Year: 2008

It would not be so bad for the president if a sizable fraction of the electorate shared his continuing optimistic delusions. Instead, in cities, towns and countryside, plain people of both political parties now fear that even twice 20,000 new US troops sent to Iraq would fail to create a viable and prosperous Iraqi democracy. There is, perhaps, one area where President Bush is enjoying some unearned luck. That area is the US macro-economy.

In terms of economics the six Bush years have not lived up to the Kennedy-Johnson 1960s growth era; nor to the Clinton epoch of 1994-2000. Still, during 2001-06 the record for real growth and freedom from inflation has been moderately OK on Bush’s watch. Don’t think that it was Bush’s promised program of “compassionate conservatism” that fended off unemployment and persistent recession. It was certainly not faith-based compassion that lowered tax burdens on my affluent neighbours in the comfortable suburbs.

In writing up for the future record books, top economic historians will give major credit to the Greenspan and Bernanke Federal Reserve. As with most of today’s central banks, the Federal Reserve policy-makers are accorded a degree of independence from both the executive and legislation branches of government. I cannot award Alan Greenspan a perfect A-plus grade: Unwisely he did opt to let the late-1990s Wall Street stock market bubble run its course for too long. And, rashly, Dr Greenspan did given his blessing to the Bush tax giveaway to the most affluent.

However, in comparison with the general run of past US and global central bankers, Greenspan did exercise canny flexibility. Will Gov. Ben Bernanke’s new bid for explicit inflation targeting work out better than Greenspan’s flexibility? Only time will tell. Two new unforeseeable complications have been testing Bernanke’s preferred strategy. First came the recent supply-side shock from OPEC’s oil-price rise that for a time doubled petroleum price to $80 per barrel. Second, the Federal Reserve did have to lower interest rates more than a dozen times to fend off the recession brought on by the bursting of Wall Street’s late 1990s stock market bubble. Inadvertently, this contributed to a housing and real estate bubble. I write ‘contributed to’ because in any case the US was susceptible to similar real estate bubbles experienced in both Europe and Asia.

If we are ever tempted to think economics has become an exact science, reality disabuses us from our hubris. No experts predicted that those many lowerings of US interest rates would principally stimulate consumption spending rather than, as Keynesians used to think, principally stimulate capital formation. Why think expanded consumption spending to be worse than expanded investment spending? The answer is this: Bush already inherited a US society opting to save less than the country will need down the road when 10 years from now the post-1946 baby boom generation will be retiring.

A cautious and sound Republican fiscal policy would certainly not concentrate on cutting out inheritance taxes on the ultrarich. That tactic perforce shifted the emphasis onto monetary rather than fiscal policy to counter the 2001-03 recessionary forces. Some approving words can be said for reducing the tax rates on corporate dividend receivers to 15 percent and reducing the long-term capital gains tax rate also to 15 percent. Admittedly these new measures will not serve to reverse globalisation-induced inequality of incomes. Still, objective experts must concede that they do get some credit for stepping up the US’s ‘total-factor productivity.’ It is this last process that America’s future growth pace must depend upon most.

What about the new Democratic control of both houses of Congress? This will serve to check the bale influences of lobbyists and tendencies toward ‘plutocratic democracy.’

Raising the minimum wage will be irresistibly popular. But its macro impact will not be great. Market wage rates have already risen to beyond $7-plus per hour. Don’t expect material reduction in inequality to come from this measure. The 2006 electoral landslide against the Republicans provides no mandate for a new burst of trade union militarism. Under globalisation that path would markedly speed up loss of American jobs to lower-paid workers in Asia and Eastern Europe. It is centrist democratic actions that will maximise the probability of a Democratic president being elected in 2008.

A stampede to protectionism ought, in my judgment, to give way to restoration of regulatory programmes and fiscal programmes that go some cautious distance toward transferring some of the winnings from globalisation to the lower-middle classes, who are both numerous and hurting. Easy for me to map out such realism, but it will be devilishly hard to contrive the compromises necessary to evolve toward a ‘golden mean’ mixed economy.

© 2007 Paul Samuelson, Distributed By Tribune Media Services, Inc.

All through the many years of the 1929-1939 Great Depression, Wall Street publicists and President Herbert Hoover would repeatedly announce: “Recovery is just around the corner.” Yale university’s great economist Irving Fisher preached the same message. They were wrong. And history repeats itself.

