Why Barack Obama Cannot Prevent America's Next Great Depression
Barack Obama, America's 44th President, is one of the most brilliant, hard working and innovative politicians to occupy the White House. If the current economic crisis were a typical post-war cyclical recession, there is no doubt that President Obama would be up to the challenge, and lead the United States to renewed growth and prosperity. Alas, we are in different times, with a uniquely devastating and dangerous economic disaster of worldwide scope. Not even as gifted a leader as Barack Obama, I fear, will prove sufficient in arresting the rampaging Global Economic Crisis.
No one can accuse Obama of not recognizing that the U.S. faces a severe economic recession. Most of his administration's initial activity has centered around crafting policy responses to the recession, primarily involving the unprecedented expenditure of borrowed money in an attempt to revive growth. However, the very character and essence of his administration's economic policymaking reveals the lack of comprehension of how dire and unique the Global Economic Crisis is on the part of President Obama. At his core, Obama believes that the American economic system is basically sound, but slid into a severe recession because of irresponsible behavior on the part of some actors within the financial oligarchy. Hence, by restoring growth through deficit spending and enacting a new regulatory regime to restrict the destructive greed of some Wall Street tycoons and bankers, we can return to the happy economic days of yore. In effect, Obama is acting like a nostalgia buff, hoping that the correct policies will recapture the solid economic model of pre-George W. Bush America. Unfortunately, this view of America's political economy is mythological. The U.S. economy was unhinged under the presidency of Bill Clinton as much as it has been under Bush, yet Obama has chosen Clintonites to serve in the most important economic policymaking positions in his administration. Cheerleaders for a failed model will not lead America to a new economic Jerusalem.
A major part of the problem Obama is facing is philosophical. He is following a conventional view of counter-cyclical economics; when a recession occurs, the sovereign can go into debt and use borrowed money to artificially increase demand and thus arrest the decline in growth. Once the recession is arrested, government fiscal policy can return to a more prudent policy of balanced budgets, as restored economic growth eliminates the need for the government to maintain demand. Sounds simple, as this has been enshrined as the recession-fighting bible created by economist Maynard Keynes. The only difference, the Obama administration would argue, is that this recession is much bigger than previous economic downturns, and therefore requires much more significant deficit spending. Otherwise, the Keynesian model remains unaltered.
This perspective by the Obama administration, in my view, is myopic. Like many contemporary politicians and economists, President Obama and his senior economic advisors have misread Maynard Keynes. Contrary to public perception, Keynes was no economic radical, but a centrist in dealing with the challenge of managing economic cycles within a capitalist system. Though Keynes did believe deficit spending was justified as a means to stimulate economies in deep recession, he also advocated budget surpluses during times of relative prosperity. In effect, Keynes believed in "rainy day" economics; in times of plenty you put away a little fiscal cushion that can then be spent during a recessionary period to enable the sovereign to maintain economic demand during a time of private sector contraction and declining tax revenues. This is actually a conservative philosophy that many farmers are familiar with.
In the United States, even during times of sustained economic growth, massive government deficits have been de rigeur during the past nine years, in the process doubling the national debt. There is no rainy day fund to speak of, so the staggering deficits that are now being enacted by the Obama administration are, in my judgement, fiscally unsustainable. Already, the projection for the current fiscal year's deficit has risen by $200 billion to a stratospheric $1.8 trillion; my own estimate is that it will top $2 trillion. Looking into the future, the current Obama fiscal agenda foresees annual deficits of $1 trillion or more for several years into the future, gambling that the recession will be short-lived, with growth returning as early as the last quarter of 2009, leading to increased tax revenue and declining deficits.
But are we in a recession? The current downturn is already the most protracted and destructive since World War II. However, there is another ingredient that has been added into this toxic economic stew: globalization. We are in a Global Economic Crisis in which synchronized contractions across the world create multiple negative feedback loops that reinforce the underlying negative causation. The subprime collapse in the United States crippled banks in the U.K. and devastated Japan's export machine; the Eurozone economic contraction is now impacting America's export driven manufacturers. When China's exports to America decline, commodity exporters and peripheral economies that supply value-added components to China's export goods get whipsawed. This phenomenon is occurring at an accelerating pace, despite attempts by the Obama administration to portray minor statistical anomalies to the prevailing trend as "rays of hope" and "green shoots." Reading tealeaves is no substitute for critical analysis.
