How HGttG saves the world

Don't Panic

I'm beginning to think that the text book of any economic theory could be summarised with the title page from Hitchhiker's Guide to the Galaxy. It really comes down to something just that simple. The economy goes up because people keep their heads and make usually reasonable assumptions about the future, measured calculations in the aggregate (certainly not in the individual world of course). It goes down when people panic.

Sometimes that panic is perfectly justified. And then the key becomes how to stop it. There might be some reasonable measures needed, such as a chapter in that prospective text entitled "Don't get excited either", where people begin to make irrational assumptions. Things like "housing prices CAN'T go down" or "this complex financial derivative that I don't understand MUST be worth something."

We have a few things going for us.

1) Obama. I personally don't always agree with him. Many economists don't, or certainly agree with many of the policies that have originated with this administration. But the public still has some sense that this is an unflappable character we've elected who will be working very hard and very intelligently to help resolve this situation. FDR inspired the same charisma, to the point that when he finally settled on an agenda for a while, even the markets responded with a healthy dose of optimism. There were many false positives that for some reason FDR's team did not pick up on. Or maybe FDR's semi-inate political sense against inflation and deficits. There's a story about a press junket in 1936 for economists about how they'd conquered the deflation problem and wages were improving, that things were generally getting better and they could start tackling the INFLATION problem (which didn't yet exist). The assembled economists openly laughed. It was no laughing matter. The result of this policy assumption was the second half of the Great Depression, starting in 1937. We may see the same adjustment period. In both cases, the frequent but timely use of the President's bully pulpit can be used to restore a dose of boisterous confidence or sanity. I think Obama has been picking his spots rather well thus far, even if some consider him to be spreading his agenda too far and wide. I'm not sure yet if his actual agendas however are going to be greatly useful, or at least, the version as enacted into law by Congress.

2) Bernanke. I don't mean that I have confidence or the markets have confidence in him now. But this was a guy who built his career on studying the Great Depression. If the Fed is somewhat unshackled from Congress (a position I'm not quite clear on how it is, it's supposedly autonomous), it's possible we would see a better policy lying about for the path out of the woods. Then again, it's equally possible, given the Fed moves in October of last year, that we'll end up deeper into the woods than we ever wanted to be. The mixed response of countries like China, who own a considerable portion of our debts, to our monetary policies has not been encouraging. I suspect some dash of technocratic governance would be encouraging to the general market, certainly more so than the sort of half-assed governance we've been getting for a long while now (at least as long as I've been following politics, way back to parts of the Clinton administration).

3) No Bush, No Paulson, No Greenspan. I think the first two are self-explanatory. Greenspan is credited in part with an expansionary period leading up to this debacle, and with under-regulating encouragements that are widely seen as ripping up the financial sectors, particularly by distorting the housing market. I think this is a fair criticism. There was certainly a period of easy money that got us into the problem. I think we can at least patch up the leaking parts that deregulation created. If not fix them to satisfying levels, at least keep the water from flowing in at destructive levels (certainly more plausible a circumstance with these people out of the way). It's clear though that we still don't have a solution which addresses the tightening of money that created the present situation, something which occurred in a post-Greenspan era, and shouldn't be a burden. (Actually that's Bernanke's fault). There's a difference between "easy-money" of the sort created from thin air to give loans to people who already cannot afford them and "easy-money" of the sort provided to expand the economy by giving it to people who will multiply it by making sensible risk assessments. Right now there's very little of the second because banks either aren't loaning it out or aren't able to make sensible risk assessments. I'm not sure which of those possibilities is worse (given the amount of money we, taxpayers, loaned to banks specifically so they should loan it back out).

At least the first is immediately actionable if we have the right minds attacking it: penalize the excess reserves rather than provide incentives to keep the money there, in a safe, boring, non-multiplying vault. As we are currently doing. The second can be mollified by steadily repairing the housing market. They really should have had the FDIC coordinate with some of the regional and national banks to get people to re-negotiate into favorable terms as quickly as possible, even hamstringing into some write-offs of debts in exchange for a promise to cut the government or the bank a check for any recovered value (up to the write-off amount) later when they go to sell their house. Foreclosures depress the market further and can cause death spirals, which are hazardous to individuals (and by extension the financial instruments that are based on these loans made to individuals), and to banks generally who must hold the properties at a depressed price level with no way to generate income from them. They are often better off taking a lower price of income coming in for a while rather than swallowing whole the losses. The idea would not be to keep housing prices leveled, but to get them to level off more gradually than they have been so as to establish a decent and manageable trend line. Banks can operate with the assumption of loss. They cannot operate with the assumptions of loss and continued loss without any inkling of profitability in sight.