Today, Federal Reserve Gov. Ben Bernanke admits that nobody, including himself, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis.

Why this new vacuum of non-transparency? As one of the pioneer economists who helped create today’s utterly new-fangled securities, I must plead guilty that these new mechanisms both (1) mask transparency, and (2) tempt to rash over-leveraging.

Why should my non-economist readers care about the above technicalities? The best reason is that we must worry whether the policy tools that served so well for Alan Greenspan’s Federal Reserve and for the Bank of England will now have to be changed.

It used to be enough for the central bank to “lean against the wind.” That means, lower its interest rates when unemployment is too high and deflation threatens. And when business growth is too brisk, central banks are supposed to raise their interest rates to dampen growth and to forestall price-level inflation that threatens to exceed 2 percent per year.

This month, central bankers and Treasury cabinet officers cannot know whether current interest rates are high or whether they are low.

Surprising but true. Safest bond interest rates are indeed low. But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even mammoth General Electric would find it expensive now to finance a loan needed to build a new and efficient factory.
The situation is not hopeless. New, rational regulations that discourage predatory lending and rash borrowing could have helped a lot.

Stabalising
Also, as we learned during the Great Depression, the government’s treasury and its central bank must be both the lenders of last resort and the spenders of last resort. Speculative markets will not stabilize themselves.
The art of best policy is actually the middle way. Not too much freedom for market forces. And definitely not too little freedom.

Global markets have moved into a new epoch. China, India and even Russia and Ireland are currently growing at almost twice the pace of the United States and the core countries of the European Union. Gone are the days when a U.S. president can command the ocean tide to come in and command it to go out.

The U.S. population is five percent of the global total. And still it enjoys per person about 20 percent of total global output. That’s the picture now. Will this last?

When I come to write a newspaper piece like this 10 years from now, I believe America may still lead the pack in average real per capita affluence. But in all probability, the China that has already displaced Japan as the economy with the second biggest total gross domestic product will likely, by 2017, have a total GDP equal to America’s.

When that happens, a typical Chinese family will still be a lot poorer than a family in the United States or even Ireland! Remember, China’s population is several times that of America or any European country. Don’t even ask me what the U.S. dollar in 2017 will be worth.

President George Bush and Vice President Dick Cheney will be long since retired on their respective Texas and Montana ranches, but their rash 2000-2007 tax-cut-and-spend policies will by then have harvested the follies that they foolishly sowed.

Since we live ever in the short run, global leaders must make their best guesses about what to be doing in 2008. Here are my tentative suggestions.

Watch the developments alertly. If America’s Christmas retail sales fail badly — as they could do when high energy prices and high mortgage costs pinch consumers’ pocket books — then be prepared to accelerate credit infusions by central banks on the three main continents.

Price instability
Keep in mind threats of excessive inflation. But be aware that the skies will not fall if the price-level indices blip up from 1.9 to 2.6 percent per annum. What worsens the public’s expectations about price instability is excessive spike-ups in the cost of living chronically maintained.

Finally, to reduce the burden of mass foreclosures of over-expensive mortgages, pioneer as we did with the Depression-era Reconstruction Finance Corp. to explore new quasi-public agencies that specialiSe in supplementing for-profit ordinary lenders.

This suggests expanding in a controlled way the lending powers of quasi-public agencies such as Fannie May and Freddie Mac. Better that they should lose a bit when they help homeowners of modest means fend off foreclosures on their onerous mortgages. Maybe such novel innovations will turn out not to be needed. But keeping in mind worst-case freezing up of bank and other lending agencies, advance exploratory planning will be worthwhile insurance.

What the world does not need now is tolerance for any persistent weakness in global Main Street growth. It is better when physicians worry unduly about a patient’s health than when they worry too little. Good advice also for governmental leaders.

© 2007 Paul Samuelson Distributed By Tribune Media Services, Inc.

For reasons we shall never know, thereafter China stagnated. It was the Dutch society in the Age of Exploration that ended highest on the flagpole of per capita Gross National Product. Then in the 17th century, Isaac Newton, standing on the shoulders of Copernicus, Kepler and Galileo, initiated our current epoch of continuous scientific progress. For two centuries, up to the late years of Empress Victoria’s reign, it was Britain that ruled the roost.

