Financial community to politicians: 'Your deal stinks.'
Posted at 3:30 PM on August 2, 2011
by Bob Collins
(11 Comments)
Filed under: Economy
Did the politicians ever talk to the financial "experts" before coming up with the "solution" to the debt crisis?
It wouldn't seem so. For a second day, the financial community is weighing in on the debt solution signed into law by President Obama today. Financial community to politicians: "Your deal stinks."
The Dow, at last check , is down almost 300 points. The S&P 500 has turned negative for the year, and those aren't even the indicators that matter to the experts. For the Dow, it's been the longest losing streak -- 8 days -- since the fall of 2008, which was also the fall of the American economy.
Economist Ed Yardeni, quoted in the Wall Street Journal, said "One especially negative PM told me: 'This is the 1930s on Prozac!' That's a very clever turn of phrase. In other words, we are in a depression, but thanks to very stimulative monetary and fiscal policies, it hasn't been another Great Depression so far."
Mohamed El-Erian, chief executive officer and co-CIO of Pacific Investment Management Co., says the politicians not only didn't make the future any better, they made it worse.
"We're out of the woods in the sense that we will avert this real threat of the technical default," Mr. El-Erian says. "However if you judge it in terms of the broader objectives, which is to put the country on the path of medium-term growth and medium-term fiscal viability, we may have made things worse rather than better," he said.
That's just the kind of pick-me-up the financial markets need.
U.S. Treasuries -- that is the indicator people in the know pay attention to -- rose for a fourth straight day today. They're considered a safe-haven when the economy tanks.
Or, as Neil Irwin, the economics reporter for the Washington Post put it...
In his subsequent article, Irwin describes the problem faced by the Fed.
The basic challenge for the Fed is this: It is charged by Congress with maintaining stable prices and maximum employment. But when those goals are in conflict with each other, the options are difficult to decide. That's the circumstance the nation faces now: It's adding jobs too slowly to reduce unemployment. Yet prices are rising at about the 2 percent or so annual pace that the Fed considers to be stable. Anything Fed leaders do to try to address the dire job market could push inflation above their comfort level.
Many politicians playing chicken with the economy last week said they didn't believe the tales of woe about the economy would happen if the debt crisis persisted.
It's happening, presumably because the solution is no solution.
Comments (11)
another can another kick.
History used to be mandatory in public schools, hope it still is.
If I remember American History correctly, President Hoover responded to the severe depression prompted by the 1929 stock market crash with restrictive fiscal policy. The restrictive fiscal policy was widely credited with deepening and widening the depression. FDR eased the pain of the depression through Keynesian deficit spending. That depression was so bad that we came up with another word for depression … now we call ‘em recessions.
So, now in 2011 our response to this recession is a restrictive fiscal policy and spending cuts. Huh?
Are these the same economists and market gurus who agreed with the President that a "balanced approach" was needed? (Revenues in addition to cuts being that approach.)
If so will they be willing to say that "on the record" so the politicians who fought so strenuously to keep revenue increases out of the deal can understand that their solution is causing the markets to tank?
I didn't think so.
Hmm - the President's deficit commission recommended a deficit reduction plan in conjunction with raising the debt ceiling. You know... that commission nobody wanted to listen to because they called for tax hikes along with entitlement cuts. And nobody still wants to embrace their findings. So, I agree with matt - it's another kicking of the can.
Also, I'd have bet on recession regardless of this deal. Just sayin'.
@tboom,
It appears you either remember your history incorrectly or at least didn't question it when it came to Hoover
http://mises.org/daily/5215/Is-Budget-Austerity-ModernDay-Hooverism
matt,
Quoting the vos Mises Institute to refute claims about the Great Depression is about as intellectually honest as quoting J.M. Keynes directly.
It is not an unbiased opinion. It comes from an organization with a strong axe to grind against government intervention.
If you might consider other sources as well. Ben Bernanke is widely considered an expert on the Great Depression, and is not what anyone would call an obvious Keynesian liberal.
His take on the depression also mentions the 1937 reduction of Federal spending as a major contributor to the 2nd dip from 1937 to 1942.
We're not in exactly the same situation -- for one, we're already off the gold standard. We also haven't really addressed the banking regulations like was accomplished early in the recovery period of 1933-1934.
But we'll all be better off if we can visit the literature of all sides in the battle, not just the firebomb throwing reactionaries.
Why doesn't Fed target inflation to go up to 3 or 4% for a while?
Paul Krugman (gee, didn't he win a Nobel Prize?) and other highly respected economists have been trying for many months to get people to remember this (about how "austerity" extended the Great Depression). Even without that history lesson, we should know that fiscal contraction and tens of thousands of additional lost jobs will just make this recession worse.
And did they write into the debt-ceiling deal that there would be no unemployment extensions when the current one runs out (just in time for all the new layoffs)? I've heard that a couple times today, but I haven't been able to find any details.
Krugman?! Talk about "firebomb throwing reactionaries."
@davidz,
I was simply offering that as a concise rebuttal of the Hoover legacy. Yes, Mises.org has a viewpoint as does justabouteveryone.org
I can link to Delong who I think we can agree sides much more with Keynes than he does the Austrian school and he admits that Hoover raised spending but tries to wash it away by saying he wanted to cut spending
http://is.gd/BVfmLM
In the end we have seen Keynsian economics destroyed in this recession. The govt pumps have runneth over at levels that would put FDR to shame for the last 10 years as we feed wars, cut taxes, helicopter drop money, triple the money supply and we still have the weakest economy in two generations (the extent of the weakness has not been fully realized IMO).
To borrow from Cowen "The Great Stagnation" is upon us, we cannot spend out of it. This is not cyclical it is the new normal. Balancing the budget at the new normal is the only choice until a new economic shift comes upon us.
Regarding Krugman he has a tough time coming to grips with the fact that Keynsian pump priming is in full effect because it is not going to his preferred recipients. Keynsian economics is not always progressive and he has yet to square that (Nobel prize or no...and we can still continue to debate the value of that prize as our peace prize winner has entered 3 shadow wars since taking office).
There is no austerity, no sobriety, no economic logic in use in Washington...the lunatics (read politicians) are running the asylum.
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