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Thursday, 16 October 2008

Ship of State in storm votes new orders

The Presidential election is like voting for a new captain of a ship out at sea during a severe gale. Some of the crew want less canvas and to make for nearest landfall while others want more sail to try and outrun the strengthening stormforce winds. There are uncharted waters ahead and hidden reefs; so more sail or less? Which way to go is a practical probability choice, and that means ideology. Obama appears ready to outrun the storm at all costs and face the unknowns, while McCain, the ex-Navy flyer, wants to go only with what he knows from his own past, to make for the nearest inshore waters however rugged the shoreline.
In Europe, there is a committee on the poop deck; today the EU President Sarkozy and European Commission President Barroso told the Brussels press pack they while they EU states had previously been for all going their own way they now had come together (thanks to PM Brown) in recognition that the financial crisis is everyone’s problem and this extends to all of the world beyond Europe and the USA too. Therfore, they (all 27 states) are inching toward the idea of a Bretton Woods II to decide a new role for the IMF. A week back when IMF was being debated as a new global central bank it was to deal with the financial crisis (no-one mentions BIS for some unknown reason) into which all countries would put funds. Now, this has moved on to looking to the IMF as a recession-busting solution, a big money savvy UN? No details yet; conference at the weekend. Also, Sarlozy made clear there are big fish to fry in the forms of new regulations to tackle shadow-banking (whatever in financial markets is lacking in regulated transparency), hedge funds and ratings agencies, but as yet no clear steer on directly tackling toxic assets. What Sarkozy made clear is that as circumstances changed so too should ideas change about what to do especially regarding Europe acting collectively from now on; no more indidividual initiatives. That is a bit hard on the Irish and the British whose flair for innovation, if a bit late in the day, had turned round everyone else’s way of thinking again in history to a Keynesian solution, even if that is not yet a fully respectable term to use among the highest rungs on the political ladder. In the US, we may recall that Richard Nixon once said, “We are all Keynesians now,” in an acknowledgement of J M Keynes’s influence on reflation measures, but he was only half-serious at the time. The oil shocks and high inflation of the 1970s actually kicked the great British economist out of fashion in favour of Monetarists and their very much simpler explanation for inflation that it is to do with excess domestic supply of money. Now Keynes is back bigtime and on a global level.
Governments globally have announced and partially implemented about $5 trillions worth of guarantees and liquidity swap windows, which is more than the $3 trillion or so in sub-prime, CDO etc. writedowns. Little of this is actual cash and should not be equated with directly compensating or making up for losses in bank asset writedowns, share falls and property falls. These currently amount to about $40 trillions worldwide (two thirds ratio to world GDP) which should take roughly a full decade of positive world growth to reinflate back.
In this context, the debate between the two candidates vying to gain control of 25% of the world economy, and thereby powerful influence over most of the rest appears more like a city hall debate than one to decide a leader of the world? The debate was on domestic issues, but what is domestic to the US is global to the rest of us. Whether Obama proposes a $170bn economic stimulus package (that he kinda hinted might be mostly funded from higher tax on the richest 5%), that his party in Congress is upping to $300bn mostly deficit, or a McCain administration’s $300bn corporate tax cuts and taking $300bn from TARP to buy folks’ defaulting mortgages, both also have to recognise that Federal now means owning major equity in the US banking sector, the very same folks who will have to buy whatever Government treasuries the Middle East and Chinese and Japanese don’t buy. Yet, Obama made it clear that it made no sense to borrow from China to pay for Middle East oil, while McCain wants to import zero oil from every country that doesn’t like us, and that means everyone, except Canada, and if oil why not a lot of other stuff too? But McCain is a free trade marketeer and Obama is a friend to blue collar (US middle class) and wants to save Detroit Auto, but is also keen on internationalism and helping poor countries, and so maybe they just got their liberal and neo-liberal ideologies a bit mixed up.
Ideology of what George Soros calls “market fundamentalism” is another kind, and like budget deficit matters, at least temporarily, this is ceding ground to Keynes. A few months back, Mr Obama would have found it too risky to propose a lot of new spending so close to 4 Nov. He was following the example of Clinton in ’92 and ’96, promising social programmes investing directly in human capital while also promising to balance the budget Under Clinton in the ‘90s, the social programmes got delegated to the states who were given more deficit spending lee-way (an approach McCain wants to follow) and they didn’t make a lot of headway (not with a Republican Congress) while, against all expectations, he actually first balanced the budget and generated a surplus. He could not do both it seems. McCain wants to make big tax cuts, not social programmes, a spending freeze, and still balance the budget in his first term!
