January 8, 2010y
There's no denying that the economy is getting better, but will it last? Many economists don't think so, including experts at opposite ends of the ideological spectrum, like Paul Krugman and Martin Feldstein.
They think the economy will begin to fizzle sometime in the latter part of 2010 when Obama's $787 billion fiscal stimulus runs out and consumers are forced to pick up the slack in demand. That's a safe bet, too, considering that unemployment will still be somewhere in the neighborhood of 9 percent and households will still be digging out from the $13 trillion they lost during the crisis.
And the fact that the Fed is planning to end its quantitative easing (QE) program in early April, doesn't help either. That will just suck more liquidity out of the system and push long-term interest rates higher. When that happens, housing prices will fall, inventory will rise, and a surge in foreclosures will put more pressure on the banks balance sheets.
That's why the pros are so glum, because they know the economy needs a second dose of stimulus to stay on track, but the politicos are dead-set against it. Congress is afraid of the backlash from voters in the upcoming midterm elections.
They'd rather drive the economy back into recession then risk losing their jobs. Despite the propaganda in the media, stimulus works. In fact, Goldman Sachs attributes all of last quarter's (positive) growth to Obama's stimulus.
Here's how Nobel prize winning economist Joseph Stiglitz sums it up in his China Daily article "Harsh lessons we may need to learn again":
When consumers are forced to cut back on spending, because they're too far in debt or worried about their jobs, the government has to step in and make up the difference or the economy goes into a tailspin.
The deficits need be big enough to maintain aggregate demand while the private sector regains its footing. Otherwise, consumer spending declines, which lowers earnings and forces businesses to lay off more workers. It's a viscous circle. But if the stimulus is distributed wisely, multipliers kick in and help to lift the economy out of the doldrums.
Here's a good breakdown of how it works from an article in the New York Times:
So far, the stimulus has done exactly what it was designed to do; give the economy a big enough boost to get through a deflationary rough patch.
Unemployment is flattening out, manufacturing is expanding again, the stock market keeps climbing higher, and a recent survey of individual investors shows the highest ratio of bulls-to-bears since 2007. That's a good start, but the economy is still weak and needs more help.
So why are policymakers so eager to take the
patient off the ventilator before he can breathe on his own again?
Politics, that's why...
The White House economics team is trying to
garner support for policies that will strap the faltering economy into a
fiscal straightjacket and pound the green shoots into mush. All the railing
against deficits is just empty blather backed by junk economics.
Rubin admits that the recession "would ordinarily be met with expansionary policy", but suggests that he has a better remedy than stimulus. Does that make sense?
After all, it was Keynes counter-cyclical public spending (stimulus) that just produced positive GDP for the first time in 4 quarters, whereas, it was Rubin's deregulation of the financial system that pushed the global economy to the brink of disaster. There's no question of whose theory is more credible or likely to work.
Even so, it's worth considering what Rubin has
to say, because it clarifies the views of Obama's chief economics advisors
Geithner and Summers. After all, the trio is joined at the
Indeed. So, Obama has already joined the ranks
of the deficit terrorists.
So Rubin is working for Peterson? That explains everything.
Here's an excerpt from a Dean Baker article which appeared in the UK Guardian this week:
Ah ha! So, the real goal is to slash spending to impose onerous austerity measures that will lay the groundwork for dismantling critical social programs, like Social Security, Medicaid and Medicare.
That's why Rubin is working hand-in-hand with
his allies in and out of the White House. It has nothing to do with what's
best for the country. It's another looting operation spearheaded by
the same band of Wall Street pirates who just blew up the financial
Yada, yada, yada.
More free trade, more outsourcing, more
off-shoring, more lost jobs, more structural adjustment (at home, this time)
more privatization, more screwball globalist Utopianism. It's all right out
of the Neoliberal playbook, corporate America's sacred text. And it looks
President Moonbeam is marching in lockstep with the rest of the
That's because a long drawn-out mini-Depression
puts the Rubin troupe right where they want to be - with one hand choking
the life out of the economy while the other steals whatever is left in the