Around 1900, Britain’s rebellious child, America, with its plentiful resources, took over world economic leadership. However, 30 years from now, experienced historians in 2037 will probably trace America’s decline relative to the billions of Chinese back to the likes of young President George Bush, Vice President Dick Cheney and Cheney’s minions.

History shows that historians never do get things quite right. Even if voters had put the most perfect philosopher kings into office between 2000 and 2008, by mid-century the population living on the Pacific Rim, one-third of the world’s total, would still have surpassed North America plus Europe in total real economic output.

Why and how? It will be much the same story of how and why the United States was able to learn and utilise the best technology known to the Germans, French and British. Freed of Communist Mao’s know-nothingism, low-wage Chinese have similarly been able singularly to copy Western technologies.

By coincidence, a billion low-paid, educable workers in India – freed of Nehru’s Fabian socialism – will also increasingly out-compete more and more initially higher paid North American and Western European workers.
Readers will misinterpret my text if they think that it foretells a dismal story for the present affluent regions. Economics, unlike geopolitics, is not a zero-sum game. When Germany’s Bismarck defeated France’s Louis Napoleon in 1870, that was indeed a zero-sum political-power game, where one side lost what the other side gained. By contrast, when Japan gained on America in per capita real income from 1950 to 1990, that did not imply any falling off of US per capita real income. US GDP per capita, in the Age After Keynes, in fact continued to rise, and did so faster than in historic capitalism’s past laissez-faire periods.
 
Let me now add what needs to be added in any essay on ‘Globalisation and its Discontents:’
1) The market mechanisms necessary and sufficient to propel total productivity, alas, will invariably at the same time exacerbate inequalities between winners and losers.

Digression: Simon Kuznets, a great quantitative economic historian, guessed wrong about the future. Professor Kuznets opined that initial growth would first worsen equality; but later, he expected, competitive markets would restore greater equality. Nobel Prize winners can, alas, be wrong. Laissez-faire market capitalism has never yet arched downward measures of inequality between the luckiest rich and the no-longer-secure middle classes!)

2) The lush fruits of science, which bring us improved life expectancy and greater quality of living, also worsen our environment and ramp up our vulnerability to the devastation of war and terrorists’ malevolence.

3) What can keep economics the Non-dismal Science are the considerations that the potentialities of science itself can (a) enable us to limit contamination of air and water and (b) rectify (somewhat) the degree of worsening inequalities.

4) Will our democratic political system automatically achieve these good offsets against environmental evils and pitiable income and wealth inequalities? No. Definitely not. These admirable things happen only if the majority of voters do, purely out of altruistic impulses, agree to tax some of the winners’ winnings and use these things to reduce some of the losses that the market will mete out to the losers.

Let me now get realistic. During the Great Depression, under Franklin Roosevelt’s eloquent New Deal leadership, we voters did have a feeling, “We are all at risk together. There but for the grace of fate, I would be jobless and homeless.” Therefore, in great majority, we voters did opt from 1932 until 1980 for a mixed society and not for a libertarian, laissez-faire, market-only civilisation.

That’s the way voters still think in successful places like Finland and Denmark. In those places, libertarian economists with names like Milton Friedman and Friedrich Hayek are little mentioned. Yet when polls about ‘happiness’ are taken around the world, it is from such mixed-economy places that the bulk of people report themselves to be ‘least unhappy’ and ‘least anxious.’

Realism and conscience require me to record a final weighty warning.

No democratic government anywhere can successfully second-guess the market mechanism by extreme transfer programmes from rich to poor in the hope of levelling out family differences in wealth and income. At best, the Golden Mean of the feasible best must utilise limited state-enforced income redistributions.

© 2007 Paul Samuelson, distributed by Tribune Media Services, inc.

In the first decades after World War II ended, Germany, Japan, France and even Italy did well. So they earned A or A-plus grades. Then, increasingly after 1960, new growth winners emerged: On the Pacific Rim, hot on Japan’s heels followed Taiwan, Singapore, Hong Kong and South Korea.
 
In the European Union, core countries such as Britain, France and Italy began to lose the momentum that the successful American Marshall Plan had stimulated. Gradually Spain, Finland, Norway, along with Holland and Belgium, gravitated to being lead bicycle riders in the growth sweepstakes.
Which regions were notoriously absent from the good-news headlines?

