Where is the US economy headed?

The financial crisis was avoidable says the Financial Crisis Inquiry Commission



I loved one of the comments...

It was a snowball rolling downhill JP and anybody who tried to stop it before it came to rest would have been thrown out of office. Then it got too big to stop. Some are now saying that the banks are too big to fail and too big to save.

It could easily have been avoided by making credit much more difficult but that would have caused unemployment, deflation and offshore homes for the funds. Growth requires "funny money". There is insufficient real money. Double entry book-keeping evolved into all the wierd and wonderful things known as financial instruments.

But the report doesn't blame the people. How nice. It doesn't blame media and big business for making people want things to bolster their self esteem.

The regulators, the managers and Wall Street are easy targets. Possibly don't command more than half a million votes.

Don't fall over, spendi, but I agree with you. Unparalleled greed at all levels and the willingness to live on credit - again at all levels - is the cause.

I don't dismiss the possibility that it was engineered on purpose.

Interesting article, JPB. Thanks for linking to it here.

This just in...
The Times is reporting that a state oversight board has taken over administering the finances of Nassau County NY. It is described as a wealthy but highly taxed county. It's annual budget is now $2.6Bn and it is on track to run a $350Mn deficit.
The board will be able to control the budget, labor contracts, borrowings and any financial commitments.
I am reporting this because as we have opined here before, this kind of crisis is likely to occur in many state and local governments.

That may be true, but it's still going to be a struggle for all levels of government, because of the difference in their politics.

The truth can be simple at times. I think you are correct! Now if we can get people to se the difference between political science and political engineering we may be able to advance

We do need at better explanation than that it happened while they were all sleepwalking.

Many events, on retrospective (and leisurely) analysis are found to be predictable or preventable, but which in the record of history are only very rarely either predicted or prevented.

The weather is a very good example - great storms and hurricanes are analyzed after the fact and their formation, growth and movement are found to be an understandable and deterministic recult of known processes and physical "laws". Unfortunately their actual formation and movement are not predictable at all in prospect. The best we can do is to predict their likelihood on a seasonal basis, and guess their future movements after they are formed and found. Even here we are often suprised by what actually occurs.

The core issue here is that most complex, but deterministic processes (and the operation of a modern economy is surely one) are not really predictable in their future dynamics. This is a well-known result of the properties of the dynamics themselves and the mathematical equations that represent them. It is called chaos. Chaotic systems present generally stable and predictable average behaviors (like the seasonal occurrence of hurricanes) but the specifics of individual storms and like events remains quite beyond our ability to predict or prevent.

The political stakes in economic events are high and the impulse to blame one's favorite target (whatever it may be) is strong. This only adds to the confusion in a futile attempt to predict the unpredictable and prevent the unpreventable.

Alternatively both socialism and death are stable and predictable. I would prefer the storm.

So you would eschew cradle to grave cossetting on principle I suppose? The temptation to so do is common in those who are cossetted. It's a style choice adopted at no risk.

I was only flying a kite George when I suggested the recession might have been engineered.

A slightly clever formulation that gives the appearance, but not the fact, of a logical deduction.

Whether I am "cosseted" or not has little to do with the very insightful and accurate observation I made above.

I can't help but chuckle when people describe their own words as 'insightful.'

Cycloptichorn

I smiled too - a satisfying moment.

I don't think preferring the storm is very insightful. From an comy armchair it is a sort of vicarious and fantasised masochism. The storm, from my experience, is very tiresome.

Your sig. line suggests a warm and cuddly cossetting to me.

I prefer the double t. It's more redolent of an enhanced cossetting than cosseting.

You misunderstand the sig. line and me: read it again - both the storm and the post perspective from an armchair are emphasized. It is from Yeats (However, as an Englishman you might not understand it.)

What the hell is "the double t" ?

A different view on our economic and scientific past:

Obama's "Sputnik Moment"
The lesson from the 1950s is that it takes more than private enterprise to revive American innovation. It takes lots of government spending.
By Fred Kaplan
Posted Tuesday, Jan. 25, 2011, at 11:02 PM ET

Sputnik I
President Barack Obama didn't say much about foreign or military policy in Tuesday night's State of the Union address. To the extent he did talk about it, he spent more time on economic agreements with India, South Korea, and China than on the wars in Afghanistan and Iraq—and, given the state of the economy and the nature of the political battles ahead, the balance was probably right.

