Harvard’s Ricardo Hausmann has some tough comments for the US politicians and Fed: Stop whining and take your medicine like a man:
"The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis. Interest rates should be slashed quickly and $150bn put into taxpayers’ pockets by April at the latest, they say. The Fed cut by another half-point on Wednesday.
The goal seems to be to avoid a 2008 recession at all costs. As Larry Summers, former Treasury secretary, put it, failure to act would make Main Street pay for the sins of Wall Street.
It is easy to lose sight of the overall picture. Main Street consumers have overspent and over-borrowed and are unable to meet their obligations. The fact that households may have so behaved because they were enticed by “teaser loans” does not change the facts; it only assigns blame. Consumption has been above sustainable levels and needs to adjust down, whatever view one has about the responsibility of adults over their financial decisions . . .
Hence, macroeconomic policy should not be based on a panicky attempt to avoid a 2008 recession at all costs but on a forward-looking strategy that achieves the needed reduction in consumption at the lowest cost in terms of the stable growth. This is not achieved by giving US households a $1,000 cheque by April, a trick that no macro economic textbook would argue is particularly effective. If there is fiscal room – a big if, given the weak structural position of the US government and its likely cyclical worsening – it would be better spent in accelerating investments in plant and equipment via accelerated depreciation schemes, to improve the capacity of the economy to keep on growing after the crisis."
Ouch.
Go read the entire piece . . .
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Source:
Stop behaving as whiner of first resort
Ricardo Hausmann
Financial Times,
January 30 2008 19:36
http://www.ft.com/cms/s/0/28b464a2-cf50-11dc-854a-0000779fd2ac.html
Am I missing something? Isn’t Wall Street paying for “this” through the nose? Almost every bond insurer is facing insolvency, brokerages are firing thousands and some are fleeing all but core businesses, banks are paying much lower dividends thus sending their stocks into the toilet, and Ferrari dealerships now sell at half price. When all is said and done the hedge fund business will be radically different (regulated), securitizing debt will be much more difficult because people will actually examine the contents of the security, and it could come to pass that the public recognizes that there ain’t much profit in owning stocks unless you continually monitor them and trade out of losers quickly. In other words, stock investing is at least a full time job.
Hi Barry,
What are you doing up at 4:00am you maniac. I can’t tell you how much I appreciate your fine blog.
Howard, I can’t argue that things seem bad here, but I can suggest that they are going to get a lot worse. There hasn’t been any real value created at the heart of our economy for over ten years. That was the mid 90’s when productivity gains were at their highest levels ever. Because we have been leveraging everything since then, the future looks bleak – you need real people making real dollars to be strong.
What hausmann saying is, fixing damaged economy with temporary band-aid won’t do any good. You deal with the source of the problem, not the symptomps.
If Fed stopped taking care of their wall street friends, more job will be lost, more company/banks went under, and overall americans will face with hardship they never experienced before. But it is really what they deserved for their own doing.
Wanna get out of that situation ? Live by your means, limit your debt-funded spendings, root out irresponsible banking practices/bankers. That’s what US told asian countries, latin american countries, and russian when crisis comes.
I am from one of the asian countries that hit hardest in 1997, so it is ironic how US telling other countries what to do in crisis, and yet avoiding her own recipes when dealing with more or less the same situation.
Now they are saying that the mono-line insurance write downs aren’t going to be as big as the press has been reporting. Where have we heard this before. Why do they put these obfuscating, lieing excutives on the teley? Get unbiased views! Or as close to that as you can…not these idiots.
Dexter, thanks! We Americans haven’t looked in the mirror in a long time.
They’re not content with whining and moaning: how about some inflation ex-inflation accouting gimmicks while at it?
“SEC Changes Accounting Treatment to Help Subprime Lenders”
http://tinyurl.com/ypdu6x
Hmmmm! After all, the US financial markets are so attractive, given their enviable transparency, aren’t they?
Now, try to say that to anyone, (including to self looking in the mirror) while keeping a straight face.
Good Luck!
I think the Fed and our govt. are throwing everything they have at it, not just checks. Cutting rates, discount window, and soon will be buying some of this bad debt on the backs of taxpayers. Helicoptors drops are always secret you know.
I think you hit the nail on the head Justin. Party is over because I really don’t see anything replacing the hole housing will leave in GDP.
