Nouriel Roubini's Global EconoMonitor

Avoid the Double Dip

From Foreign Policy:

How Obama can save the fragile economy from going back into a tailspin.

Roughly three years since the onset of the financial crisis, the U.S. economy increasingly looks vulnerable to falling back into recession. The United States is flirting with “stall speed,” an anemic rate of growth that, if it persists, can lead to collapses in spending, consumer confidence, credit, and other crucial engines of growth. Call it a “double dip” or the Great Recession, Round II: Whatever the term, we’re talking about a negative feedback loop that would be devilishly hard to break.

If Barack Obama wants a realistic shot at a second term, he’ll need to act quickly and decisively to prevent this scenario.

Near double-digit unemployment is the root of the problem. Without job creation there’s a lack of consumer spending, which represents 40 percent of domestic GDP. To date, the U.S. government has responded creatively and massively to the near collapse of the financial system, using a litany of measures, from the bank bailout to stimulus spending to low interest rates. Together, these policies prevented a reprise of the Great Depression. But they also created fiscal and political dilemmas that limit the usefulness of traditional monetary and fiscal tools that policymakers can turn to in a pinch.

With interest rates near zero percent already, the Federal Reserve has few bullets left in its holster to boost growth or fend off another slump. This lack of available good options was patently on display in August when Fed Chairman Ben Bernanke spoke with a tinge of resignation about new “quantitative easing” interventions in the mortgage and bond markets — a highly technical suggestion that, until the recent crisis, amounted to heresy among Fed policymakers. It certainly hasn’t helped that the U.S. federal deficit has reached heights that make additional stimulus spending, of the kind that helped kindle the mini-recovery of early 2010, politically impossible.

Yet all is not lost. Obama will face an increasingly partisan and divided Washington over the next two years, but he can take steps to reduce the odds that this dark double-dip scenario comes to pass. This will, of course, require deft politics. To that end, the administration should focus on policies that create a revenue-neutral fiscal stimulus — one that targets both labor demand and consumption.
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27 Responses to “Avoid the Double Dip”

hloweOctober 12th, 2010 at 3:31 pm

“If Barack Obama wants a realistic shot at a second term, he’ll need to act quickly and decisively to prevent this scenario.””This will, of course, require deft politics.”Do you mean the middle class getting on board with increasing taxes on those over $250,000 (or perhaps a modified plan of say $5000,000) while becoming angry with republicans for siding with the “rich”? If so, you likely underestimate the republican machine that has already convinced the masses that the difficult issues we face are a result of Obama’s policies, and lowering taxes for the rich is good during a deleveraging period when there is little demand.In 2007 I told people, the next president would likely be a one termer because of the coming issues which most of your readers understood. Even most of those people blame the problems on the current pres. The reason is that the republican machine is the yelling as loud as they can, without charging for their opinions. Also the subject matter is over the heads of the average individual who has a life to live.Perhaps letting the economy fall into disrepair while punishing the “evil doers”, would have allowed the economy to begin a healing process prior to re-election, while making it clear it was due to past sins, Unfortunately we now should be concerned about bigger problems in the future with a likely less worldly figure in charge when Countries Clash.

GuestOctober 13th, 2010 at 3:50 am

i thought obama was waiting for the aliens to land and invade earth?? you know, help clean this mess..Retired NORAD Officer’s New Book Predicts a Tentative Worldwide UFO Display on October 13, 2010

GuestOctober 13th, 2010 at 9:00 am

Electing a dark horse candidate with a slip resume on a wall of hope for an heroic Presidency by deeming was a risky venture, especially with a man very ignorant of economics and business.The GOP would most likely embrace Nouriel’s payroll tax holiday. Instead, Obama as the eternal campaigner has chosen to play political football with the Bush taxcut expiry, making it a class warfare issue to tax all those rich bastards that he and Dems so depise to reward the ‘good’ poor people whom they see as potential captive voters.Actually the absolute cost in loss of revenue from the rich is small in proportion to that of the those below US$ 250,000 and the increases in spending, especially the Dems beloved entitlements and public union pension funds. Obama’s consumption argument about how those ‘good’ poor people consume as opposed to those nasty ‘rich’ people just demonstrate his ignorance and preference for political hype over sound economics.In short, getting the country out of the present funk is no mean job for anyone. It requires some compromises and social consensus. So far Obama has not shown the willingness, emotional maturity and intellectual capacity to take this on. After fall elections, I am not optimistic.