To understand how determined he is ideologically you have to appreciate his personal history. In October ’67 he was shot down on a (arguably illegal under international law) bombing mission over Hanoi , badly injured and spent 6 years as a North Vietnamese POW until the Paris Peace Treaty in January ’73. On an amazingly strong principle of honour he refused early repatriation, and therefore missed the whole of the anti-war movement years to emerge a hero blinking with incomprehension that the US lost the war! The ‘70s were a time when conservatives worked fearlessly long and hard to restore faith in American values after the misery of Vietnam, and upped the ante in the middle of the Cold War, with Soviets in hot wars in Africa and military coups and revolutions in Central and South America, and then Afghanistan, a misbegotten period like so many in the twentieth century that culminated in even President Carter (Dem.) being the first to tell the Soviets that NATO was prepared to use “First Strike” folowed by 3 years of spooking the Soviets right up to DefCon2. Reagan’s election was the culmination of this reactionery time, but he turned out to be fiscally unconservative and recognised passionately how much he hated and feared nuclear weapons, and a true hero in this at least, he effectively negotiated the end of the Cold War. Except for Iran-contra and some other stuff all was fine for US ultra conservatives after that, except for Bill Clinton stealing their fiscal policy, until Bush II’s dot com, Enron, Iraq and Sub-prime, when now America’s financial and industrial might (as well as its political military problems) are severely discredited. For McCain this must be like the ‘70s reprised and he is sticking by his lifelong fundamentals, small government and balance the budget and win the war in Iraq, and he means it. He doesn't like countries that don't like him.
Obama’s history is a generation later and is far more academic and involved in social issues, legislation at State and then Federal level, and less mired in the twentieth century's battles. For details read the Wikipedia entries.
My view is that this makes him a less ideologically fixated and more flexible candidate to deal with the complexities of the crises he will have to manage. The Bush presidency bequeathes an explicit recognition that markets are not good at self-regulation or self-policing – a working assumption central to Keynesian theory. One is reminded of the quip, “Just as there are no atheists in a foxhole, there are no market fundamentalists in a Depression,” and the same applies to fiscal spending, finance sector restructuring, managing out of a global recession and ending wars. To balance budgets now would repeat the mistakes of the Great Depression from which Keynes produced his General Theory.
Lapses into Keynesianism however takes different forms. For Republicans, it is a time to propose new tax cuts for business, including waiving capital gains tax, which many believe would help stimulate economic activity, while others recognise this as a green light to carpet-baggers, vulture funds and short-sellers. For Democrats, the preferences are for an extension of unemployment insurance, food stamps, health care, school and college education and assistance to delinquent homeowners. Others such as Lawrence Summers, the architect of much of New Democrat (and New Labour in the UK) economics, recommends investing in infrastructure and other measures to raise long-term growth. There is a complete hodgepodge of economic reactions to the crisis, like arguments over which direction to go in when the first priority is to bale the ship. Many new directions were not in circulation only months, weeks, even days ago. Keynes would have recommended getting everyone on the pumps, as much cash to the cash-poor as quickly as possible, though today cash-poor includes the banks and stock investors (down to 2003 levels and heading for P/Es of less than 7), and he would agree we cannot afford not to spend more public money faster. Keynesian demand theory, some say, would have told the Bush administration to have aimed for budget surplus by 2005, but the Iraq War and other considerations put that idea on the side-burner. Other economists worry that the habit of public largesse in the style of Hoover and FDR or Reagan and Bush snr who doubled the Federal Debt might sink deep roots in both parties. Fiscal policy should be counter-cyclical – but that requires the help of banks who are currently de-leveraging, and therefore the only reflator left standing is government and genuine long term equity investors at least until the economy recovers. Many social programmes run by charities are being hit by falls in their endowment investments and therefore without big new private charity donations, again it is to government that these programmes will look for support.
Washington’s moves on supervising previously unregulated areas of the financial markets, such as derivatives, and the decision to take $250bn of federal stakes in large private banks, might also prove to be more enduring than expected. It also places a great burden on Government to rigorously plan; the hidden hand of capitalism is cuffed to Goernment's hand, as surely as the 400 bankers who got cuffed by the FBI so far. After years of Congress and White House having less and less say in economic affairs they now have most to say including widespread caps or bans on bonus culture $billions. Legislators or Presidents who cannot get their minds around the multi-dimensionalities of political-economy and Keynesian ideas better take a big step back and leave matters to others who can!
In Europe, Brown, Sarklozy, Merkel and other political and financial leaders, and in the US Bush, Bernanke, Paulson and others have all reassured the markets that the SARP embrace of nationalisation does not equate with Socialism, which by definition is long run and this taking over the heights of the economy is only temporary. Mr Bush pledged yesterday in his 22nd statement on The Crisis in four weeks, “These measures are not intended to take over the free market but to preserve it.” An Obama or McCain administration both say they would divest those stakes one or two years from now. But as Keynes said: “Long run is a misleading guide to current affairs. In the long run we are all dead.” Or as Milton Friedman – Keynes’ ideological foe – remarked: “There is nothing so permanent as a temporary government programme.”

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