If you have "no place to go," come here!

"The parasites are eating the host"

(Hat tip to Naked Capitalist for the riff and the link.) William Buiter in FT on the United States as a banana reoublic with nukes:

I have spent a good part of my career as a professional economist working on developing countries and emerging markets - in South America, in Central and Eastern Europe and the former Soviet Union and in Asia. Increasingly, I find it helpful to analyse the crises afflicting the US and the UK as emerging market crises - perhaps they could be called submerging markets crises.

During the decade leading up to the crisis, current account deficits increased steadily and became unsustainable. Strong domestic investment (much of it in unproductive residential construction) outstripped domestic saving. Government budget discipline dissipated; fiscal policy became pro-cyclical. Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles. Corporate governance, especially but not only in the banking sector, became increasingly subservient to the interests of the CEOs and the other top managers.

There was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place. Truth-telling and trust became increasingly scarce commodities in politics and in business life. The choice between telling the truth (the whole truth and nothing but the truth) and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.

Truthiness rots everything.

As part of this widespread erosion of social capital, both citizens and markets lost faith in the ability of governments to commit themselves to any future course of action that was not validated, at each future point in time, as the most opportunistic course of action at that future point in time - what macroeconomists call time-consistent policies and game theorists call ’subgame-perfect’ strategies. ...

And now the policy implication, which is a counter-argumennt to Krugman's view that it's not possible to err on the upside of a fiscal stimulus:

Effective Keynesian fiscal policy requires a virtuous policy maker, capable of credible commitment - that is, commitment capable of resisting the future the siren calls of opportunistic reneging on past commitments. The Obama administration is new and has had but limited opportunity to abuse the trust placed in its promises and commitments. That puts it in a better position that the UK government, which has been in office since May 1997. But many of the top players in Obama’s economic team are strongly identified with the failed policies, regulations and laws that brought us the disaster we are facing.[Well done! Chalk another victory up for the Village!] So the amount of credibility capital is severely limited even for Obama. ...

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ - the cessation of capital inflows to both the private and public sectors. There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers. But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

Eesh. Just. Eesh. Chickens, meet roost.

No votes yet


bringiton's picture
Submitted by bringiton on

This argument is fear of fear itself. The US economy is at base more than strong enough to recover so long as we do not quaver and fail to do the very simple things that are required to bring it into balance. Collective investment (stimulus spending) is what is needed, and lots of it. The procedural choke points in spending are such that we literally cannot over-budget.

Consider: That the US economy was weakened by the Great Depression is unquestioned. Still, it was resilient enough so that just ten years later we were able from essentially scratch to rally ourselves and not just defeat the two largest military powers ever assembled but beat them to a bloody pulp, both at the same time. We are a very strong nation.

Our economy today is, at base, a great deal stronger than it was in 1930. We are enormously powerful. An increase of targeted bang-for-the-buck new domestic expenditures of 2 trillion over the next four years will do fine. Letting the BushCo tax cuts for the rich expire, cutting unproductive military spending by getting (m/l) out of Iraq, reducing our nuclear weapons stockpile and ending the stupid Starwars and Eastern European DEW projects, all of which are planned by Obama and will happen, will free up the money to initiate UHC and increase domestic spending on education and development of carbon-neutral or better energy sources.

The road ahead will be rocky, but there is no reason to think that we will have a collapse provided the right macro moves are made and the Obama administration for now appears to me to be on the right track. Fearmongering over the barely possible - remotely possible - downsides serves no one but the entrenched oligarchy and should be ignored. It is like focusing on the danger of freezing in the outside cold while standing in a burning building.

Submitted by lambert on

was two-fold:

1. Trust is social capital that our rulerz have, over the last 30 years of Conservative Ascendancy, squandered, and

2. Keynes-ian policies, to be effective, require that the policy makers and implementors be trusted.

Those are interesting theses I'd like to see Krugman address; all I can say is that the writer seems to know his stuff, isn't obviously insane, and presents his case in a coherent manner.

How will all this will play out in reality? I don't think anybody can know (modulo theories of, er, central planning*, which, on alternate days, I'm perfectly willing to entertain). What I will say is that for 8 years, I've never been cynical (or pessimistic) enough.

NOTE * I'm entirely capable of believing that when Reagan and Tip O'Neill made their own "grand bargain" on Social Security, Alan Greenspan took the long view had the prospect of looting it in mind, even if that happy time was 30 years off.