The deeper economic question

That we are in the middle of a financial crisis and an economic recession is a fact. That we are not sure how long it is going to last or even how either one of them will evolve and affect the other is also true. We are just guessing.

We know that a recession was impending, but without a financial crisis it would have been all that much easier to mitigate its distributional effects. It is clear now that the financial crisis was generated by an excessive amount of capital searching for scarcer return opportunities around the globe and that in a lax regulatory environment they promoted the bubble that distorted the real picture of the economy and promoted a larger and more painful plunge.

The leaders of the 20 countries who gathered recently in Washington produced a text that essentially calls for more regulation, global standards, more transparency and more accountability. They also call for the creation of a super global regulator from the ashes of the IMF/World Bank combination.

However, the deeper economic question here is one of trust. In paper, all the regulations were in place and after the financial crises in Asia and Latin America it was understood that the systemic problem behind most crises is excessive risk-taking on the part of financial players during economic expansions.

Sometime before the economic cycle reaches its peak and the stocks of public companies are enjoying a prosperous market, the financial sector transforms itself from being speculative to being outright irresponsible or super speculative as the more solid investments become harder to find. Excess liquidity only exacerbates the behavior. This is why the sub-prime debacle took place at the end of the upward part of the economic cycle partly precipitating the inevitable.

Thus, if we understand all this very well, why are we calling for a radical transformation of the financial sector?

If the central problem is one of trusting the regulators, then the issue is relatively simple, change the regulator who failed for another one who has a stronger work ethic. That settles the secondary question of ownership. Ultimately, whether the State takes control or not we still need honest people.

Instead, the real effects of this reform so far have been an increased concentration of power in fewer hands leading to a much less competitive environment. Worse yet, fewer and larger financial institutions will have greater political power, ergo more lobbying power and will be more difficult to regulate.

And why do we need a new super regulator?

The IMF/World Bank combination has enough infrastructure to be one today, but their problem are the people working there, their ideology and the models they use to analyze the world.

Perhaps what we really need is to fire the people who failed at their jobs and hire other people who we can trust. Instead, we are hiring the same people who have failed at their jobs to redesign the system and we are spending billions in making it less competitive. It seems we are doing nothing short of planting the roots of a future crisis.

If the real problem is one of regulation, then we need more and better regulators, and some tougher laws. We understand what is wrong. What we really need is a group of leaders in which we can trust so our current institutions can be more effective at doing their alleged job, to maintain the trust in the international financial markets.

An economic stimulus package will go a long way to mitigate the plight of the unemployed and to promote consumption and production, but it will not restore faith in the financial sector. And that is the deeper economic question.

— Luis Brunstein

The emerging economic policy

From the ashes of the still-burning financial sector and slowly and tentatively walking across the fields of the newly ranks of the unemployed in the United States President Elect Barack Obama and a team of experienced members of the national economic establishment held a first meeting to profile a first approximation to a set of potential solutions.

Most notably is the mix of academics and practitioners, however, besides the former Secretary of Labor under Bill Clinton, Robert Reich, most of names are not associated to the progressive ideas exalted by Mr. Obama during his “change” campaign.

There are other people in this country, center-progressives like Joseph Stiglitz and Paul Krugman, who should have been consulted on account of their vast knowledge and understanding of global crisis. While this may be a sign of things to come, at this point is too early to produce a fair judgment.

From the initial meeting with this group of people Mr. Obama announced that the first order of businesses would be to quickly implement an economic stimulus package and during his speech he tangentially suggested that some of the bailout money could be diverted for this purpose.

Additionally he suggested that his administration will tray to revert a tax reduction on the upper classes passed during the current administration and lasting until 2010. Ideally Mr. Obama would like to revert the law in 2009, thus gaining a year of additional tax revenues to be used towards the stimulus package.

Are these good ideas?

The short answer is, yes.

