Wrestling Alligators, Draining Swamps: Economic Policy, Politics and Partisans

The Economy, Policy and Politics:Wrestling the Crisis Alligators

By Dave Livingston. Dave is a management consultant with almost 30 years of experience with analyzing complex business problems and developing solutions and new businesses. He blogs on public affairs at his blog Parts, Systems, Structures and Outcomes ( http://llinlithgow.com/PtW/ ) where he attempts to apply that toolkit to current affairs and public policy.

Introduction

2009 was the year we narrowly avoided an economic collapse into a second Great Depression and managedinstead to turn it into a Great Recession. While the Economy has stopped its freefall we came very close to theedge of the abyss. The Economy is beginning to recover thru the combined effects of fiscal and monetary policybut joblessness is still higher than at any time since the Great Depression and will take years to begin growingagain. Unfortunately the long-term prospects are rather poor, with a weak and jobless recovery and relatively highunemployment and poor job creation throughout the rest of the decade.Unfortunately the things necessary for our survival also became political footballs with strong opposition more onthe basis of ideology than on a sound understanding. We try to dig deeper into the crisis, the fiscal policies andthe strategic outlook to debunk many of the myths that became headlines and political attacks.A key component of the crisis was malfeasant behavior on the part of the Financial Industry where short-termprofits were gained at the risk of long-term damage. To prevent a future occurance we need to re-think the roleand function of the Industry and re-formulate the legislative and regulatory regime under which it operates.But political sausage-making is an ugly business at its best and the influence of special interests has ralliedbehind reducing and slowing down reform, despite its being in the best interests of the country and the industry.Combined with partisan political interests industry lobbying has made the scope and extent of reform morechallenging than it should have otherwise been. On the other hand there was so much going on that there waslittle time, energy or attention to spare but 2010 promises to be the year of a multi-year effort. An effort that hasalready seen reasonable draft legislation in both Houses as well as the initiation of the Financial Crisis InquiryCommission (FCIC), or Pecora II.When you take it all together we’re facing a very tough decade of weak growth with no bubbles to hide behind.Here we lay out some of the ins and outs of the crisis, its aftermath, government policy, the efforts at regulatoryreform and dive into the longer-term outlook. We face three major challenges, sequentially:1. The need to get the economy back on a sound footing where growth reaches takeoff velocity andbecomes self-sustaining.2. The need to de-leverage the economies because growth in the last two decades was built on excess debtaccumulation by consumers, and even businesses.3. The need to return to being a nation of savers, instead of a nation of spenders who direct those savingsinto productive investments that are the real, long-lasting source of growth and jobs.The jury is out whether or not partisan politics, the influence of interest groups and the will of the voters will enableus to meet these challenges. But one way or another we will be living with the results for a long time to come.

Economy, Policy and Politics: Navigating the Hurricane + Tsunami

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Table of Contents

1. Miracles on Pennsylvania Ave: Make it So, No. 1! 32. The Chinese Goldsmith, Finance and the Next Big Fight 73. Banks Hate Banks, Voters Hate Banks: Hear the People Singing! 104. The Beginnings of a Great Debate: People Singing, Politicians Making Sausage135. The Sine Qua Non: Economy, Stimulus and Outlook 166. Change is Necessary: Current Course and Speed = ROCKS! 217. Pecora 2 Hearings, Malfeasances, Your Future & Cusp Points 27

Economy, Policy and Politics: Navigating the Hurricane + Tsunami

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February 16, 2009

Miracles on Pennsylvania Ave: Make it So, No. 1!

The big news from the last couple of weeks, at least domestically, is that we've succeeded in crafting and passingthe largest peacetime suite of economics legislation in our history (the Stimulus Package plus the next round ofTARP) with more to come as the other two legs of a 4-legged stool. Those being a Housing rescue package anda re-formulation of Financial Industry regulation. We also learned that the ME is not the only place whereintransigent adherence to provably wrong shibboleths of policy, position and belief are rampant. Nonetheless thepackage is un-surpassed for size, scope, force and timeliness and as such gets a B+ on economics, an A- onpolitics and an A for pragmatic and realistic policy-making craftsmanship, admittedly grading on a curve. What dowe mean by all that?

Economic Policy to Date

First, make absolutely no mistakeabout it. This package is absolutelyessential to saving the economy.We're in a very serious situation wherethe liklihood of a more pronounceddownturn followed by a decade orbetter of Japanese Malaise is entirelypossible. Further, the economy isunlikely to recover on it's own becausethe normal, organic self-correctionmechanisms are broken.People and companies are, were andwill be continuing to pull in their hornsas the situation deteriorates;government is the ONLY possiblesource of the spending necessary tosalvage things.Second, in a short-term view the notion that OMG it's spending is just utter and absolute nonsense, that in fact isthe whole point. It doesn't matter if gov't employees steal everything and go to Vegas - it's still stimulative.Third, there are real tradeoffs between tax cuts (which are fast but don't give you much bang, direct spendingwhich gives you a much better multiplier but is slower and investment, e.g. infrastructure, where you get the mostbang but is much slower and complex.For example investment in new energy sources doesn't do much good if you haven't the power grid to move thenew power. Fourth, given the spending if you can use some of it to both get high multipliers AND lay thefoundations of down payments in future improvements in the economy that's smart policy-making. Finally, this is alarge, very complex under-taking for which the implementation mechanisms are lacking; as a result there's only somuch spending you can do in certain timeframes and you need to build up your capabilities. You also need to getsupport and buyin. Taken all together the package is a very well-crafted balance among all these competingrequirements, let alone in the time and with the ideological oppositions it faced. We've gone into some of thisbefore (First Things: Financial Crisis, Economy and Barry) but if you'd like some more details try these more"technical" discussions (State of the World: Crisis Metastasis, Strains and Fault Line,Economy vs Earnings CageMatch: Outlook, Business Performance & Realities ???,Time, and Past to Play Bizzball: Economy to Business