Sadly, many of the African countries that newly got their independence degenerated into one-dictator regimes. And, alas, in the Middle East, except for places generously blessed with oil resources, both the economic and the political scenes have been pitiable.

In contrast to today’s positive growth in China and India, a couple of billion folk who lived in those places between 1950 and 1970 were faring badly when so many of their neighbours were developing so rapidly. There is no mystery why mainland China stagnated miserably. Mao’s brand of communism was perpetually a dismal failure. Steel mills in the backyard were a joke – a bad joke.

Now we know what could not be understood back then: The Chinese population, given a chance to thrive in market economies, did possess tremendous potential. Mercantile successes by Chinese outside of China – in places like Malaysia and Indonesia – suggested strongly that the epoch after Mao’s death could be the great success that has actually taken place if only the market would be given a try.

Liberation from the empire
The Indian story involves some essential differences. The British Empire had brought considerable schooling to the Indian peninsula. After liberation from the empire in 1947, Indian’s great leader was the aristocratic Nehru, who favoured bringing from the West economic advisers steeped in British Labour Party Fabianism. Therefore, the Fairy Prince of the market mechanism was late in coming to awaken India from its sleep. But better late than never.

Economic history teaches no simple lessons. But the weight of past experience suggests strongly that one-party bureaucratic organisation of production and consumption does a bad job everywhere in giving people a good and growing standard of living.

Be warned, though. Don’t go from one extreme to another. No one knows better than 21st century economists that unregulated laissez-faire market mechanisms – unchecked by democratic governmental regulations and sensible macroeconomic policies – will generate both systemic income inequalities and boom-and-bust business cycles.

Before the 1929 Wall Street crash, pretty much pure capitalism prevailed, not only in America but also throughout the advanced West. Back then, before the age of penicillin and CAT scans and echograms, physicians also were limited in their ability to cure diseases and prolong quality of life.

Economic science was in a similar fix. It didn’t know then how to temper and attenuate the vicissitudes of economic fortune. That’s why economics had long earned the title the Dismal Science.

Personally, I knew all that well. The economic textbooks read at our top universities had little to say about the great worldwide depression as it worsened after 1929. Harvard and Chicago were alike in this respect when I attended them on comfortable scholarships. But both were late in recognizing the actual new facts of life. That was then. This is now. Probably France in the next few years will pick up steam under its new President Nicholas Sarkozy. Fanatical US patriots will then say, “France’s new success comes from aping the American pattern.”

Universally true
That’s a wrong interpretation. Yes, America’s business cycles have gentled down considerably. But this has been universally true. I’d prefer to say that such future French successes (if they materialise) are because they have begun to do some of the things that Ireland and Finland have been doing.

What are they? Among other things, the past activities of strong US trade unions dealing with Americans Fortune 500 corporations have vanished. Why? You might say that the AFL-CIO big unions committed suicide in the new free-trade globalized environment because every past union ‘victory’ actually betokened a defeat, which speeded the exit of US of auto, computer and myriad other manufacturing activities.

My sermon is not aimed for people abroad. Bush-Cheney Republicanism has been harmful in both Iraq geopolitics and its encouragement of corporate misgovernance. That’s why the Democratic Party is most likely to sweep our November 2008 elections. In the present scenario, non-centrist wings of the Democratic Party can gain considerable advantage. Republican strategists hope they will grow. Since the US electorate has not turned leftish en masse to any appreciable degree, the best last hope of the Machiavellian Republicans is that 2008 Democratic candidates for office preach protectionism and anti-market phobia.

Defining and reaching the optimal centre is not easy. And by definition, the centre is duller than the dubious extremes that surround it. Two basic truths will dramatize this. 1) Pruning back the give-to-the-richest tax breaks of President Bush’s will little affect America’s Schumpeterian innovation propensities. A good reason to do that pruning. And 2) However, at best, most of the new inequalities traceable to globalised and internal free trade cannot be achieved by any feasible acts of good government.

Centrist improvements are important but modest. Dramatic proposals from either the left or right will once again be proved in the long run to be fools’ gold only.

© 2007 Paul Samuelson Distributed By Tribune Media Services, Inc.

A century ago, the esteemed philosopher George Santayana warned, “Those who ignore history will be condemned to repeat it.” One can add, “And those of us who do know history will be condemned to repeat it with them.”