GuestOctober 15th, 2010 at 6:58 pm

For what I have been reading (in this web site and others) the fundamental reason why we have little demand and high unemployment numbers is the fact that we are in debt and we have to go through a deleveraging phase (Financial sector, Corporations and households in the short term and Government in the mid term) before we come back to sustainable growth again.If this is true what good will do to decrease the employment tax? Corporations will cash the tax reduction, but they will not create new jobs until demand starts recovering. Am I wrong?We can see an analogy with the financial markets the fact that the banks are not lending even though they have money. Roubini himself have said that QE2 will not bring any major benefit because if the banks are not lending with one trillion in reserves they will not do it with two trillion in reserves.The trick we must try as I understand it is to go through the deleverage process without crashing the economy or getting us into a Japan-style stagnation. I think throwing money to the symptoms of the disease (low growth, high unemployment) instead of resolving the cause of the problem (debt) is just wasting money for political reasons. Any help to the system is just to avoid the crash while we restructure our debt.By the way I do no think austerity is what must do now to resolve the situation. Austerity would have worked when we were getting into debt and it will work (if we do it) once we resolve our current debt problem. But right now we need refinancing, restructuring, defaulting and any other mean to get rid of this debt ASAP, but in a controlled manner.What are you ideas in refinancing, restructuring, or defaulting our debt?

economicminorOctober 17th, 2010 at 11:43 pm

John Mauldin’s latest newsletter hits a home run. You just have to read this! same ole’ Banksters who created Round One of the Greatest Financial mess in our life time were now caught trying to cover up the original sloppy work with more fraud. It seems that when they created the toxic waste, I mean MBS’s and CDO’s they didn’t or couldn’t or didn’t want to transfer the actual note legally. So they didn’t.. In some cases they never actually had the notes. They were still in the offices of the originator. Which in many cases went under and left all those notes to be recycled as the new owners cleaned out their office buildings. Glitches in the ointment. It was suppose to be sunscreen and it turns out it was really a skin devouring bacteria instead.Their fraudulent behavior came to light when trying to ignore the law again. Now States’ Attorney Generals in the heat of an election, have decided to actually look into the fraud and file suit.A Note can not be foreclosed upon unless you actually are the one who is stated on the note as owning the note. It seems that a whole lot of the notes (the actual security interest) were not transferred when the MBS’s were created because the banks didn’t want the liability of actual ownership.. Ha Ha Ha!!! And for sure not when the CDO’s and CDS’s were then conjured up from them. So NOW, how does a bank or institution foreclose on a property when the law and note do not give them the authority to foreclose or even re-write (modify) the security interest? Even though they guaranteed the resolution of default when they sold the bits and pieces of tranches to *investors*! They can’t legally. So they were just making up documents and hoping that no one noticed… Already caught between fraud, legal obligations and consequences.. they did what they had to do… they got their people to fix it all up! :-)NOW >>> who owns the house or property when the note is invalidated by lack of proper procedure? When the note was lost or made invalid by lack of actual legal transfer. The person in title will end up with the asset, free and clear… That’s the law. If you don’t make the payments on a note which is no longer a legal obligation, can you and your asset be separated?The banksters even tried to get the Congress to change the laws… and they did.. But so far it looks like Obama isn’t going to sign it. So in effect vetoing it. Probably a good thing.. for justice and fairness. We’ll have to see whether it is good if it brings down the entire pyramid scheme.In the mean time, we have Title Companies who guaranteed the titles and entities who paid good money for the income and home owners who may have just won the lottery and the Banksters. And the lawyers and the Atorney Generals and lots of fraud and fear. And the FED who is already planning to buy up a lot of this trash with new QE2$. Will this just be a print or will there be notes to be secured by future taxes? Lots of intrigue and a new Congress. Thing are certainly interesting to say the least.One thing I know for sure is that we have a lot of mis allocated resources within a dysfunctional system. Chaos is becoming the norm rather than stability. But as Minsky said, instability will lead to stability which in turn will cause the system to become again unstable. We just have to be patient.Those who bought the income streams are sure going to file suit when they get neither income nor the asset resold and a cash settlement. They will have to write off the entire investment as a loss. This is going to be huge for the insurance companies who sold annuities and the pension funds who were already underfunded. Some of the Banksters should go to jail instead of enjoying their bonuses. Unless the FED just takes all this and swallows it up with fresh new money created from rarefied air.Who knows?

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