TW: Simon Johnson is former chief economist at the IMF, he generally is pretty sober minded, tries to stay above the Keynesian/Monetarist fray (unlike say Paul Krugman). His assessments seem on target to me. They are troubling.
Many feel the crisis is abating, but is that true? Many are more than willing to avoid reform (UGH!!). We are in an increasingly strident inflation v. deflation battle. It is hard to fight one without encouraging the other and if one does not know which is the real foe, paralysis usually results.
From Simon Johnson's blog:
1. Financial markets have stabilized – largely because people believe that the government will not allow Citigroup to fail. We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside. How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation...
2. The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years. Longer term growth prospects remain uncertain – has consumer behavior really changed; if finance doesn’t drive growth, what will; is the budget deficit under control or not (note: most of the guarantees extended to banks and other financial institutions are not scored in the budget)?
3. More broadly, there is sophisticated window dressing in the pipeline but no real reform on any issue central to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis. The financial sector lobbies appear stronger than ever. The administration ducked the early fights that set the tone (credit cards, bankruptcy, even cap and trade); it’s hard to see them making much progress on anything – with the possible exception of healthcare.
4. The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before late 2010. The financial markets beg to differ – presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices, and potential commodity price inflation worldwide. In all recent showdowns with standard macro models recently, the markets’ view of reality has prevailed. My advice: pay close attention to oil prices.
5. Emerging markets are increasingly viewed as having “decoupled” from the US/European malaise. This idea was wrong in early 2008, when it gained consensus status; this time around, it is probably setting us up for a new bubble – based on a “carry trade” that now runs out of the US. The ”appetite for risk” among investors is up sharply. The G7/G8/G20 is back to being irrelevant or merely cheerleaders for the financial sector."
1 comment:
I have followed Simon closely. He has been spot on thusfar in his analysis. Interestingly, although he is regularly carried by the mainstream media, the Whitehouse like to ignore him like he doesn't exist. I have sent his Baseline articles to my congressman regularly (a Republican) and interestingly he is yet to respond. Additionally, I believe that Krugman is a wonk who is joined at the hip to the Obama economic team. That is a shame, because, as much as I love the President, his pragmatic approach and intelligence, I really don't like or respect Geithner or Summers, and Vollker appears to be just "window dressing."
Now, I fear that there will not be strong regulation enough to drive growth to other sectors, and rather a continued reliance on the "bubble" people to put us back on the correct economic course. They are currently under the impression that the worst of government intervention or regulation is over, and they are on the brink of going back to the same old aggrandisement schemes with high bonuses and a huge share of the GDP that created this incredible mess. And, really the larger problem is that the rest of the world is gradually losing faith in the willpower of the new administration to give things a fresh start and make essential changes to move forward.
Meanwhile the toxic assets get more toxic by the day, and with the collapse of the commercial real estate market looming, the future looks bleak in the half-measure environment of our Federal economic team and a bought-and-paid-for Congress.
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