ratio ever, 120%, through Massive Government Spending. Yet you rarely hear about that part. Or that wealthy Americans and Companies had to pay more taxes than ever in our history. People got jobs, people felt good, they spent, the wheel got going again. The innovation it created was unprecedented. When soldiers returned Eisenhower (a former one) recognized the need for infrastructure and built the interstate system.
To hear these conservatives talk its as if WWII and the subsequent economic recovery just 'happened.'
It is that the very people who can help alleviate the economic crises are kept silent by the news media and disregarded by the White House and all others in positions of power.
There is too much noise. Too many people are online.
Such that people are resorting to violence or crazy actions to be heard.
Look at mobs in London, racial killings in Mississippi, and countless of insane actions in the last month alone.
We are more adept at finding American Idols than identifying people who can help produce jobs i.e. Innovators with products that are badly needed globally. Innovators who vow to keep manufacturing in the USA.
Let me guess. you solution...... cut taxes more.
Statements about reducing wealth are just wrong, the wealthy have gotten more wealthy the last 30 years not poorer. Get your facts straight! If our economy was working at all the corporations and businesses would be spending their hoards of cash on economic expansion, they are not. Why? No demand, you and I are unable or unwilling to spend that leaves government to spend and prime the economy. But, of course you would rather see the nation go through another great depression before actually learning from history and accepting the responsibilities of citizenship which include taxation for the good of the nation even if it is not of direct benefit to you!
That design was set by the rich people and implemented by the weak-minded gov't officials and elected "leaders" we have in place. Until the horses ignore the reins we are going to go where we are being directed; over the cliff.
But the minority cannot stop it -- it is coming, and probably soon that I expected.
If that is good news of bad news, depends on the leader/s that will surface from it. A transformative leader. You know, the one that Obama told us he was but was not.
Clear solutions exist... we just need a leader with a clear vision that the nation will both follow and stand behind pushing him or her.
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I agree somewhat... I am listening and I want to listen to differing views. The only thing that "they" do not get from me is agreement at every turn.
H
Where is your helicopter car?
Sharing these funny cartoons that illustrate just what you are saying about weak leadership. Great laughs!
http://precisiontradingsolutions.blogspot.com/2011/07/debt-ceiling-cartoons.html
We are in a liquidity trap. "Helicopter Ben" has dropped the money, but the Wall Street cargo cult that got all of that newly minted money are just sitting on it. We have more money than we need to end deflation, but that money is not going to put anybody in this country to work until the financial needs of consumers have been met.
Take it away from the corporations by raising taxes on them. Then GIVE that useless "quantitative easing" money to the PEOPLE who make this country go by CUTTING payroll taxes.
In every case, the GOP payroll tax increase that came with the Tea Party "satan sandwich" needs to be CANCELED just as the President has asked.
Has Grover Norquist said one damned word about the GOP 10 billion dollar a month tax increase payroll, slated to take place in January?
Consumer, already impoverished, is approaching insolvency, and demand is down. Fiscal policy, as directed by GOP Congress consists in doing anything possible to make unemployment, stock market, and economy worse.
1. cut spending on things that aren't really needed. Entitlements such as social security, medicare, medicaid, etc. are needed and folks are entitled to them, so they are off limits, although we can institute cost controlling measures like price controls to stop the rise in Medicare costs paid to the private market. We cut the military/security complex. We send our boys overseas to middle east so corporations like Big Oil can get richer, but it really doesn't do much for greater America and certainly isn't worth the cost (half the budget excluding SS when all facets of military/security related spending are tabulated).
2. Start to generate more revenue by finally raising taxes on the rich and corporations. A report released a couple days ago shows 1500 m/billionaires payed zero in federal taxes, and the same can be said of two thirds of all corporations that do business in the US. The rich have made out like robber barons for over 3 decades, including raking in 88% of the economic gains since the Great Recession "ended" in the summer of 2009. Yet we're all working harder for less. Make the rich give back.
These 2 things will eliminate the deficit with money to spare to either start to pay down the national debt or reinvest in infrastructure, green energy, and education programs.
I would also like to see some strengthening and more cost efficiency in entitlement programs like allowing some percentage (if not all) of Medicare drug prices to be negotiated (as is the Veteran's Administration does now) Why are we protecting the profits of the pharmaceutical companies at the cost of our country?
The keiserz is NOT the rich, the problem is too many in this country that don't do anything but feed at the teat of govt. We need more taxpayers, not more taxes. The govt needs to get out of the way, and let capitalism work. It created the wealthiest country this world has ever known, with just 250 million people and 200 years.
You say absouletly nothing about all the millions on the govt payroll who do nothing all day but shoot pool, fish, and hang out on the corner. The "rich" in this country pay 85% of the taxes. They are tired and near the breaking point. Now some of them skate, but folks like me, who make a good living.and work for a paycheck are beat down. I'm taxed at 50% of my income then I have people like YOU telling me I'[m not payin enough. Gimme a break.