Summary: In the past few posts I have discussed a possible solution to this crisis. Unfortunately, it will not work. The reasons why are both depressing and technical, so let’s defer them until the next post and instead concentrate on what must be done. A reminder: we can only speculate about these things, as they lie beyond both fact and theory.
For a summary see A solution to our financial crisis. This series of posts took you to the cutting edge of insights about the crisis. Now we will attempt to go beyond that.
- Stabilize the financial system – Being attempted, probably now it’s too late.
- Stabilize the economy with monetary stimulus– Rates are comign down and money printed, but probably with relatively little effect.
- Stabilize the economy with fiscal stimulus — Just now being considered; will work but slow to implement and slow to have effect.
- Arrange long-term financing for steps #1 and #2 with our foreign creditors – Unacceptable to our leaders at this time.
None of these will work, in the sense of having full effect before next Fall. That does not mean they are not worth attempting (i.e., the Fed and Treasury have programs included in numbers 1 and 2 ). Or worth doing, to help at a future date (number 3, recently advocated by Pelosi). Or worth advocating, hoping it will done before disaster strikes (number 4).
However, we must prepare for the possibility that the economy will be in a severe recession — or even depression — when the new President takes office in January. A depression does not mean like the 1930’s — the Great Depression. There is a large gap — usually ignored by analysts — between the severe post-WWII recessions (1973-75 and 1980-82) and the horror of the 1930’s. The frequent depressions of the late 1800’s lie in that gap, and for various technical reasons we may now be experiencing one of those.
The new President must be prepared to immediately take action after inauguration. There is no time for the usual drill: search for staff, redecorate the Oval Office, have meet-and-greets so the new officials get to know each other, schedule meetings to formulate a plan and build support. The damage to the economy will be terrible by that time these things are completed, and (worst case) the economy still might be sliding downwards. Also, any plans will require time for Congressional approval and implementation, and plus lag times until results appear.
Then there is is the bad news. The conventional solutions which the new Administration could easily put into effect — fiscal and monetary stimuli, plus devaluation of the dollar to stimulate exports — probably will not work (in the sense of sparking a recovery of the economy). Let’s defer the reasons why until a later post, and consider the implications. We have two alternatives (not exclusive):
- Wait it out. Rely on conventional mitigation efforts to cushion the downturn until the economy’s natural recovery begins.
- Explore the fringes of economics, seeking some smart people who can take us beyond the now-exhausted standard Keynesian theory. We need new ideas.
New Recommendations for the new President
These are things to do, not arranged in a sequential order.
(1) Right now start assembling your “shadow cabinet”, and their key assistants. Get them working together ASAP. This poses all sorts of operational and marketing problems, plus the risk of conflict with (or undercutting of) the existing guys running the show. Deal with it.
(2) Get a small team searching for solutions outside the conventional beltway consensus. This is America, the brainstorming center of the world. There are new ideas out there.
(3) Prepare a plan. It will be complex.
(4) After the election, start building support among key political and business leaders for the plan. Coordinate to the maximum extent possible with the outgoing Administration.
(5) Once in office, move immediately to implement it.
We do not know if these things are even possible, esp (2). An unprecedented crisis requires extraordinary responses.
Originally published at Fabius Maximus on Oct 9, 2008 and reproduced here with the author’s permission.