Nouriel Roubini discussing the market meltdown. I’m less sanguine than he is about Neo-Keynesian stimulus spending. US infrastructure needs re-building so badly, but I don’t think that is what is going to slow down the recession/mini-depression. It may halt it somewhat (maybe), but it’s too long by the time Obama gets into office and before the projects will really get going. Paulson & Crew have not surprisingly known what the f–k to do with the monies so far given in the bailouts. Nor the CEOs of said firms who have their heads up their back sides.
Even someone like Roubini or Nassim Taleb, as well as Peter Schiff & George Soros, correctly predicted the housing bubble collapse, which then exposed a much deeper bubble (a super-bubble in Soros’ terms) that was the entire solvency/credit trap that has taken over and the failure of 30 years of economic policy. Black swans in Taleb’s language can not be predicted. Both he and Roubini correctly predicted that said market was built on sand and would eventually collapse, but neither one of them got right precisely when it would happen (they both thought in 2003). And now after the fact, as Taleb would say, we create a story—a narrative fallacy in his words–that Bear Sterns was the presenting cause of the collapse. But say Bear Sterns had been bailed out, maybe something else would have caused it, or rather simply exposed what was shoddy construction. Eventually a house built on shifting sands is going to fall down. Predicting exactly when or why is not really the issue. The issue is the poor choice of construction.
But looking back over my blog, I noticed these comments to a post of mine from my friend Daniel O’Connor. He wrote the following on Jan 23rd of this year. That’s January of 2008. That’s as the sub-prime bubble is beginning to burst, but before bailouts, market crash, the “r” word, unemployment hitting big, the credit crunch really coming to the fore. His predictions are beyond prescient. I’ve highlighted the relevant portions on specific points of pinpoint accuracy in his predictions and added some bracketed comments for contextualization/translation:
The market economy is now very clearly in the midst of a deflationary-recessionary system dynamic wherein money-credit and productive output are both contracting. This is what the early stages of a depression look like in this unique new era. [ed: Credit Crunch, Global 1-2 yr Recession/Mini-Depression]. It may not come to pass as a full-blown deflationary-recession, but the basic system structure is in place and the dynamics are working in predictable ways.
The Feds already are and will continue to do everything possible to inflate money-credit and GDP over the next several years, fighting the market system’s natural drive to reduce asset prices (primarily housing, but also stocks [Stock Market Crash in Fall 2008] and soon enough commercial real estate) and write-off the associated debt [See bailouts of AIG, Citigroup, etc. via TARP, .
They did this with surprising effectiveness beginning in 2000, but at that time they had a balanced budget and a housing sector not yet maxed out in terms of debt and asset prices. Now they are in a desperate situation, far worse than the 2000 scenario and about all they have left in their conventional policy arsenal is to maintain massive budget deficits that are monetized by the Federal Reserve (i.e., the Fed buying new treasury securites to fund the deficits as a way to automatically create new money and thereby inflate GDP via excessive government spending). If they were to spend this extra $300B a year on domestic infrastructure and clean technology [Obama's Fiscal Infrastructure Stimulus], rather than weapons that are destroyed in their use to destroy other people’s capital structure, then the deficits might not be nearly so bad for the economy.
Beyond this, look to the Fed to start systematically buying Treasury securities on the open market [see Roubini's statement on this very point in the video above] as a way to lower long-term interest rates–very unconventional, though I suspect they are already doing this now. They are also likely buying stocks through their secret accounts on Wall Street in order to preclude a crash.
This is serious game time for these guys, so from their perspective another 4 years of deficits is not only not a problem, but a key part of the short-term solution to a bigger problem than they will ever admit publicly.
If I ever run for office (not gonna happen), then I’m asking Daniel to be my economics adviser. If you want to check out some more of his stuff, his website is here (Catallaxis). He has some recent posts from the summer more fully fleshing out his views on Integral Theory of Praxis. Some really brilliant stuff. I hope to have some time to comment on some of it in the next few weeks.