TheMillerCircle.org

Many people throughout our economic spectrum are asking whether we will see a bottom to this financial  crisis.  When will it level out? How can something as seemingly innocuous as a relatively small number of sour sub-prime mortgages trigger off a complete collapse of a giant global economy? What was it that made our economy so fragile? What did we do wrong? How can we right this badly listing ship? At the same time, most of us in the middle class feel that we didn’t do anything wrong, that we worked hard and did what our non-verbal contract asked of us: We expected the same from those running our financial system.  It was primarily a few people at the top, many of whom are still profiting from the bailout, that form the core of the responsible parties. Shouldn’t these people go to jail, if only to serve as the historic example of what can happen if you treat the stock market like your little private toy?

In the last decade plus, we have been witness to two stock market bubbles. Both were falsely created, through hyping either the dot-com companies in the first bubble (~1995-2001), or the sub-prime mortgage bubble that lasted from 2002-2006.   Stock market bubble creation is a means by which wealth is transferred from the middle class to the wealthy and the super rich, from those in the stock market for long-term investment gains and projected economic security, to those in the market that help create and extract wealth from an unsupportable market frenzy of their design and choosing. We don’t think of these bubble creators as criminals, yet they are the masters of thievery. They  have robbed us of billions if not trillions of dollars, to say nothing of their behavior in igniting our fiscal/banking collapse.  Aren’t these people bigger criminals than those who rob grocery stores or gas stations to feed their families? Are they not the arch criminals of our generation? Or, will we eventually thank them and thank G.W. Bush as well for dramatically bringing us to the low point of our errant history over the last 40 years, such that we now have greater clarity of vision about how to best shape our future?

Obama’s plan to get us out of this deep recession is different than what FDR did in the Great Depression of the 1930s. In FDR’s case what he tried to do was ignite a stagnant economy. The factories were still intact in the depression of the 1930s and FDR’s mission was get them running again– get people back to work–open the factory doors that had been shut.  For FDR the intermediary solution was to offer government employment through jobs creation and public works projects.  Obama faces a fundamentally different task and his solution is appropriately geared for this new dimension of responsibility. We don’t need to open the old factory doors that have been shut, as the insides of these factories are bare–everything went to China.  We need to create new buildings that do different things, as we march towards full employment through a brand new economy that is something like the one we had in the post WW II era, but with better health care and less pollution.  The new dimension to our economic needs has been revealed by the fragile nature of our current economy and is reflected in the fact that its collapse was lightening swift, triggered by a relatively small and seemingly insignificant flash point. Our economy was too fragile for our present and future security and for that reason alone, we need a new one.

The collapse of our current economy revealed all of the elements of corporate greed, as we saw with Enron, to an over-leveraged investment economy, public debt as a percentage of our GDP that reached levels equivalent to those seen in the Great Depression, topped off by the ponzi schemes of phony investors like Bernard Madoff and his $ 50 billion “investor” loses, created by bilking his own friends. Each day we learn of new tragedies about people who had invested their life savings into Madoff’s investment ponzi and have now lost everything. We have learned too that our banking system, which was created to serve the public, morphed itself into institutions of high profit and finance with bank boards that served the narrow profit interests of bank executives. We suffered rating agencies that showed banks and corporations how to fix their books, hide bad debts and generate spikes in the companies stock price that gave the executives huge bonuses and stock incomes.

During the housing bubble in 2005, central bankers paid tribute to Alan Greenspan at a meeting in Jackson Hole Wyoming. One paper given in his honor discussed whether he was the greatest central banker of all time. It was Greenspan who was particularly forceful in keeping out regulatory oversight on such financial  instruments as “credit swaps,” one of the culprits in our current fiscal crisis. What happened to create the banking bubble? We have yet to learn the details, but once armed with that seedy, carnal knowledge, we will surely have the makings of a new definition of  greed. The new definition should be good enough to send off to the National Bureau of Weights and Measures (now the National Institute of Standards and Technology or NIST) as our new American definition of the word “greed”: “a lust for financial  profits above all other motives and desires as exemplified by the American  banking industry executives  during the late 20th and early part of the 21st century”–at least that’s a rough draft.