Why did our top experienced experts fail to anticipate the worldwide financial turmoil brought on by the 2006 bursting of the real estate bubble?

No one can be a perfect forecaster. But leaders do differ in their long-run average of prediction accuracy. Alan Greenspan, during his decades of public service and private consulting, was definitely better than most. Prior to 1997, he made only a few bad calls. But mostly these were venial sins, not what theologians call mortal sins.
However, just before his January 2006 retirement as top Federal Reserve governor, Chairman Greenspan made the mortal error that will mar forever his reputation.

While just before his eyes the bursting of the subprime mortgage bubble was taking place, Greenspan viewed it all through rose-colored glasses.

New models of financial engineering, under rash deregulation, were exploding with dysfunctional finance. To Dr. Greenspan, this looked like clever risk-bearing by respected Wall Street activists.

What was dysfunctional before and after the fact looked rosy to Dr. Greenspan. I suspect this traces to his gut remembrances of Ayn Rand extreme libertarianism.

Greenspan has been in plentiful company. None of the CEOs for the biggest investment banks ever had the least understanding of the mathematics of derivatives or of the intransparency and hyper-leveraging they were involving themselves in.

Now Wall Street Journal pundits tell us on Monday, Wednesday and Friday “the worst is behind us.” But on Tuesday, Thursday and Saturday, pundits tell us “the worst is yet to come.”

Which is right? What knowledge of past history could help answer that timing question? Actual economic history, almost by definition, is what mathematicians call a non-stationary time series. Their past probabilities can be helpful, but only somewhat. And when new things happen, palaver about history can sometimes be materially harmful.
There can always be something new under the sun — even if you shouldn’t bet on it. The 1929-1939 Great Depression couldn’t happen. But it did.

Hitler’s Germany almost won World War II. But it didn’t.

All of the above is a way of saying that no one can now know when the global economies will recover from recent serious turmoil.

This one can know, however. The system cannot be counted on to heal itself. Fed chief Ben Bernanke did the right thing when he stretched the powers of our central bank to check the financial bleeding.

My guess is that after the Democratic Party victories in November 2008, new shifts in policy toward the center will be needed: (1) to improve sensible regulating; and maybe (2) the U.S. will have to rely in the end on myriad federal spending to clean up the financial engineering messes.

That was what had to be done in both the United States and Germany back in the 1933-1939 period of recovery achieved by depression brought on by massive deficit (!) spending. This, and not easier credit by central banks, is what mostly restored job opportunity to the one in three American and German workers who were suffering long-term unemployment.

Searching for scapegoats is all too easy. The SEC monitors of speculative risk-takers were asleep at the switch. So were central bankers in the U.S., the U.K. and the new EU central bank.

And where were the great, tried-and-true accounting firms? They were leading and abetting the charge into unknown abysses of leveraging and risk-taking, rather than controlling against them. The list goes on and on.
I stop at the abject failure of the three principal rating agencies.

They indiscriminately gave AAA ratings to good fish, foul fish, and stinking-foul foul fish. Why? Because, of course, they would otherwise lose the fat fees their customers paid only to messengers of good-sounding news.
To sum up, the financial system on President Bush’s watch became systemically fragile and dangerous.

After all my bad news, it may come as cheerful when I say that the mess is not incurable. With time and good sense, after next November’s victory for centrist policies, each of the grave ills can be improved upon.

However, because homes, offices and factories are such long-lived durable goods, the housing meltdown is likely to last for years, not months. Furthermore, realists must expect the early kind of unwise actions by the Democratic victors: Such marred Franklin Roosevelt’s New Deal programs during his first few years in office. Also, the good economic deeds from President Clinton came mostly during his second term in the White House.

No democracy is perfect. One worrisome thing is the kind of promising to special groups that the victors had to make in order to become victors.

I leave for another day the threat of extreme protectionism bred by how much the middle classes have suffered during Bush’s eight years in office.

(C) 2007 PAUL SAMUELSON DISTRIBUTED BY TRIBUNE MEDIA SERVICES, INC.

Destined to burst – as it did burst and still does fester – it surprised and shocked global central bankers and Washington bureaucrats.

More importantly, the collapse of home prices bred huge losses for both rich and poor. That was an obvious effect of plunging price drop.

