[Pen-l] Greider on the international (and ideological) dimensions of the financial crisis

[Ann Davis <davisa@xxxxxxxxxx>]

Greider also quotes the Levy Institute analysis.  This comment is from The Nation.
Ann

The Crisis Is Global

The Nation


By

William
Greider

January 15, 2009

Three large obstacles are blocking
Obama's path. The first is one of scale: his nearly $800 billion recovery
package sounds huge, but it is perhaps two or three times too small to
produce a turnaround. The second is that the financial system--still
dysfunctional despite the bailouts--requires much more than fiscal
stimulus and bailout: the government must nationalize and supervise the
banks to ensure that they carry out the lending and investing needed for
recovery. This means liquidating some famous nameplates--led by
Citigroup--that are spiraling toward insolvency. The third is that the
crisis is global: the US economy cannot return to normal unless the
unbalanced world trading system is simultaneously reformed. Globalization
has vastly undermined US productive strength, as trade deficits have led
the nation into deepening debtor dependence. 

While Washington debates the terms of Obama's stimulus package, others
see disappointment ahead. The Levy Economics Institute of Bard College,
an outpost of Keynesian thinking, expresses its doubts in emotional
language that professional economists seldom use. "The prospects for
the US economy have become uniquely dreadful, if not frightening,"
Levy analysts reported. The institute's updated strategic analysis warns
that the magnitude of negative forces--the virtual collapse of bank
lending, private spending, consumer incomes and demand--"will make
it impossible for US authorities to apply a fiscal and monetary stimulus
large enough to return output and unemployment to tolerable levels within
the next two years." Instead, the unemployment rate is likely to
rise to 10 percent by 2010. Obama's package amounts only to around 3
percent, annually, of GDP in a $13 trillion economy. Levy's analysis
calculates that it would require federal deficits of 8 to 10 percent of
GDP--$2 trillion or more--to reverse the economic contraction. And yet,
the institute observed, it is inconceivable that this level "could
be tolerated for purely political reasons" or that the United States
could sustain the rising indebtedness without terrifying our leading
creditors, like China. 

Stimulus alone by a single nation will not work, in other words, given
the distorted economic system that Obama has inherited. The stern warning
from the Levy analysts and other skeptical experts is that the United
States has no choice but to undertake deeper systemic reforms right now,
rather than wait for recovery. Will Obama have the nerve to tackle these
fundamentals? To do so he would have to abandon some orthodox assumptions
about free trade and private finance that he shares with his economic
advisers. 

The most obvious and immediate obstacle to systemic change is the
dysfunctional financial system. It remains inert and hunkered down in
self-protection, despite the vast billions in public money distributed so
freely, no strings attached, in the last days of the Bush administration.
We will learn soon enough whether Obama intends to start over with a more
forceful approach. Obama and his advisers are eager to get another $350
billion in bailout funds, but they have remained silent on whether this
will finance a government takeover of the system. Without such a move,
the taxpayers will essentially be financing the slow death of failed
institutions while getting nothing in return. 

The most complex barrier to recovery is globalization and its negative
impact on the economy. Given our grossly unbalanced trade, we have kept
the system going by playing buyer of last resort--absorbing mountainous
trade deficits and accumulating more than $5 trillion in capital debt to
pay for swollen imports, while our domestic economy steadily loses jobs
and production to other nations. Renewed consumer demand at home will
automatically "leak" to rival economies and trading partners by
boosting their exports to the US market--which subtracts directly from
our GDP. This is the trap the lopsided trading system has created for
recovery plans, and it cannot be escaped without fundamental reform.

To put it crudely, Obama's stimulus program might restart factories in
China while leaving US unemployment painfully high. In fact, some leakage
may occur via the very banks or industrial corporations that taxpayers
have generously assisted. What prevents Citigroup and General Motors from
using their fresh capital to enhance overseas operations rather than
investing at home? The new administration will therefore have to rethink
the terms of globalization before its domestic initiatives can succeed.

A global recovery compact would require extremely difficult diplomacy but
could be possible because it is in everyone's self-interest. The United
States could propose the outlines with one crucial condition: if the
trading partners are unwilling to act jointly, Washington will have to
proceed unilaterally. A grand bargain could start with US agreement to
serve once again as the main engine that pulls the global economy out of
the ditch. That is, the United States will have to continue as the buyer
of last resort for the next few years, and China and other nations will
have to bail us out with still more lending. In the short run, this would
dig us into a deeper hole, but the United States could insist on a
genuinely reformed system and mutually agreed return to balanced trade,
once global recovery is under way. 

Congress can enact the terms now--a ceiling on US trade deficits that
will decline steadily to tolerable levels, as well as new rules for US
multinational enterprises that redefine their obligations to the home
economy. Unlike in other advanced nations, US companies get a free ride
from their home government when they relocate production abroad. That has
to change if the United States is to reverse its weakening world
position. Tax penalties plus national economic policy can drive US
multinationals to keep more of their value-added production at home.
These measures can be enforced through the tax code and, if necessary, a
general tariff that puts a cap on imports. Formulating these provisions
now for application later, once the worst of the crisis is over, would
give every player the time to adjust investment strategies gradually.

President Obama and his team may at first scorn the notion of saving the
world while negotiating a bailout for the United States. They will be
reluctant to talk about reforming the global system by threatening to
invoke emergency tariffs. But we are in uncharted waters. Impossible
ideas abruptly begin to seem plausible. Six months from now, if the Obama
recovery does not materialize, the president may discover he has to
reinvent himself.

About William Greider

National affairs correspondent
William Greider has been a political journalist for more than thirty-five
years. A former Rolling Stone and Washington Post editor,
he is the author of the national bestsellers One World, Ready or
Not, Secrets of the Temple, Who Will Tell The People,
The Soul of Capitalism (Simon & Schuster) and--due out in
February from Rodale--Come Home, America. 


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