The ongoing Global Economic Crisis has proven to be so severe, sustained and virulent that if it is not yet a global depression, it has embarked on that dangerous trajectory. However, another flaw in the Obama administration's approach is its failure to recognize that a substantial part of the financial system is rotten to the core, and not merely a fundamentally sound system with a few bad apples populating it, who can be restrained by improved regulation. More importantly, the Obama economic team seems to have convinced themselves that "mind over matter" is the best palliative for the nation's stricken banking system. When a sovereign's private banks are essentially insolvent and not engaged in normal loan activities, this is another manifestation of an economic depression. Rather than admit the truth, the Obama administration cobbled together a make-believe series of bank stress tests, which supposedly show that America's banking system, with a few minor problems, is essentially sound and fiscally healthy. This conclusion is an utter fraud, designed to artificially create a climate of economic confidence. It won't work, and by delaying an honest approach towards the nation's crippling level of bank insolvency, the policymakers are insuring that the final cost of the inevitable day of reckoning will be far more costly to the taxpayers.
The economist Hernando de Soto has captured the essence of the Global Economic Crisis as few others have. In his view, the Western world, and principally the United States, who have for so long railed against Third World inefficiency and corruption, have created the largest, most toxic shadow economy in the history of human civilization. More than one quadrillion dollars in unregulated financial derivatives paper, according to de Soto, has destroyed inter-bank and financial counter party trust to such an extent, credit flows have largely frozen despite unprecedented levels of taxpayer-funded borrowing to bailout the global financial system. Nothing short of an honest accounting of the true value of the toxic assets underlying these colossal derivatives products, which equal twenty times the entire world's GDP, can put the global economy on the road to recovery. Until these unregulated "unknown unknowns" become fully transparent, all other government interventions, including Obama's massive borrowing binge, are doomed to failure. Sadly, as the bogus bank stress tests reveal, President Barack Obama and his Clinton-era economic advisors have financial transparency as the least important objective on their agenda.
It seems that President Obama, despite his obvious leadership gifts and towering intellect, has chosen to place his faith in a team of advisors who are tied to the Wall Street oligarchy by an umbilical chord than cannot be severed. In a sense, Obama is following the path of the last Soviet leader, Mikhail Gorbachev, who also sincerely wished to resolve his country's economic problems, but believed that the system was fundamentally sound and only required a modicum of reform to correct its distortions. Only after the collapse of the USSR did Gorbachev conclude that the system itself was unsustainable. Now it appears to this observer that President Obama may be fated to travel the same path as Gorbachev, and like him, end up as a valiant failure.
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A coming world that's 'a whole lot smaller'
http://www.theglobeandmail.com/globe-investor/a-coming-world-thats-a-whole-lot-smaller/article1141752/
Obama's administration, like Bush's before him, are trying to sustain the unsustainable.
Obama had little, if any choice. For more than 35 years we have exported our wealth to other nations. We have surrendered our position as the largest manufacturing economy in the world. Historically, our national debt was consistently 20%-40% of GDP. W. came into office & our debt was a bit higher, but finally being reduced after 2 decades which saw it increase 5-6 fold. W. left office with our debt at approximately 80% of GDP & the economy trashed.
Starting last September we were faced with the prospect of an immediate depression or making an attempt to halt our economic free fall. We elected to put our last remaining chips into the pot, however, by then we had too few. Within the next year or two our debt will exceed our GDP. Such a situation is unsustainable. Interest on the debt together with the looming cost of our failure in ignoring adequate Social Security financing WILL lead us to hyper inflation, depression or both.
Imagine a world where you could solve a debt crisis caused by over-consumption by borrowing and consuming more. Come on! We spent the last 10 years borrowing enough money to pull forward 15 years of income. There is nothing left to draw on...
Don't kid yourself.... two different crime families run Washington. Both are beholden to Wall St. and both have the same objective.
Are we merely arguing about the timing of the collapse of the US Treasury bond market? Collapsing tax revenues + massive deficit spending means more treasury bond sales at ever higher interest rates at precisely the time when we are facing an increasingly reluctant foreign buyer. The math doesn't lie.
Obama is failing in his economic policies because he is a democrat and the democrats, like the republicans, do not have the people's interest in mind. Both democrats and republicans work for the corporations who sponsor their campaigns, not for the American people. If Obama actually cared about us, he would get rid of Summers and Geithner and hire someone competent and with no conflicts of interest. Obama has not recognized that both Clinton's and Bush's policies have utterly failed, yet he hired their advisers instead of selecting someone competent with no conflicts of interest.
I feel sorry for Obama as i think he actually feels he can do something about the crisis. It will soon be apparent to everyone that it is all beyond his control. The best he can do is to slow it down a bit as he has been trying to do but of course that does not solve the problem. All of his measures will end in disaster until the toxic assets are dealt with in a rational way. It has become a political game at this point and therefore I predict real disaster. Non one wants to speak the truth. Too bad.
His attempts thus far have been futile, spending our money like a sailor on shore leave. And to what result? Anybody seen any mortgage relief? Are banks back to normal? Chrysler in bankruptcy, GM heading that way. Only Obama knows what's best, apparently they taught him all of those skill in community organizing school.