However, undreamed of was the actual fact that the whole global structure of credit — including credits quite unconnected with real estate or mortgage lending — froze up so as to threaten bankruptcy and losses to ordinary businesses and families.

I will try to sketch out briefly the main macroeconomic story of the last dozen years, globally and in the US.

In the last half of the 1990s, innovational improvements in technology did raise US and global productivity. That in turn set off a Wall Street stock market bubble.

All bubbles grow from their own momentum. I buy stocks because you have bid their prices up. You buy more stocks because I’ve pumped their prices up. Beautiful while it lasts.

Governor Alan Greenspan at the Federal Reserve observed this, but decided not to intervene. (Maybe he thought it would be enough to handle the mess when the bubble burst. Also, in line with his conservative youth, he would rashly say publicly: Intelligent and experienced bankers and accountants discern new sound values. Who are we to say they’re wrong?)

What is forgotten is that in every bubble, the biggest fool looks temporarily like the wisest and soundest pundit.

The Wall Street bubble burst in the spring of 2000. On schedule, a global recession set in. Sensible expansion-of-credit policies by the European Central Bank, the Bank of England and the Federal Reserve were able to keep the recession short and mild.

Worldwide low interest rates then set off a real estate bubble. How fortuitous to always have a new bubble replace a vanished bubble.

Financial frenzy
It is pointless to ask why governmental macro-economic agencies didn’t try out strong preventive regulating to cool down the crazy lending and borrowing practices in the 2000-2005 mortgage markets. They did not.
Academic economists were little better than public officials. Here is just one example: A guest columnist for the New York Times – well trained and a professor at an elite university — pointed out that one virtue of the frenzied financial practices was that they broadened home ownership by less affluent folk.

Yes, but no warning was given by that expert on how home ownership, coaxed out by misleading sub-prime lenders, translates in terms of economic science into dangerous leveraged high-cost betting on a real estate bubble that is to last forever.

Now I come to the biggest surprise of all. Back in, say, 1990, when there had been a previous drop in home prices, people got mortgages from their local banks. Such bankers knew a lot about their customers and the local neighbourhoods. Lenders and borrowers had a mutual interest in avoiding and minimising foreclosures of home ownership. That was then.

In the last decade, a thousand unregulated hedge funds have been born. New and non-transparent options (puts, calls, swaps) have replaced simply owning stocks and bonds outright, free of leveraging loans.

Furthermore, today’s mortgages are being ‘securitised.’ Banks divide them into graded packets. The most sound loans promise the lowest earning yields. The inflated loans to bad credit risks are sold to pay the buyer the highest yield — highest unless it goes into default. Does all this sound innocent and safe? Readers will hardly believe it when they are told that the rating agencies — Moody, Fitch, McGraw-Hill, S&P — blindly awarded highest AAA ratings to both the good-cheese packets and the rotten-cheese packets.

Economists and bankers hailed these new ways that could spread risk-sharing efficiently. What we didn’t foresee was that instead of reducing riskiness, these new instruments can tempt folks into leveraging two to one, 10 to one, and even 50 to one.

Why would the rating agencies bless both the good and the bad? Those who sell these non-transparent packets pay the rating agencies. Common sense assures that those who rate will get the most business and the most profits if they tell their customers what those customers want to hear so that they can persuade gullible risk-takers to pony up funds to keep the housing bubble bubbly.

Attention deficit?
This kind of bad stuff we expected back in 19th-century rigged plutocratic markets. Or maybe in the post-2000 island tax havens. But surely not in the US, EU, UK, Japan or Korea.

Central banks are supposed to monitor money-market procedures. My hypothesis is that Federal Reserve Governor Ben Bernanke or Bank of England Governor Alwyn King were focusing so intensely on targeting against excessive inflation that this diverted their attention away from the looming credit crunch in private markets.

Repeatedly, we heard economists declare: Central banks ought not to bail out foolish investors from losses due to rash investing. To do that would encourage more future rashness in investing.

True enough. But once Rome was burning, Nero could not let things take their course to teach people how to be careful with matches.

Finally, late but not too late, the European Central Bank led the Federal Reserve and even the Bank of England into averting macro-financial crises by pumping newly created moneys into the banking system.
Better late than never.

© 2007 Paul Samuelson Distributed By Tribune Media Services, Inc.