Under the current circumstances it has become clear that increasing the amount of available money in the economy, lowering interest rates, and otherwise making it easy for banks to obtain fresh funds has not promoted economic activity, as verified by the recent increased in unemployment and fall in output. Hence, monetary policy is trapped in a pool of cash.

An stimulus package, allegedly, would not only restore employment, as hinted by Mr. Obama, via the public sector but would, fundamentally, put money in the hands of workers who will spend it right away in food, shelter, clothing, education and all the necessities. Every dollar that goes to the hands of the working class will have the largest multiplier effect on the economy.

During a crisis this is the most adequate and progressive solution. In that sense, it agrees with both, Krugman and Stiglitz’s views and most likely with many Keynesian and Post Keynesian economists dispersed across the academic firmament. And that reveals that perhaps, Mr. Obama is beginning to walk the walk above and beyond the views held by anyone in the traditional establishment.

— Luis Brunstein

The 2012 Presidential campaign

After a few days all of us are beginning to recover from the initial state of shock, we have witnessed the election of the first black President of the United States. Of almost equal significance is the manifested shift away from one political paradigm towards another, away from corporate-socialism/neo-conservatism towards center/progressivism.

It is true, Mr. Obama’s eloquence and public charisma has been a fantastic conduit for the relatively progressive platform profiled by the Democratic party onto the nation, but the vote in favor of “change” was also one of equal force and magnitude against “more of the same.”

This was a vote against policies emanating from the right wing of the Republican party, the “Bush doctrine” of preemptive strikes and equally harmful aggressive foreign policy stance including violations of human rights and crimes against humanity, the attempted privatization of our retirement system, the implementation of regressive and polarizing economic polices, the promotion of a lax and laxer regulatory environment at all spheres of our socio-economic life laying the groundwork for the current crisis. This was the essence, the core, of the rejected paradigm.

The newly elected President represents a historically disenfranchised minority; it is the cherry on top of the ice cream, a welcome opportunity for other minorities in the future.

But now, as we dry our last tears, it is time to go back to work. The 2012 campaign has begun. The incoming administration will have to make some difficult choices. There are some magnificent hurdles ahead of us.

In the immediate horizon this administration must find a way to restore the integrity of the heart of the core of our economic system, the credit markets. This will be a daunting task of gargantuan proportions and a sort of fiscal Pandora’s box. It will surely involve a much greater regulatory machine run from atop the State. Perhaps, as suggested by some, the solution would be to implement a super lender of last resort who would also be a super regulator. But that would suggest a much more progressive ideology than what has been currently exhibited, time will tell.

In the near future, this country needs to revisit the problems associated with undocumented immigrants peripherally associated to globalization and outsourcing, universal health care, public education, capitalization of public infrastructure, Social Security funding, the invasion of Iraq and seriously improving our foreign relations with the various players in the Middle East, Asia, Africa and Latin America.

In the long run, the mounting problem of our foreign debt will burden future generations who will have to learn how to consume less and pay higher interest rates in the credit markets. This may prove to be an insurmountable problem for the new President and one that will test all his management skills and political savvy. And then we have the ominous and related problem of global warming and funding the research for alternative fuels initiatives.

Along the way the Obama’s administration will make, surely, some mistakes, but if it stays true to its progressive agenda we, the ones who voted for him, need to remain ever vigilant by his side. We must never again fall sleep on our laurels, we did that before and look where it got us.

No, we cannot afford another calamitous administration. The 2012 campaign starts now and we are all in it; you have no choice. Be informed, participate, become educated and opinionated, questions your leaders, your representatives, walk the walk, vote in every single election, fight for power and hold on to those newly acquired progressive spaces, do not let go, be a Pitbull and a guardian for the progressive cause.

History shows that great pyramids are built over many years and with the aggregated effort of millions. We have a duty, an obligation to remain alert and combatant, because our future and that of your love ones depend on our continuous efforts, the next Presidential campaign has began.

--Luis Brunstein