But he did evoke a huge defense issue from a half-century ago—the signal wake-up security call that marked the years of transition from Dwight Eisenhower to John F. Kennedy, the single word that has symbolized ever since the fear of slipping behind in a dangerous world: Sputnik.
"This is our generation's Sputnik moment," Obama said. As a result, we need to fund "a level of research and development we haven't seen since the height of the space race," with particularly strong investments in biomedicine, information technology, and clean-energy technology. In the same section of the speech, he likened this funding effort to "the Apollo Project," which later put a man on the moon.


Yet later on in the speech, Obama proposed, starting this year, to "freeze annual domestic spending for the next five years," a step that, he boasted, would "bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president."

It's hard to see how he or the Congress can resolve this contradiction—Kennedy-esque vigor and investment on the one hand, Ike-like torpor and penny-pinching on the other. He said much of this extra money could be freed up by eliminating subsidies for the oil companies. First, good luck on that. And second, that alone won't free up enough.

The history of Sputnik, and the revival of the American economy that it spurred, is instructive.
Sputnik was the 184-pound satellite that the Soviet Union launched into outer space on Oct. 4, 1957. It was a first (the United States had tried once before, with the Explorer, but failed), and it shocked the world. Everyone had assumed the Soviets were technologically primitive; now it looked like they were ahead.

The achievement wasn't merely symbolic; it also meant that, if the Soviets could build a rocket to boost a satellite into orbit, they might also build a rocket to boost an intercontinental missile that carries a hydrogen bomb and comes back down on the other side of the Earth, blowing an American city to smithereens.

Edward Teller, father of the H-bomb, declared on national television that, with Sputnik, America had "lost a battle more important and greater than Pearl Harbor." In the U.S. Congress, Clare Boothe Luce, R-Conn., called Sputnik's beep "an intercontinental outer-space raspberry to a decade of American pretensions that the American way of life was a gilt-edged guarantee of our national superiority." Senate Majority Leader Lyndon B. Johnson's aide (and later presidential speechwriter), George Reedy, sent his boss a memo, emphasizing, "It really doesn't matter whether the satellite has any military value. The important thing is that the Russians have left the earth and the race for control of the universe has started."

President Eisenhower wasn't so alarmed; he regarded Sputnik as a stunt. He'd seen the top-secret CIA reports (which he did not share with Congress), concluding that the Soviets were still many years away from a workable ICBM. In this same period, many on the Hill, Republican and Democrat, were relying on leaks from the intelligence branch of the Air Force, which was far more pessimistic (and, as it turned out, inaccurate) about an impending "missile gap" in favor of the USSR.

John Kennedy ran for president in 1960, promising a "new frontier" founded on "vigor." Early in his term, he directly responded to Sputnik in two ways: He poured money into the Minuteman ICBM program (both before and after he realized that the missile gap was a myth). And he pledged to land an American on the moon by the end of the decade.

In the spring of 1959, Texas Instruments had introduced a new technology called the microchip. But it was very expensive and generated no demand from the private sector. However, these tiny chips would be needed to power the guidance systems in the Minuteman's nose cone—and in the coming Apollo program's space capsule.

It was the Pentagon and NASA that bought the first microchips. The demand allowed for economies of scale, driving down costs enough so that private companies started building products that relied on chips. This created further economies of scale. And so came the inventions of the pocket calculator, smaller and faster computers, and, decades later, just about everything that we use in daily life.

None of this was inevitable. It started only because of government investment. Obama made this same point in Tuesday night's address: "Our free enterprise is what drives innovation. But because it's not always profitable for companies to invest in basic research, throughout history our government has provided cutting-edge scientists and inventors with the support they need. That's what planted the seeds for the Internet. That's what helped make possible things like computer chips and GPS."

GPS was initially an Air Force program, designed to make bombs more accurate. The Internet was an internal communication program created by the Defense Advanced Research Projects Agency.

Obama could have gone back further. The first commercial computer, the IBM 1401 of the late 1950s, came about only because the first customers were government agencies, the Social Security program and the Veterans Administration, which required a computer with enough capacity to store data about the millions of Americans receiving government checks.

