Tuesday, July 20, 2010

Gut Checks and Balances

This PTSD economy does not indulge in confidence. How strange a twist is that? If this land is still made for you and me here's the new century rationale: Individual enterprise demands a life-giving blend of creative spark, market magic, and the delusional conceit of "why not me?" Now where are you hiding my mojo?

How do we shift the momentum in favor of a sustainable recovery -- one that might actually spill into the next electoral cycle? The biggest miscalculation here by President Obama isn't whether to split the difference in clause B by dropping the provision in bottomless loophole X. It's the notion that his re-election rests in the balance of his legislative record. That's over-thinking -- an Obama indulgence. The decision to cast a presidential vote? That's the biggest impulse buy since they started making electoral cycles from the unused inventories of local TV stations.

Obama may "get that" when his advisers remind him of this obvious point. But his gut is playing catch up. He continues to see his temperance and self-control as a corrective hedge against the excesses of parasitic capitalism and the fat foxes in our foreclosed hen houses. But then there's the falling out. That's the cooling of Obama's ties to the American business community as a standby explanation for swelling unemployment at a time of record-setting earnings.

Long story short: CEOs have soured on the relationship because the President surrounds himself with ivory tower eggheads whop couldn't tell a payroll tax from a roll call vote. The other deal-breaker is more personal: that when Obama admonishes Wall Street elites for playing by their own rules he's the teetotaler at the lectern -- the law professor-in-chief, not the bully populist.

It harkens back to the last big bull rally where the animal spirits of sustaining job creation were matched only by the unbridled mojo of executive lust. That doesn't mean cheating on Michelle is the surest way to put people back to work. I'm not even saying that President Obama should unhinge his austere nature. The man rarely seems to meet a gratification he can't delay.

But maybe he could nudge the Fed to do the right thing -- the fiscal equivalent of charging $5 for a gallon of regular. That's the political suicide pill known as raising interest rates. A lot. Not at the margins but 2-3 points in one rate hike. Obama will then double the shock (after all we're already in shock so he has free reign to keep going). He will release the unspent TARP funds as the after-burner stimulus that a broken and divided Congress has no moxie to pass. This extreme, bad ass cocktail is Red Bull laced with whiskey. We're stepping on the brake and gas pedal. Both feet. At the same time.

This is decisive. This is leadership. This comes from the gut -- one of the less developed of this President's formidable assets. Best of all this is not a brokering at the margins. This Heimlich-like maneuver is dramatic, not reckless. It's not driving the car over the cliff like starting unfunded and infinite wars with tax cuts for the upper one percent. Those are the folks who've cashed out of this economy and are not dependent on its return.

We're still crashing the car but it's within the lab test facility. Barack likes it when his resolve does the testing and not the reverse. This is a reckoning. It's not about kicking capitalism in the balls. Au contraire, it pumps high, life-giving octane back into the Fed tank for dangling carrots and wrangling sticks that were burned for kindling in the meltdown.

That kind of calculation not only takes guts -- it attracts votes, especially from the same non-plussed and marginalized supporters who will protest the sluggish economy by staying away in droves this November.

1 comment:

Marc Solomon said...

Marc: you do yourself a disservice by posting the theory that interest rates should be raised at all, much less "a lot." I know I'm being insulting, but there's only one word for this: ignorance. It shows (not in general, but in regard to this subject alone) that you don't know macroeconomic theory, you don't know economic facts, you don't know the implications your idea has for economic classes, and you don't know history.

1) The Fed raised rates at the beginning of the Great Depression -- it made it far worse.
2) Higher interest rates favor lenders (the wealthy) and hurt borrowers (the rest of us).
3) One of the biggest dangers on the horizon is not inflation or even disinflation, but DE-flation. Deflation is profoundly destructive to everyone but the wealthiest. Most people have negative wealth -- their debts are more than their assets. Deflation causes the debts to become greater and the assets to become less, in constant dollars. Moreover, deflation promotes unemployment by decreasing demand in a vicious cycle whose only cure is inflation (lower interest rates plus massive government spending and a weakening of the dollar internationally). Higher interest rates would certainly push us over the edge into deflation. The "cure" would force us to promote far more of the "disease" (though I can't imagine what disease you think the cure is treating).
4) There is no problem right now that higher interest rates would make any better. They are good for only two things: breaking the cycle of runaway inflation, and discouraging "bubbles." There may be a bubble right now: bonds. Bonds become more valuable with deflation, so they are the exception to the "bubble" justification for higher rates. Otherwise, no bubbles appear to be happening now -- quite the opposite. So there is literally nothing that raising rates would contribute positively to. there is no justification whatsoever.
5) Higher interest rates maker the dollar stronger, which would be very bad in the intermediate future. The trade deficit is perhaps the single most dangerous aspect of the economy right now. A stronger dollar would make the trade deficit far worse.
6) Higher interest rates would cancel out any stimulus by severely reducing the velocity (speed of circulation) of money, and indeed decreasing the money supply if it led to widespread bankruptcy.
7) Higher interest rates would greatly reduce the already dangerously low rate of lending, prolonging the recession literally for a half-decade if not more.

I know it's obnoxious, but I've GOT to say this. I really can't believe you'd put your name on a post with this idea. I'm not talking about politics or differences of opinion. I'm saying you're just plain wrong. There is no conceivable argument, from the right or left (except for one favoring the high-speed extreme concentration of wealth in fewer and fewer hands), that would support this idea. It's not ideological for me to say this: it's a fact.

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