Saturday, September 18, 2010
Real Economic Recovery Requires Common Sense and Knowledge of History, Not Ideological "Purity"
Federal Reserve Chairman Ben Bernanke has proclaimed that the 2008 bank bailout, in which Congress voted to spend up to $700 billion to prop up the nation’s financial markets, was effective, and averted a significantly more devastating economic crisis. While most economists agree with the claim, for most citizens, the crisis that threatens them looms as ominous as ever, and the anger they feel is likely to have a big impact on the November elections.
There is no small irony in the fact that while the TARP bailout is frequently described as a Democrat program, it was actually initiated during the Bush administration, and finally passed with an atypically bipartisan final Senate vote tally of 74 in favor and 25 opposed. Only one senator, Edward Kennedy, did not vote due to his well-publicized health problems. Of those who voted to approve the bill, 40 were Democrats and 34 Republicans. Of those voting against it, 10 were Democrats and 15 were Republicans. Yet, as voters’ anger about the bill increases, most politicians are scrambling to desistance themselves from it in preparation for the November elections.
As part of the attempt to prove TARP’s effectiveness, Herbert Allison, Treasury’s assistant secretary for financial stability, stated that three-fourths of the money that was loaned to banks has been repaid (see http://www.recovery.gov for actual figures by state). However, repayment of the loan was not its actual purpose. The intent was for banks to feel sufficient relief from pressure to begin lending again, and thus far, that hasn’t happened. What has happened is that financial institutions are reporting significant profits and positive cash on hand. Some, such as Morgan Stanley and Citigroup’s Smith Barney, which received a combined $60 billion in bailout funds, went so far as to award executives with multimillion-dollar “retention awards” – PR spin for bonuses – even as they were preparing to lay off workers. To those workers and millions like them throughout the country who have lost their jobs, the anger is both palpable and justified. And those angry people aren’t likely to be enthusiastic consumers, the most essential element in any real recovery.
The manufacturing sector is another essential element that seems to have been left out of the recovery. Manufacturing companies rely upon consumers to purchase their goods, and banks to provide them with working capital to meet consumer demand and remain competitive. Unfortunately, at this point in the “recovery,” those manufacturing companies can rely upon neither, since both the consumer and the lender remain fearful for the future, and are hedging that fear by hoarding what resources they have, rather than spending or lending. Lacking orders for goods and confidence in the availability of capital, companies aren’t too enthusiastic about hiring, further fueling consumers’ uncertainty about improvement in the employment market.
The end result is that some corporations that dramatically cut expenses – in great part by means of layoffs – during the recession are seeing soaring profits. According to the Federal Reserve, company cash reserves topped $1.84 trillion in the first quarter of this year, up $382 billion from last year. But they are sitting on those reserves as a hedge against potential future crises, rather than investing and re-hiring. They’re also cutting back on dividends paid to investors, further eroding investors’ imperative to further invest.
It has been shown that historically, corporate profits and the stock market rebound earlier than employment figures following a recession. History is certainly repeating itself, only in a significantly more dramatic fashion this time around. According to Adrian Cronje, CIO and partner at Balentine, an Atlanta-based wealth management firm, “There is a record level of cash on balance sheets – something like 15% of the market cap.”
With unemployment approaching 10% nationally, consumer demand remains weak. The job gains of the last quarter or so are encouraging, but not enough to offset the fact that the country has well over eight million fewer jobs than it had before the recession officially began in 2007, according to the U.S. Bureau of Labor Statistics. Obviously, “consumer confidence” is something of a misnomer at this point. As long as consumers continue to hoard what they have, rather than save, invest, or spend, it is inevitable that businesses follow suit to some degree.
Citizens’ anger over the disparity between Wall Street bottom lines and their own financial hardships is certainly justified, made worse by the level of government spending in efforts to turn the recession around. Perhaps borne of a sense of helplessness, a number of very vocal groups – most notably, the Tea Party organizations – are calling for dramatic cutbacks in government activity and corresponding spending, and a significant percentage of citizens are taking up the cry, essentially blaming the attempted cure for the disease.
In Franklin Delano Roosevelt’s inaugural address in 1932, he said, “The only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Ironically enough, when the nation began to emerge from the Great Depression, Roosevelt – like the current administration – came under tremendous pressure from a fearful electorate to cut back on the programs that had been implemented to turn the nation’s economy around, thereby reducing the tremendous debt which those programs had caused. Ultimately, he succumbed to that pressure, and a rigorous austerity campaign was instituted across the board. Rather than improve the situation, however, in 1937, the country fell into a deep recession; not as severe as the Depression itself, but still bad enough to threaten a return to the horrors of the early 1930s.
The question we must ask ourselves is whether history is likely to repeat itself this time around, and whether we are able (and willing) to learn from history’s lessons. Certainly, there are mechanisms in place nowadays that didn’t exist before the Great Depression, designed as fail-safes against a repeat of such a dramatic fall. However, the sheer scale of our modern economy, along with the complexity inherent in a now globally-interconnected economic structure, renders much of that machinery inadequate. For all our efforts to protect ourselves from economic meltdowns, we have come dangerously close, and aren’t out of danger yet.
Perhaps it is time for us to put logic ahead of fear, and to assign our loyalties to the well-being of our country, rather than to an allegiance to a party or ideology. If our focus remains upon ideological purity and our efforts upon “winning” by making those with whom we disagree lose, we could well experience economic devastation that dwarfs that we experienced during the Great Depression. At no time since have Roosevelt’s words been truer. The only way to move beyond our fear is to set aside our efforts to assign blame for political advantage, to commit to rebuilding the world’s most affluent economy, and to see that the recovery isn’t limited to spreadsheets and stock tickers. The economy is founded upon a system of interdependence, and neither Wall Street nor Main Street can thrive while the other founders. And despite what the most partisan elements in both parties would have us believe, the same holds true in our system of governance. When proponents of one or the other ideology holds absolute sway, our nation suffers. It is only by working together in an atmosphere of compromise, with each side willing to give ground, that we can hope to realize the goal of effective governance so essential to a thriving society.