New Deal in the 21st Century

by Alik Yanchinov

ayanchinov@hotmail.com

http://articlesunitedstates.spaces.live.com/

If you went to the bank to ask for a mortgage, the first thing the bank would request from you is your credit history and score. They are so important to us that’s why we try really hard to keep our credit history clean and score high. But what if you had failed to pay the loan back, then the bank would have had no choice but to foreclose your loan and sell your property to recover its losses. In many ways these banking practices make common sense because they have been developed through the centuries since Lombardi’s moneychangers of the Renaissance.

What our Government has done recently is quite opposite way: it bailed out the banks. The latter did not have enough money to cover their expenses especially when they throw lavish parties and carry out conspicuous spending. There is a lot of reasons and great deal of explanations why the Government had to do so. The most important is the argument that if the banks had failed the whole financial system could have collapsed and it could have made things even worse. The same happened before, and a lesson was learned under F.D. Roosevelt. What the Government did is based on the past experience. It seems to many of us that bailout worked in some way.

I have no doubts that Paul Henry and Ben Bernanke are Einsteins in economy and finance and the most distinguished and respected persons in these fields, but fear factor is the most powerful generator for making a mistake.

Even though we have very similar historical parallels, but we live in the different historical times and so-called recession is not longer just a pure American phenomenon. It is global and interdependence between the US economy and the rest of the world is very tight and looks like a vicious circle. US indices go down, so do European and Asian indices. And vice versa. Our Government and the governments of the most influential countries have already acknowledged that the banking crisis has to be solved by collective efforts and wills of the governments. It is not so easy to reach a comprehensive agreement that can satisfy all countries.

Everyone knows how we got there. Mortgage meltdown led to precipitous fall of mortgage backed securities (as if they were securities at all in the sense of this financial term), then banks had to experience insolvency to cover their liabilities, then insurance companies became next victims of greedy mortgage lenders, and so on and on. This picture has not finished yet. I do not want to be Cassandra but there is no guarantee that the worst is already behind us. Unfortunately, the worst times are still ahead. Sorry.

It takes America about four years to acknowledge that a chosen course of policy does not work that way it was designed for. Maybe the premises were wrong or goals were not crystal clear of what to do, but something has to be done. Then after four years we can say enough is enough, and we know that the bailout has not worked for us. It got things worse.

I think a bailout will not work for America, Americans and the World. We are loosing not only money but also the most importantly our precious time and opportunity to implement antirecession measures. Luckily we have everlasting democracy; we can openly discuss and finally arrive to more or less right solutions to the problems.

What was offered is an idealistic approach to quickly fix a problem and then expect positive results.

If we return to our moneychangers, we can see that this approach will not work whatsoever. If I give you a loan, you fail to pay it back and someone gives me money instead of you, at the end of the day I will avoid giving you a loan next time. Is that simple? Yes it is. No one in a right mind gives you money next time unless he would be forced to do so or have irrevocable warranties from very solid entities.

What happened with government bailout is the same story. Banks received the money, but they have no incentives to lend to anyone in the treacherous waters of today’s economy. The first scenario of the bailout the banks has to be a failure.

The next step from the Treasury was buying banks’ shares in order to attain some control over the banks. The agreement, for example, between Citigroup and the Treasury stipulates how much top managers can get in salaries and compensations. This is a better shot, but it has not worked yet. Neel Kashkari from the Treasury told the Congress committee that they had to wait until it would work. So the question is will it work?

The answer for me is obvious. Limited control over the banks is standing on the crouches and cannot give the Government the rights and leverage to convince the banks to inject credit capital into the economy. What they would do first is to cover their losses and keep themselves afloat. It is a basic instinct to survive. It does not need to be a professor to realize that the king is naked. Yes, the Government can use a lot of influence and political pressure, but it is essential, that the banks have no will to issue credits.