Face it folks, we have an inexperienced president with a big ego who is trying to spend his way to economic recovery. The only problem is that his spending is increasing our taxes, which limits the spending that we can make to fuel the economy.
I find this article meanders, so I'll post in kind. Incidentally, the words "fundamentally sound" are not Obama's but those of his predecessors. I agree that the enemy within is the financial oligachy.
I think Obama clearly sees much of the fundamental restructuring that needs to be done, particularly new growth engines related to health efficiency, manufacturing, green products and services, and energy efficiency, to name a few.
I don't like the fact that the financial oligarchy appears in large part, whole. The good part of Summers' actions so far is that the system we have is working up to a point. The bad part is that the best opportunity to reform the oligarchy--as a reaction to threatened collapse, has passed.
The troublesome part of your article is that focusing on impending depressions, etc., obviates the possible good results of identifying the problem and plodding along solving them. Sure it's not fast enough but I sense movement. As Woody Allen put it, 99% of success is showing up at the office every day, so give it time.
One of two sides will lose the financial reform game by attrition, either the progressives or the financial oligarchy. Regulations will be key.
Running a small company, it is my belief that our economy will not grow long term until capital is focused on new and home grown companies, and not wasted on financial instrument schemes here and abroad.
If you think this article "meanders," check to see that your own abilities to concentrate and focus haven't, like many Americans, atrophied to the point of not being able to see even a slice of the bigger picture. Not seeing the bigger picture in these times could be very dangerous to you, your family and your community.
This article doesn’t--IMO--meander, nor does it equivocate, try to be "balanced" or play both sides of the "issue.” Instead it speaks fundamental truths the Powers That Be are unwilling or unable to accept; truths that have little to do with the "American way of life" they are desperately trying to return us to. Growth as the unthinking mantra of America is over. We have built a consumption-addicted society fueled by dinosaur bones(oil!), and its clear this growth is unsustainable and could lead to a societal collapse, or at the very least a violent re-ordering of our modern life, and frighteningly soon.
Ironically, the article's main point is that the ruling elite and many, if not most other Americans, fail to see that this game, our lifestyle, isn't merely receding, but is likely over, be it 2, 10 or 50 years from now. And this is a large blind spot to have.
So, concentrate, focus a bit and re-read this article if you really thought it meandered, because you could learn something, even truths that may help you save your community, your family, or your own life!
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Only our government thinks losing high value added jobs in American is good for America. That is because what is good for America is being determined by those who have divorced themselves from any responsibilities for the rest of us. How can anyone think anything good can come from this framework? One crucial difference between Obama and FDR is that the FDR realized in what kind systemic pickle we were in and was willing to experiment to get us out of it. Obama is neither an experimenter nor does he believe we are in anything more troublesome than a bit deeper recession than usual. I believe both American people and Obama are for a huge surprise. My hope is that we do not lose what democracy we have left in this process.
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Excellent analysis. Obama administration has misread the nature and the scope of this recession. Although the manifestation of this meltdown has appeared in financial sector which acted irresponsibly that in itself is not the genesis of this crisis. The main causes are to found in unsustainable trade imbalances caused primarily by American corporations either by exporting of productive capacity away from our shores or capitulating to any serious competition. Free trade that they have devised is not free trade at all but labor arbitrage. Not everyone wins in this game. There are winners and losers. Corporations and exporters win and American people lose. While this structural decline has been masked over by cheap credit for a few years, this is no longer sustainable. To jump start our economy under such circumstances means jump starting manufacturing in China. This is sheer insanity.
Let's see, we face economic collapse, peak oil, global climate change causing massive migration and starvation while Monzanto owns the food supply, none of which can be fixed because our government and political system is owned by people AKA corporations so our representatives don't work for us anymore and even if they did because we blew up all the voting machines, the Supreme Court under the Corporate Elitist Roberts would undo the progress all while the world hates us because we torture and have the biggest military in the world prostletizing Christian superiority.
Would somebody please legalize pot so I can get through this.
the one possible(and last)parallel to gorbachev that is not mentioned is the world banks led by the usa withdrew russia's credit forcing a collapse of the economy and communist ussr.
what will happen in the usa when the creditors pull the plug? the end of capitalism supplanted by what? squalor, violence, real revolution? a glorious do over?
If it is truly a collapse, then we are in for a very tough time; I would expect martial law, rationing and various groups protesting violently against the government.
The best case scenario IMO would be the emergence of a more democratic republic, one that embraces the idea of a solid social foundation for all of its citizens.
The worst case scenario is probably an all out free-for-all struggle that would breakdown society as we know it, with people grouping together for the sole purpose of survival--something hopefully more workable than the socio-economic carnage envisioned in Cormac McCarthy's "The Road."
