Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

09 October 2009

A Double Dip?


October can be a difficult month. It’s a time when exuberance—rational or not—yields to craving for security and warmth. It’s a time when squirrels hoard their nuts. It’s a time of great turning in human affairs. The Russian Revolution and the Crash of 1929 both came in October.

Could this fall be like that for us? No one yet can tell for sure. But there are signs that analysts could cite (after the fact) as omens of a double dip, a “W-shaped” recession.

Our government’s rescue of our financial system may not be a fait accomplis, but a work still in progress. A bankruptcy of CIT—the lender of choice for small business—would be a threat in name only. CIT presents a $ 7.6 billion problem, which is not even pocket change today. It’s a rounding error in our $ 3 trillion government bailout.

But darker clouds are on the horizon. FHA may be next. That’s probably less than a $ 100 billion problem: manageable but still troubling. Yet an FHA failure or pullback might exacerbate the mortgage crisis and delay a recovery in housing.

The housing market once seemed on the way to a slow and cautious rebound, but millions of foreclosures still lurk out there. Housing’s intrinsic illiquidity, coupled with banks’ reluctance to write things down, always dictated a slow-motion train wreck, not a fast one. Without continued, expensive government intervention, the worst may be yet to come.

Yet there is more. Now comes the threat of a meltdown in commercial real estate. Like the housing meltdown, it will be a slow-motion train wreck, perhaps even slower than in housing. Apparently commercial lenders are less eager to foreclose on borrowers of their own class and station, when more money is at stake, than on helpless, frightened home owners. But whatever the reason, defaulting mortgages on commercial real estate are potentially a trillion-dollar problem in New York City alone. Bailing that out would put us well beyond TARP territory.

Nobel-prize winning economist Paul Krugman sees another big problem: a falloff in international trade worse than in the Great Depression. I see that as a symptom, not a cause, of global economic woes. Despite the President’s recent jab at Chinese tires, no nation (including our own), has made a serious move toward trade protectionism. Trade channels are still open; they’re just not being used as much. There is nothing (yet) like the sudden trade blockage and hoarding that led Imperial Japan to seize the Malaysian rubber fields and Nazi Germany to grab the oil in Romania and the Caucasus. Oil and other basic commodities still flow in a global market; some economists even believe they are now in glut.

Yet declining trade could presage further trouble in one respect. Trade is what joins the globe in a common economic fate. It’s what “couples” our fragile economy to the rest of the world. So it could spread our continuing contagion to otherwise healthy lands. We now account for only a quarter of global economic activity, but another precipitous drop in the quarter that we represent might drag the other three quarters down.

What will make the difference is confidence. That, or the lack of it, is what causes runs on banks and economic downturns. We are still the global economic leader, and the world is looking for signs that continued confidence in our leadership is rational.

Some things on the horizon might justify that confidence. Production and delivery of Boeing’s “Dreamliner” seem just around the corner. Apple never tells in advance, but there are rumors that it has a world-beating netbook (or a cell phone that acts like one) in process. GM’s Chevy Volt—the world’s first modern electric car—is just over a year away from scheduled mass production. If we can avoid a severe double dip for another year, the rest of the world may regain some confidence in us as an engine of innovation and real growth.

More entertaining Internet get-rich-quick schemes like Facebook and Twitter won’t do the job. Nor will internal sales of dresses and jeans, which are mostly made in China anyway. The world wants to see evidence that the US has something besides surplus food and risky financial schemes to sell before it can believe in us again.

All but two of the seven factors that caused me to predict a global recovery last spring are still in evidence. The world is indeed a far different and better place today than in 1929. Except for our still concentrated and still pathological financial sector, we have a far more robust and diversified economy now than then. The world is smarter now; Marx and Engels, Smoot and Hawley are all long dead. At a quarter of global GDP and falling, we are less important now. Huge sums of cash are still sloshing about, waiting for something real to invest in.

But the last two of my seven factors still hang in the balance. Whether we can contain a second dip here at home within our financial, auto and housing sectors remains to be seen. If a double dip were to motivate China and other lenders to stop lending—or even to demand higher interest rates—all bets would be off. The whole house of cards might collapse into “stagflation” here at home and global economic calamity.

So everything depends on the very last factor: whether the rest of the world believes we have rational leadership again. There my optimism of April, which focused mainly on our popular new president, may have been premature. In economic matters, no president acts alone.

Imagine how you might feel today as a foreigner. An economic superpower over which you have no control has just caused a global economic meltdown. To be more precise, outrageously stupid, greedy and selfish behavior on the part of a small group of wealthy financiers in that superpower caused it. Yet the superpower’s legislature won’t do a thing to regulate, let alone discipline, the miscreants who caused the calamity. Not only that: the legislature won’t even prevent them from throwing another derivatives party or protect its own consumers against further predation.

Now imagine that your own country has an effective, smoothly running health-care system operated, insured or managed by your government. Imagine further that all of your major trading partners have the same, except for one: that selfsame superpower that just caused the global economic meltdown. Would you be eager to follow that superpower’s “leadership” when, after a century of trying, it still can’t still enact a similar system, but instead insists on continuing to spend twice what everyone else spends on health care for worse results? And how would you feel, knowing that the reason for this failure is the belief, held by a substantial minority of that superpower’s voters and leaders, that that superpower’s own government is incompetent and evil?

It’s not just that the superpower won’t fix the what caused the economic meltdown or its own decades-long health-care crisis. You fear that its hubris and poor contact with reality might infect other things, like the global effort to arrest climate change.

You fear that the superpower will continue to gnaw on its own governmental belly, ignoring facts and evidence and urgent global priorities. You wonder whether its sense of superiority and exceptionalism will lead it to question not just the global consensus on health care, but eventually the very laws of economics and physics. In short, you wonder whether the superpower that led the globe out of the chaos of humanity’s greatest war has lost its mind.

That, I think, is the hidden meaning of our President winning the Nobel Peace Prize today. Of course he deserves it. And of course the stark contrast between his intelligent but guarded optimism and his predecessor’s obnoxious “Texas swagger” was in part responsible.

But I think the Nowegians were also sending a message to Congress and the American people. The world’s patience with us is limited. The rest of the globe will not wait forever while small minds from small states, time after time, delay and thwart the changes and repairs that we must make to retain our global leadership. It will not stand idly by and watch the “indispensable nation’s” delusions of superiority and exceptionalism destroy the global economic system which took half a century to build.

The world is watching to see whether the confidence that keeps oil on the dollar standard and our bond interest low is justified. It is waiting to see whether we have recovered from our ideological disease and are sane again.

If Congress fails to justify that confidence, no one can predict what will happen. Oil off the dollar standard, rising interest rates and stagflation here at home might be just the beginning.

Ever cheerful and positive, the gentle Norwegians have clothed a warning in an award. And we had damn well better heed it.

Correction: An earlier version of this post referred to an award by the Swedes. Although Swedish industrialist Alfred Nobel established and funded most prizes in his name, Norwegians choose the winner of the Peace Prize (but not the other prizes).

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