When FDR had to grapple with the Great Depression, his pièce de résistance of anti depression measures was public works that helped people not only survive, but also resuscitate the economy from depression. Now, very often I hear that we have a lot of proponents of the same approach. As of now it seems very tempting to execute the same plan. But we have different sets of the historical background, economy conditions, labor resources and many other factors. In the US there is a great need to improve, expand and revamp our infrastructure. At the same time, we know that most public works will be performed by immigrants, especially by illegal aliens, who have interests in their home countries. Eventually and mostly, we are going to subsidize Central and South America. Such a process is going to dry our capital that is supposed to revive our economy. In regards to illegal aliens, we must assume that they have no access to the banking system of the US and therefore they have to keep their money under the mattress or send to their home countries. So this chunk of money is not going to the banks, which can use it to make loans.

On the other hand, people that are going to do public works will be paid low wages that can sustain them at the level of survival. And there is no secret that their expenditures will be food and basic goods that produced abroad. We are going to have the same results in investing in foreign countries.

We live in the different world and times.

Do not take me wrong: I am not against public works, but they are not a crucial factor that can help our economy to get on its feet.

The current credit crunch is based on the fundamentals of the US economy. Since 1978 we have steadily exported capital and jobs to China. The latter has made remarkable progress in producing goods for the World for 30 years. Some countries have been inspired by Chinese growth and adopted similar economic policies in their territories. Since then we have lost not only jobs, but also plants and factories because we can no longer compete with the other countries. The upcoming administration has plans to curb the job outflow and to give some incentives to create new work places within the US. It is a right direction to move and takes many years to restore our abilities not only to be self-sufficient, but also competitive in the world arena. Can we achieve that? Yes, we can. If you take the current picture of what is going on in China, India, Brazil, Russia and other countries, it might look like we have very formidable tasks and unfavorable conditions to compete with them in production durable and other goods. But if you take the dynamics of their development, growth of population, increasing consumption, expenses and the like, we are not in the worst conditions to beat them. If we can lay the fundaments for this growth in our country, if we can give entrepreneurs more incentives and a better environment, if we can remove the web and maze of legal restrictions from doing business here, we can. So there is just one condition, it is if.

We live in difficult times. And now our Government is trying to find a correct solution to reverse the credit crunch into a right direction. Many measures have been debated and there is lot of disagreement on what to do. For me the desperate times take desperate actions. They take a lot of political will to do so. Fortunately, Barack Obama archived the remarkable victory over his opponent. If we do not take quick and decisive measures, we will sink the economy into chaos and chasm. It is clear for everyone.

Our civilization has developed handful forms of economic controls. Some of them have led to bloodsheds, loss of millions lives and long political disarray. As a person from the former Soviet Union I studied very closely how and what the Bolsheviks did to the country. It is like a bad word in the US to give a group of people such a name. But we are not going to talk about the extreme practices what the Bolsheviks did in the last century. We are all students of the humankind history and supposed to learn the best practices and examples and then creatively rethink over what would we have to do to alleviate our mistakes and avoid them at all. Some countries have known if a nationwide company gets lopsided in a business, the government can step ahead and nationalize it for its benefits and the nation. The Bolsheviks just expropriated the wealth of the rich. Nationalization is known in the US in very mild forms and now I think is very topical when it comes to big commercial and investment banks. With whole control the Government will be able to clean out the debts and resuscitate credit activities in the financial market.

Otherwise we are going drag our feet for a long time in the nightmare of financial crisis and arrive at the same decision after years.

Many would say that in the current conditions of economy such a measure could bring only devastation to the financial system and wipe it out. I would agree with that, but the Government has already tried many things and nothing works yet. Now we are repeating the same mistakes, which Japan made many years ago. We even lowered interest rate to zero as did Japan. There are some differences in velocity how two countries acted and tried very hard to fix their economies. But we are not guaranteed that we can do much better. When the Government gets control over the banks, it can clearly see what has to be done first in the best of interest of country, its people and economy.