Americans have been adjusting to lower standards of living for decades without knowing. Cheap credit masked the bare reality for a while. Now that is over. I think Americans will adjust to whatever hardship is coming their way. We have good examples how societies deal with this kind of crisis with Chile, Argentina and others. The plutocratic system is firmly in charge of our government and they will not allow any emerging threat to the present order. If people rise up in any fashion, they will be squelched by the oppressive state apparatus. We now have all the emergency powers that a government needs. If the government will not do it, the Iron Heel will reach out to private armies, the modern day Pinkertons like Blackwater and such.
Only a peaceful revolution in our heads can save us. A few degrees of mind shift is all that is needed but I think this is nearly impossible to accomplish with a critical mass of Americans being probably permanently damaged by decades of relentless propaganda and dumbing down by our very own public schools. I am for ever optimistic that we will eventually turn around but I also fear that our standard of living will drop a half or perhaps more before we wake up as a nation.
I am beginning to believe we are destined to start climbing again after we drop to the level of South American countries. Perhaps this is not an accident or just stupidity; this may be a desired outcome of our plutocratic classes. I remember CEO of Caterpillar saying once (about 10 years ago) how we will not be able to compete until our wages are on the same level as Mexico's.
Your comparison of Barack to Michael Gorbachev ministering over a failed state is more than laughable. Gorbachev won a Nobel Peace Prize (if memory serves) and he, Gorbachev was not ministering to a capitalist country! Anyone with a practical recollection will tell you that the here-to-fore Soviets are improved in standards of living, not failed, but improved. Now Barack is in the midst of the next generation experiement with finance, glbalism, and monetization of debt. And... indeed the boat may become overloaded with debt and we sink. But farmers will still produce bacon and eggs and wheat. Imports will be so expensive we'll have to produce our own stuff, and jobs will become available. And then you'll see dumb-ass Republicans singing to the virtue of the market place.
I am just not aware of anyone who regrets the failure of the Soviet system, Sheldon. (maybe you should think that over a bit...)
You seem to have missed the point, the author is not trying to compare the circumstances facing Obama and Gorbachev, per se. He is merely pointing out that Obama may ultimately find himself in the same historical boat, an epic failure who meant well, and did his best, but could not overcome the problems he faced, but is still honored for trying. I don't see the author trying to equate the problems facing the Soviet Union in the 80s to those facing America in 2009. In fact, there is one analogy that could be useful, the burden of overspending on militarism, but it isn't mentioned.
"Only after the collapse of the USSR did Gorbachev conclude that the system itself was unsustainable."
Those of us in the lower 48 believe that capitalism will continue. Barack is not going to preside over the failure of capitalism, which is the system we practice. The mega-leverage in funny money that is in the process of being "dealth with" may cause a depression, but the system will continue. Barack is not going to look back in 20 years from this date an see what Gorbachev sees of his then Soviet era.
Obama is throwing a Hail Mary pass. He has to ignore the 300 trillion US$ the top 5 US financial insitutions are exposed to. Our GDP is 14 trillion US$ versus 300 trillion US$. Europe is just as bad. The potential exposure is so great that it would kill any chance of recovery. Remember, perception is reality, so we must pretend that everything is ok while we re-invent our economy and social contract for the 21st century.
Obama additionally inherited by destiny a world going multi-polar, the Islamic world dislikes us, Iran is going nuclear, Israel is toast within 10 years, the Russians have won the great game for control of Central Asia's hydrocarbon reserves, the German Colossus is going to bed with the Russians and will redraw the economic map of eastern Europe and the middle east, the US$ as the world's reserve currency is slowly evaporating and in all likelihood China will dominate Eastern Asia and within 10 years.
Anglo-American capitalism has been critically wounded by greed. Senator Gramm, Rubin, Greenspan, Summers, Paulson, Greenberg and Cassano should be criminally prosecuted. Most babyboomer's retirement plans have been adversely impacted by Wall Street - London GREED. The Wall Street Oligarchy are conducting themselves like the French Royal Family just before the Revolution. They should listen to Obama is they have any common sense.
Yeah, 'great' article.
Just kinda neglected to mention the economic tyrannasaurus rex in the room. Just because economic collapse demand destruction has temporarily taken peak oil off the radar doesn't mean it has gone away. Every day enougn oil to fill a tank the size of a football field and 8000 ft. high is pumped from the ground and consumed. In ten years the amount of oil available to the world will be half of what it is today. The amount of oil available on the OPEN MARKET a fraction of that. In ten years the amount of oil on the world market available for the 160 countries needing oil will be substantially less than the US alone imports today.
Think about it.
Thanks Mr Filger. "More than one quadrillion dollars". Sometimes the truth is just so ugly that nobody will look at it. Universal bankruptcy. The concept evokes a quiet beauty, like the great flood.
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