Toward the end of his speech, President Obama mentioned several entrepreneurs who in recent months have revamped their businesses to solve new crises and meet new demands. They're inspiring case studies. But if the U.S. economy is going to do big things—and Obama said, twice, near the end of his speech, "We do big things"—they often don't get there without a spurt of government funding.

This relates to Paul Ryan's far-fetched views, and the conservatives' distorted view of Europe.


Their Own Private Europe
By PAUL KRUGMAN
Published: January 27, 2011

President Obama’s State of the Union address was a ho-hum affair. But the official Republican response, from Representative Paul Ryan, was really interesting. And I don’t mean that in a good way.

Mr. Ryan made highly dubious assertions about employment, health care and more. But what caught my eye, when I read the transcript, was what he said about other countries: “Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.”

It’s a good story: Europeans dithered on deficits, and that led to crisis. Unfortunately, while that’s more or less true for Greece, it isn’t at all what happened either in Ireland or in Britain, whose experience actually refutes the current Republican narrative.

But then, American conservatives have long had their own private Europe of the imagination — a place of economic stagnation and terrible health care, a collapsing society groaning under the weight of Big Government. The fact that Europe isn’t actually like that — did you know that adults in their prime working years are more likely to be employed in Europe than they are in the United States? — hasn’t deterred them. So we shouldn’t be surprised by similar tall tales about European debt problems.

Let’s talk about what really happened in Ireland and Britain.

On the eve of the financial crisis, conservatives had nothing but praise for Ireland, a low-tax, low-spending country by European standards. The Heritage Foundation’s Index of Economic Freedom ranked it above every other Western nation. In 2006, George Osborne, now Britain’s chancellor of the Exchequer, declared Ireland “a shining example of the art of the possible in long-term economic policy making.” And the truth was that in 2006-2007 Ireland was running a budget surplus, and had one of the lowest debt levels in the advanced world.

So what went wrong? The answer is: out-of-control banks; Irish banks ran wild during the good years, creating a huge property bubble. When the bubble burst, revenue collapsed, causing the deficit to surge, while public debt exploded because the government ended up taking over bank debts. And harsh spending cuts, while they have led to huge job losses, have failed to restore confidence.

The lesson of the Irish debacle, then, is very nearly the opposite of what Mr. Ryan would have us believe. It doesn’t say “cut spending now, or bad things will happen”; it says that balanced budgets won’t protect you from crisis if you don’t effectively regulate your banks — a point made in the newly released report of the Financial Crisis Inquiry Commission, which concludes that “30 years of deregulation and reliance on self-regulation” helped create our own catastrophe. Have I mentioned that Republicans are doing everything they can to undermine financial reform?

What about Britain? Well, contrary to what Mr. Ryan seemed to imply, Britain has not, in fact, suffered a debt crisis. True, David Cameron, who became prime minister last May, has made a sharp turn toward fiscal austerity. But that was a choice, not a response to market pressure.

And underlying that choice was the new British government’s adherence to the same theory offered by Republicans to justify their demand for immediate spending cuts here — the claim that slashing government spending in the face of a depressed economy will actually help growth rather than hurt it.

So how’s that theory looking? Not good. The British economy, which seemed to be recovering earlier in 2010, turned down again in the fourth quarter. Yes, weather was a factor, and, no, you shouldn’t read too much into one quarter’s numbers. But there’s certainly no sign of the surging private-sector confidence that was supposed to offset the direct effects of eliminating half-a-million government jobs. And, as a result, there’s no comfort in the British experience for Republican claims that the United States needs spending cuts in the face of mass unemployment.

Which brings me back to Paul Ryan and his response to President Obama. Again, American conservatives have long used the myth of a failing Europe to argue against progressive policies in America. More recently, they have tried to appropriate Europe’s debt problems on behalf of their own agenda, never mind the fact that events in Europe actually point the other way.

But Mr. Ryan is widely portrayed as an intellectual leader within the G.O.P., with special expertise on matters of debt and deficits. So the revelation that he literally doesn’t know the first thing about the debt crises currently in progress is, as I said, interesting — and not in a good way.

What Al Gore is to physics, Paul Krugman is to economics.

Resorting to Ad Hominem when presented with arguments you can't argue against is poor form.

He's perfectly correct, that Republicans were wrong about Ireland a few years ago and the Austerity program they cheered on in England is backfiring.

At some point, don't continual errors regarding the judgment of a situation add up and start to remove one's authority on such matters?

Cycloptichorn