When the market turns around and gets better, then our society is able to discuss how and when we can renationalize these banks for benefits of all. The recent event at Harvard Kennedy School of Government was the conference with elect congresspersons. At the event, prominent professors answered questions about the future of the country. To a certain extent we can learn from scholars what we have done wrong and have not done yet.

There was a good question from a congresswoman about the comprehensive plan of developing our economy in about 25 years from now. Some professors highly appreciated the question and acknowledged that we did not have such a plan. What a pity! A great deal of questions was discussed there, but unfortunately nobody proposed a good plan how we could handle this huge problem. To my understanding it is inevitable that the Government has to adopt a comprehensive plan in order to avoid the next depression and pull the economy out of recession. It is little too late to take some measures just to fix a single industry when they fall one by one. We have a systemic failure in economy and it has to be addressed with the same approach.

What I believe is that we need a systemic plan how to handle all problems at the time.

Many people and our current administration believe that China’s currency is undervalued and then it stimulates Chinese exports enormously. As it underlined justly there is a bigger problem in regards to the currency, yuan. Even though China adjusts its currency, the problem would not be fixed. It is clear as a day. Let’s assume we can do just a little to negotiate with the Chinese government to unpeg its currency. Even then our chances will not be favorable.

We have a huge international trade deficit and our currency, the almighty US dollar, is one problem. Since the deficit is based on gradual development in the third world to boost their economies and export more and more goods to the developed countries. It is not a big secret they did their homework to muscle their economies to the level they could successfully compete with the world’s producers. The outcome of this competition is our and the world’s financial crisis. What they did is just to give entrepreneurs much more advantages in any dimensions that they would be interested in developing their economies and export potency. We do not have to imitate their experience, but at least we can learn something useful for us. China, for instance, established several industrial zones that played a very significant role in developing its economy. In the US we could have given favorite regime to those enterprises that produce and export goods out of the country. So we could exempt them from paying domestic taxes at all for a number of years and then offer some tax schedule that could be very attractive as well. Could we have done that? Could it make difference? Yes. What the incoming administration offers is just to punish entrepreneurs. You want to ship jobs outside country? Pay the tax. Yes, this policy can slow down outsourcing a little bit, but in a long run it will be more appealing to export our jobs than keep them in the US. We must create much better and friendlier environment for any business that is interested to export goods out of the country than in any country. Only then are we able to offset our trade deficit. I do not see how any negotiations can solve the problem with the trade deficit.

A very important issue about energy needs to be discussed. Economy got into quagmire not only because of non-performing mortgages, the overheated real estate market, credit crunch, but also because of high-energy costs. The latter significantly slowed down our economy in terms of the cost of the final goods produced in the US. The issue is so controversial and there is no decisive agreement how to handle it. According to serious experts in this field, ethanol, wind power, solar energy and the like are not sufficient to substitute hydrocarbons to produce energy for the US population and businesses. The alternative for significant growth of our energy independency is nuclear energy. The US possess high-skilled workforce to produce this kind of energy. Many of us are afraid of occurrence of the second Chernobyl within the US. It is an absolutely legitimate concern for us. But if you take this issue from another point of view, it is inevitable to us to produce this energy. More over it is so strange when we discuss the production of nuclear energy with so much concern and leave nuclear arsenal of the US out of equation. We have too many nuclear warheads and our public seems not to be worried about their presence within our boundaries. So the answer is our perception on possibility of accident not more. Nobody says that nuclear power is absolutely safe, but what real choices are, we have. At this level of our technology, we cannot harness solar, wind and wave energy enough to satisfy our needs. For that, maybe, we need two or three planets. If we compare the generation of nuclear energy in Europe and Japan with the US, we produce it much less than some countries such as Lithuania and Slovakia in terms of the share of production of all energy. France, for example, is able to export its energy to neighboring countries. We just have lack of political will. By nuclear energy we can drastically reduce our import of hydrocarbons and reverse the energy stalemate in many aspects that cannot be overstated.

We know that if we miss these opportunities now, we may not be able to do so later due to many political considerations and changes in the future. Time flies and never returns.

 

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