Am I missing something?
This is my first truely observed recession since graduating college (and understanding monetary policy), but do the pundits and economists always get so ‘sky-is-falling’?
Doesn’t anyone stand back and say “You know, Schumpeter was right, we’ve got to have some creative destruction. Let’s just hope it’s short and quick, and focus on long-term goals.” These artificial prop-ups tend us towards a more prolonged fall, don’t they?
It’s always easier to prescribe medicine for someone else to take.
Finance Monk:
Many pundits and many economists have ties to business interests, business interests who would rather drum up support for bailouts than “take it like a man”.
Privatize profits, socialize losses. Always. Welcome to corporate America®
We haven’t taken anything “like a man” since at least the 1980-82 recession caused by tight money policies intended to cure inflation running in double digits. Sure it was painful (I was a college student at the time and the only money I could make was selling my plasma at a blood bank–I’d have been happy to flip burgers, but there weren’t any burger-flipping jobs) but taking the medicine directly resulted in the “Seven Fat Years” as the former editor of the WSJ put it.
Dexter,
The US is soft nowadays. We’re a bunch of pansy-asses addicted to comfort and consumption, getting fatter and stupider every day. We’ve lost the will to do the hard things, like showing some personal responsibility for our future by delaying immediate gratification and spending less than we make. (Or, by not pussy-footing around overseas w/ the lives of our troops at stake, but that’s another matter.) Hausman hits the nail on the head “…we need to to improve the capacity of the economy to keep on growing after the crisis.”
You can only do that by foreswearing that last swill of Ben’s Jungle Juice and letting the markets flesh out the winners and losers. More money just forestalls the pain, creating the illusion of real growth.
But we’ve become addicted to cheap money. Soon, though, cheap will also mean worthless…cheers to another swill from Uncle Ben’s jug. I wonder if that blood bank is still around…
Both this and the previous post are precisely the type of crap that really pisses me off. I’m not an investor; I’m a technical trader, so fundamentals, balance sheets, earnings, etc. matter very little to me. However, it is both brutally unfair and downright dishonest to allow these lenders to continue to hide bad loans on their balance sheets.
This is endemic of two problems in our society. One is the utter failure and complete unwillingness to accept any blame whatsoever. The other is the extension of the boom at all costs. As Barry’s other post regarding the FT article points out is that U.S. policymakers continually avoid hard decisions in a never-ending attempt to pander to voters.
Yes, addressing our economy’s fundamental problems will involve difficult and unpopular decisions. But it seems that none of the folks who are running things either seem to recognize this or are willing to do anything about it. I am so tired of hearing about stimulus packages and rate cuts. Does anybody understand that you cannot fix a credit problem with more credit? Eventually, the system will break down, and then we’ll all be screwed.
“Does anybody understand that you cannot fix a credit problem with more credit?”
That, Peter Davis, is really all that needs saying…
“failure to act would make Main Street pay for the sins of Wall Street.”
That’s the way its always been. However, if this time they’ve really screwed things up because of their greed, we might be able to enact some laws to better regulate Main Street through greater oversight.
I know, I know…no one wants the government intervening in the markets.
That’s a two way street. Don’t call on them when you need a rate cut or bailout either.
I’d be more inclined to agree if he didn’t spell ‘cheque’ like such a ‘pouf.’
Peter Davis: “This is endemic of two problems in our society.”
You should have added a 3rd – that GAAP is broken. It’s become so complex and rule-intensive that it’s ceased to serve the interests of objective investors. You know that old quip about French academics using language as a “prophylactic to understanding”? Well, it applies to our accounting rules now, too.
While most other sectors financial reporting can be tied back fairly easily to cash flows, the financial sector is one where results can principally be understood only through the Income Statement. Now look where the problems have occurred. I’m not saying GAAP is the single cause of the problems, but it’s a contributing factor.
Some of you dingdongs really need to stop posting. Case in point:
Justin writes: “There hasn’t been any real value created at the heart of our economy for over ten years.”
You have to marvel at the stupidity of this sentence.
The author of the article is right on that accelerated depreciation schemes would be more effective but if I remember correctly, that’s part of the plan isn’t it? To allow certain plant and capital expenditures to be immediately written-off 50%?