The solution that Obama has chosen to redeem our economic security is that of forming a new economy. In fact, by electing Obama, we have asked him to do what he promised he would do on the campaign trail. We didn’t ask that of FDR, but the crisis of today leaves us with little choice–we cannot return to the economy of high consumption, extended credit and the creation of false wealth by near pathological elevations in housing values.  Serious regulatory changes in our financial system need to be implemented to prevent another stock market bubble, whose functions are solely for the transfer of wealth.  Obama sees the need for this new economy and has targeted government investments in our infrastructure to stimulate some of these badly needed developments. From Reagan forward, including the Presidency of Bill Clinton, we avoided investing in our infrastructure. So today, we are merely trying to catch up with what we should have been doing for the last 40 years. And, if we play our cards right, we might be able to create a green economy that reduces poverty and chisels away at the over-crowded populations in our prisons, as Van Jones advocates in his book “The Green Collar Economy“.

Government is the only agent with the tool box that can spark the development of our badly needed new economy. What we are seeing today is a country that stopped making payments on its infrastructure and remained steadfastly in denial about the need to address the menace of global climate change. The green industries of ecology, environmentalism and global climate change will demand from us the kind of creative energy that has always typified the American mind and its flare for inventive behavior. Those forces need to be unleashed as never before, including the entrepreneurialism required to stimulate and grow this new economic engine. Where are the Wright Brothers when you need them? This choice for creativity over wealth, for inventiveness over stock market bubbles, can recapture some of the wealth transfer we experienced from the last two bubbles. Some of us may not see the creation and re-transfer of this new wealth, but it will be formed by and for the young members of our society, whose future economic security has been clouded since the era of debt, speculative behavior and deregulation began under the banner of Reaganism.

Obama’s budget for this year has a projected deficit of 12.3% of GDP or nearly twice the size of the largest deficit since WW II, which was Reagan’s budget of 1983 (relative to GDP).  However, Reagan’s budget was based on military Keynesianism and his ideology prevented him from admitting that his budget was good old fashioned  deficit spending to overcome the recession he had helped to create with his Laufer Curve economic naivete–or, as some have put it, “trickle down economics for dummies.” Although Republicans are helplessly  frothing at the mouth over Obama’s spending, his projected deficit of 3% of GDP in 2013 is very sustainable, if it can be achieved. If the debt grows at the same rate or slower than the GDP, it will shrink relative to the GDP.  The graphical example below did not come from Rush Limbaugh.  So here it is again for those who missed out: if you started with a GDP of $1000 and $100 of that is debt, it would give you a net worth of $900. If the growth of your debt and your GDP were both pegged at 5%, as graphically presented below, at the end of  30 years, your net worth would increase to about $5200, even though your debt had also grown.  If you were able to structure your debt so that its growth was less than that of your overall economy, the net worth picture would be even brighter. It is this kind of picture, accelerated in time over that of the graph below that Obama is banking on to generate the growth needed to make the debt affordable. The economy from the 1940s to 1973 expanded through growth in productivity. According to economist Dean Baker in his book “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” if we began and maintained the economy we developed in the postwar boom period, we would be able to take 24 weeks of vacation each year, or reduce our average workweek to 21 hours and have the same income in 2030 as we have today. That is the kind of economy we should shoot for, but do it even better, because of the duality of our needs–financial and environmental.

As the economy recovers and a new, more honest boom is created as the basis of our economic growth, one based on producing something of value for the many, rather than creating paper wealth for the few, we will look back on this dark, gray period as the beginning of a new boom with new opportunities and a new sense of purpose to our lives as we begin to make the down payment on the mother of all threats–that of global climate change and the accelerated loss of animal species, hopefully not including our own. Many of those opposed to Obama’s plan for massive Federal spending seem to represent the lost souls of bubbleism. It’s as if these Republicans, who have deprived their brains of longitudinal thinking mechanisms, must rest on their reactionary, short-term anxieties, as if they had no children to worry about. It is not the debt that we leave for our children that we should worry about. It’s all about the growth rate of the economy which can hopefully produce the level of prosperity that allows them to more readily meet the debt demand needed to recover from this 40 year period of lost opportunity and the absence of  investment in America. One we are on our feet, we can begin to scale back our huge, unsustainable military spending to begin making investments in economic developments that can further accelerate our new economy–military spending does not engage the full economy and we will need a new economic sector for government-sponsored venture capitalism.  The new chapter on developing a brighter economy has begun–join the read and come up with the badly needed new inventions and creativity. It’s not a contact sport!

[In the graph below, the red line represents the growth of debt, beginning at $100, while the black line is the growth of GDP beginning with $1000; the green line is the growth in net worth obtained by subtracting red from black. The blue line shows the steady state interest rate of .05 or 5%--something like this is what we're shooting for]

RFM