“May your children live in interesting times.” That was an ancient curse, not a cheerful wish. Wars and revolutions are exciting stories. Peaceful, prudent prosperity is oh so dull. That’s the way macro-economics seemed to evolve between 1980 and 2005, both in America and more widely around the globe. How deceptive.

1) Inflation allegedly had been tamed at the cost of only two short back-to-back recessions in the 1980-81 period, when Gov. Paul Volcker ruled at the Federal Reserve.

2) This was followed by the salubrious Wall Street stock market bubble that Merlin the Magician, in the person of the wily Alan Greenspan, allowed to fester in its happy way.

“After all,” Dr. Greenspan remembered from his day in the Ayn Rand litter, “if prudent people invest in appreciating stocks or bonds, who are we to second-guess them by lowering permitted margin leveraging or by jacking up Fed interest rates?” Joseph Schumpeter’s innovations hopefully could be counted on to raise all ships.

The inevitable happened just when George Bush captured the presidency in 2000, and when Republican majorities reigned in both houses of Congress.

Bush’s “compassionate conservatism” translated into compassionate tax giveaways to the plutocrats, along with new deregulating of corporate accounting.

Cynics in Wall Street called it the new age of Harvey Pitt. Pitt was appointed to be chairman of the Securities Exchange Commission precisely because he had been legal counsel to the Big Four accounting firms.
Pitt’s first speech proclaimed the new day of a “kinder SEC.”

Loopholes
Lawyers, accountants and CEO’s caught Pitt’s innuendo: Reach for that dubious tax-avoidance loophole, and the IRS will not mind. Conceal losses and exaggerate profits by various off-balance-sheet devices that violate strict accounting rules legislated in the years before Bush.

Why rehash this somewhat old hat history? For one good reason.
Today’s global bankruptcies and macroeconomic quagmires trace directly to the financial engineering shenanigans that the Bush era officialdom both countenanced and encouraged. Young George Bush did not only make a mess of Mideast politics. In addition, the Bush-Rove version of plutocratic democracy accomplished the singular alchemy of converting a usual plain-vanilla boom-and-bust in housing into an old-fashioned, hard-to-manage, worldwide financial panic.

This time America was the Eve in Eden who tempted Swiss, German and U.K. bankers into eating the evil apple of non-transparency and unconscious gross over-leveraging.

Did Ayn Rand or libertarian Milton Friedman ever anticipate that Adam Smith’s marketplace Eden would come to the present disorder? Where were Bank of England Gov. Mervyn King and the heads of the European Central Bank and the Bank of Japan while the disasters were unfolding?
Just like the usual mediocre CEOs, world leaders never focused on the dangerous winds that were beginning to blow.

If today were 1929, the present financial epidemics would be the prelude to a prolonged worldwide depression. Fortunately, economic history has taught us a lot since then.

Central banks, as Walter Bagehot in the nineteenth century and Charles Kindleberger in the twentieth taught, are primarily the lenders of last resort. As Kipling would put it, “What do they know of money if only money they know?” When stocks and bonds are burning up or freezing down, preoccupation with inflation targeting, Gov. Bernanke’s initial mantra, is not nearly enough.

Whirlwind
Main Streets everywhere on the globe are waiting anxiously to see how governments cope with the whirlwind that excessive deregulation sowed: lost jobs; depleted saving nest eggs; high energy and raw material prices; negative capital gains on homes and diversified portfolios. Of course, some of these trace to one’s own sins of omissions and commissions. Some do arise from supply shocks: from interruptions in Mideast oil drilling, and from inflation of raw materials and foodstuff arising from new Chinese demands for better living standards. But more stem from the faulty social housekeepers who voters, rich and poor, elected to the highest offices in the land.

The old slogan, “It’s the economy, stupid,” finally penetrated into the White House. On schedule, with the speed of light, President George Bush, who had been taught better at Yale, seriously proposed making permanent the rash tax giveaways and deregulations that have brought on today’s economic scandals.

Discredited, radical-right supply-siders from President Reagan’s first-term circus came out of retirement to ask again for no taxes on the earnings of capital in favour of reliance for vital government services on flat taxes on wage earners.

When fear of risk stifles both investment and consumption spending, sensible and measured fiscal budgetary spending is the prescription to augment central banks’ lowering of interest rates.

What follies electorates perpetrate can be offset in future elections. However, it is a commonplace that today money buys votes legally. Therefore, realists will temper their optimism with guarded caution.

