The great non-stories of 2008 - $200 oil, Fed rescue, etc.
Posted in Uncategorized by demandside on December 24th, 2008 Plus Robert Kuttner on Industrial Policy and the Obama Administration
Today is our collection of great stories that did not happen. Let’s call it a bunch of stocking stuffers, from the past year.
Our tradition, insofar as one year counts, is to concentrate on the biggest stories of the year that did not happen.
For example, the low-hanging fruit this year is the high and perpetually high price of oil. “We’ve seen the last of two dollar gasoline,” was the received wisdom. Tens of thousands of intelligent consumers traded in their SUVs for Priuses and congratulated themselves for several months. Now Oil $200 is as remote as Dow 36,000.
And you know we called it a bubble ….
But I’m sure we’ll have more on that later.
The point is that these stories were written and reported as gospel, with more authorities than you can imagine providing the quotes. When they didn’t happen, like the bottom in the housing market widely reported in the second half of 2007, the media simply went on. And the authorities were more than happy to go on with them, perhaps trailing a bit of their convicted opinions behind them, like toilet paper from a shoe. But even that was the exception.
What’s another big story that did not happen? Ethanol. What a mess. Ethanol backers point to the fact that it was apparently not ethanol that was driving up the price of food. Ethanol critics have moved on to pointing out how ethanol is not better, but worse, in terms of carbon footprint.
We’ve had wave after wave of Fed and Treasury rescues. But after sharp cuts in interest rates, brand new lending facilities, bailouts of banks and no bailouts of banks, special asset purchases from the Treasury and now direct purchases of securities by the Fed. Guess what, No rescue. The story was that the Fed would do whatever it took to address the crisis. That is still the story. It is not happening, because the Fed is married to a scheme that cannot work.
Most remarkable is the story that Ben Bernanke will do everything necessary to avoid a deflation. He wrote the playbook. And so on. Trememdous crash in housing prices, tremendous crash in stock prices, tremendous crash in other asset prices, crash in commodity prices, exactly what deflation is he avoiding with this monetarist nonsense?
How about, the market anticipates the downturn or its recent corollary, the market anticipates the recovery. If I call up my charts here, it looks like the S&P was near its highs in December, after the recession began, and that it has been following the data, not leading it. It was still over 1,300 in August. To say that the rattling around near the bottom here is any sign of recovery is highly optimistic.
How about the great decoupling? New data from China this morning indicate that this is nothing to make light of. The issues in China could be worse than we imagine today. I guess I should interject a story that should have happened — a New Deal style social safety net for the Chinese people.
But the fact remains that when everyone has to be an exporter and the importer is the country whose currency is the standard or reserve currency, we are going to have a problem.
Which leads us to Bretton Woods II, or III, if you count the non-regime of floating currencies as II? This didn’t happen. In my review of the necessity of it last fall, I focused on the need for an exchange regime that balanced trade and minimized the destructive typhoons of the free — meaning unrestricted — flow of capital. Obviously the capital in and out practice that leaves nations worse off than before is not costless, so perhaps we should choose the word restricted instead of “free.” Better perhaps to make the same substitution in free market. Unrestricted market. Yes, better. Free has such a sense of costlessness and liberty that are all too seldom associated with market excess.
Now, a reform in the farm bill. Did not happen. Bllions in crop subsidies go to the wealthiest farmers, or at least 85 percent of the subsidies do, and the excercise cripples competition and does nothing to save the family farm. You will remember we offered the idea of support to farmers, not crops, as a way out of this international debacle.
Accountability for the big banks? No. Free money from the Fed and Treasury if you will only do your job. Can’t? Okay, please take some more.
Resilience of American capitalism? No. The consumer economy that is American capitalism is falling as hard as it can. The occasional idiot still wants the government to let it go, but the occasional idiot thinks his job is safe, I guess. It’s amusing that the American Enterprise Institute, the Heritage Foundation and the Cato Institute still have something to say. But it’s what they’ve always said — it’s the government’s fault. The only governmental fault lies in the non regulation, non taxation, non stuff it has done. When government begins to do something again, as looks likely under Obama, watch for these political hacks to claim credit in some way.
Enough from me today. A little Scroogey on Christmas Eve.
Will Barack Obama Commit Industrial Policy?
This clash is long overdue. For several decades, American elites of both parties have been preaching the same gospel of free trade. Supposedly, if we just leave markets alone, different countries will produce and export what they naturally do best, and import products at which their partners excel. In the tidy and oversimplified textbook world, there is no room for questions about pollution, labor standards, product safety, financial engineering, or industrial policy.
But the real world doesn’t work like the Econ. 101 fable. In much of the rest of the world, governments help their industries develop.
However, in the hierarchy of America’s diplomatic priorities, countries like China that subsidize industries (and violate human rights) get a free pass. Other nations like Japan, that basically closed their borders to most imports for several decades while they became industrial powerhouses, got a seal of approval, too. Supposedly, what we lose in jobs and industries, we make up in cheap imports.
While other nations care about what they produce, the United States disdains having industrial policies, in order to set a good example. Indeed, we have been the principal architect of the World Trade Organization, which discourages government involvement in economic development as an illicit thumb on the free-trade scale.
Now, with the crash of 2008, it is clear that the US economy was built on a financial mirage. Our reliance on asset bubbles - inflated stock and real estate prices - disguised the fact that we were not paying our way. Much of our prosperity was simply borrowed.
Having let so many industries and jobs just go offshore, we don’t make enough to pay for our imports. Instead, we have been relying on loans from foreign central banks to finance our trade imbalance.
Looking at this economic calamity, President-elect Obama has proposed several sensible policies. He wants the U.S. auto industry to reinvent itself, with government aid and government standards. He wants to incubate other domestic industries around the goal of clean energy. And he wants to spend serious money on all of this, to help avoid a depression. The only historical counterpart is the vast industrial mobilization of World War II, which finally cured the Great Depression.
But these ideas about government involvement in the economy violate the sacred dogma of free trade. If the Obama administration is serious about reviving American manufacturing industry, it is only a matter of time before a foreign government hauls the U.S. before the World Trade Organization and charges us with the crime of industrial policy.
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