© 2008 Paul Samuelson. Distributed by Tribune Media Services, Inc.

In democratic politics, things change more slowly. Because President Bush’s first term was judged by the electorate to have been a geopolitical disaster in the Middle East, the Democratic rivals to Bush’s Republican party captured control of both chambers of Congress – a slim Senate majority, a larger House of Representatives majority, along with considerable repudiation of Bush policies by some in his own party.

Any who expected the new Democratic victors to initiate immediate drastic changes have had to learn the facts of life about how democracies operate. Yes, eventually the Democrats will achieve their promised raise in the minimum wage. But that will be almost a non-event. A few low-skilled jobs will become a bit better paid. So low will still be the new elevated minimum wage, relative to actual wage rates now paid, little good and little harm will be the only result.

Main Street Americans are so discouraged about the Iraq war and its endless daily casualties of US soldiers, all other political conflicts – including the economic ones – become overshadowed. Realists are resigned to the fact that if 21,000 additional young Americans get put into harm’s way, it will still be the case that civil war and terrorist chaos will continue in Iraq when we do pull out of there. Vietnam taught Americans the same hard lesson: Give up on hopeless ventures.

Thoughtful questioners ask present-day economics pundits: When the US stops spending trillions of budget deficits on Iraq-like wars, will the American economic locomotive be slowed down to a walk? Will there follow a 2007-08 US recession? If so, will it be big enough to lead to global macro slumps?

Nothing about the future can be 100 percent certain. But weighing all the different statistical evidence, I have to agree with the consensus view that 2007 will continue to be a moderately growing period for US gross domestic product and for employment. Why? First because our central bank, the Federal Reserve, has the powers and the savvy to lean strongly against any deflationary winds that might develop. Concretely, this means that Chairman Ben Bernanke and his confederates can stimulate credit and spending by cutting interest rates more than half-a-dozen times.

My words will not placate die-hard Wall Street Bush supporters who labor under the illusion – the delusion – that it has been this president’s rash giveaway tax reductions to those already affluent that brought about recovery from the 2002 recession following from Wall Street’s pricked 1997-2000 speculative bubble.

These ideologues forget that the important accelerations in total factor productivity of today’s America took place under the higher tax structure of the Clinton-Rubin era. Was this a one-time exception? No. The history books record how fast post-war America did grow under Roosevelt-Truman-Kennedy-Johnson. New times call for new wisdom. Centrist Democrats in concert with centrist Republicans can work out better policies than we had in the Gilded Age of the 1890s when Rockefeller monopolists in oil and Carnegie monopolists in steel controlled prices uncompetitively.

It was not wisdom when President Bush appointed Harvey Pitt to head the Securities and Exchange Commission — a man who announced in his first speech, “I am going to run a gentler and kinder SEC.” Having been law counselor to the four or five big accounting firms whose peccadilloes were to burgeon on his watch, his message was not: Pursue more efficiency if you wish for higher rewards. What his listeners heard was, “Reach out for new tax loopholes, You won’t be crucified for doing so.” Ironically, Enron, Arthur Andersen Accountants and WorldCom miscreants, whose feet were to be held to the first by Elliot-Spitzer-type prosecutors, might complain that they had been set up in a ‘sting game’ by Washington.

Under Reagan-Bush-Bush regimens, inequality between the wage of the CEO and median corporate workers has exploded from 40-to-1 to 400-to-1. Has that raised or lowered incentives to step up genuine economic growth?

My answer is that it has bribed top executives and the directors boards they dominate into the go-for-the-quick misrepresentation of corporate earnings. And to go for feasible stock options that present corporate shareowners with heads-insiders-win/tails-shareowners-lose.

Alas, somewhere some economists can be found to bless these corporate misgovernances. I am sure that if the late Milton Friedman had been asked to pronounce on the merits of ignoring option awards as a corporate cost in certifying operating earnings, that conservative libertarians would have avowed; Professor Hotelling at Columbia taught me that options do add to CEO pay by an objective present-discounted-value formula.

Each day in office, President Herbert Hoover made votes for Franklin Roosevelt, his successor. George Bush operates in the same Hoover mold.

As cynics say: History doesn’t repeat itself. But it does rhyme.

© 2007 Paul Samuelson, distributed by Tribune Media Services, inc.