In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. FULL ARTICLE by Frank Shostak
Add comment February 20th, 2010
Simon & Schuster, 272 pp., $25
Among the more trenchant touches in John Lanchester’s study of the financial bust is his framing of the new finance as Wall Street’s answer to post-modernism. Wall Street, too, in Lanchester’s account, engineered “a break with common sense, a turn toward self-referentiality and abstraction, and notions that couldn’t be explained in workaday English.” If post-modern art has often seemed like an arcane conversation among the cognoscenti that was meant more to confuse the onlooker than to satisfy or inform, one could barely say less of collateralized debt obligations (CDOs) and the welter of alphabet securities that underlay the new finance. The parallel should not be pushed too far, but Lanchester is right that the financial crisis sprang from the esoteric principles and practices of an insulated elite.
Wall Street has been so smitten with itself that it lost sight of the purpose—to provide credit and capital to the rest of us, remember?—that society entrusted to it. Lanchester, a British novelist and a banker’s son, excels at recalling, in comprehensible terms, this original—and betrayed—purpose. If his penchant for metaphor occasionally leads him off the rails, more often he spots latent truths that conventional banking reporters miss. Thus he nicely observes that ATMs, with their creation of “frictionless” and seemingly ownerless money, can induce a frightening vertigo; and that Alan Greenspan was so robotic in his defense of new financial instruments that he sounded like “a computer program written to impersonate [what] Alan Greenspan would have said: Free market good. Trust free market.”
Though he is essentially a tourist to his subject, Lanchester understands perfectly that the man behind the curtain was no wizard—that markets, far from being God-given instruments of perfection, were human constructs. He understands, too, that the precision embedded in financial models was a false precision, and that the idea that risk could be “boiled down to a [single] number” fatally endowed practitioners with an undeserved confidence. And the central error of the era, Lanchester suggests, was cultural. Quoting Senator Byron Dorgan, whose prescient warning went unheeded, “The culture is that Wall Street knows best.” The corollary was that the market was “magically self-regulating,” and thus not in need of government regulation or adult supervision.
Lanchester sees the flaws of bankers in cultural terms as well. They and the other troubadours for the new finance errantly believed that ordinary people thought like experts did—or as they imagined experts did: arithmetically and flawlessly. But since most people are neither experts nor computers, millions of them mortgaged their homes for more than they could afford. He frames the greed of bankers by correctly pointing out that no sooner is a regulation crafted than bankers set to figuring ways around it. This observation is hardly new, but Lanchester delivers it with added force by contrasting financiers with health care workers: “Doctors don’t, for the most part, pride themselves on saying ‘What the hell, nobody’s looking, so I’m just going to reuse this dirty needle.’”
ROGER LOWENSTEIN on WALL STREET’S BREAK WITH COMMON SENSE
Add comment February 20th, 2010
he big banks have gotten plenty of help with their debts. But what about struggling households and non-financial institutions? Roosevelt Institute Braintruster Marshall Auerback investigates.
Once all the TARPs are tidied up and the quarterly profits no longer a revelation, American consumers will still be swaddled in debt. What’s to stop them from just walking away from it–and who’s to say, if the banks keep this kind of behavior up, we don’t want them to?
In The Holy Grail of Macroeconomics, an account of post-bubble Japan, Richard C. Koo illustrates that highly-indebted corporations with depressed asset holdings and a positive cash flow will embark on sustained debt repayment until their balance sheets are healthy once again. He argues that this happened in Japan over the last two decades and also happened in the U.S. over the four years of the Great Depression. This ongoing debt repayment created decades of economic stagnation, particularly because the fiscal response was so fitful and inconsistently applied.
But does it follow that sustained debt repayment will be the response of a household sector in the U.S. with destroyed asset holdings and high debt? To our way of thinking, it is unclear. This is especially the case with respect to mortgage indebtedness; U. S. households have non-recourse mortgage loans and can walk away from their debts rather than pay them down.
Public opinion polls reveal that Americans are angry about the current economic, healthcare, housing and environmental crises. Polls also document that a significant majority of Americans want the federal government to do something to fix these problems. But you’ve also got the makings of a huge neo-populist anger brewing, largely because (in the words of Frank Rich), “What disturbs Americans of all ideological persuasions is the fear that almost everything, not just government, is fixed or manipulated by some powerful hidden hand, from commercial transactions as trivial as the sales of prime concert tickets to cultural forces as pervasive as the news media.” In other words, even the feds might not be able to help.
The approach to financial reform that the Obama Administration has hitherto adopted is a classic illustration of this problem. Financial institutions are now back to business as usual and have provided limited help to the non-financial sector. In fact, some of them are clearly committed to worsen households’ financial position and have oriented their activity toward this end in order to maximize their profitability. Yet, they have received commitments from the taxpayer totaling $23.7 trillion.
Marshall Auerback argues that a debtor’s revolt would be a good thing.
H/T to Naked Capitalism
Add comment January 18th, 2010
By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.
A week ago, in Atlanta, Bernanke responded to his critics, including John Taylor of Taylor Rule fame (the Taylor Rule is a benchmark widely used by central banks in setting their “policy” interest rates). Bernanke asserted that monetary/interest policy has been appropriate-and was not” too low for too long” from 2001-2006. Taylor responded in a WSJ Op-Ed piece on January 11th reasserting his position that interest rates were “too low for too long”. A very public debate has been joined. Taylor’s view is based on his chosen variant of the Taylor Rule, while Bernanke cites his own chosen variant of the Taylor rule.
This post establishes that interest rates were “too low for too long” (from 1996-2006) while dispensing with the Taylor Rule and its sensitivity to choices of inputs and assumptions. It does so in a framework that employs definitions and measures favored by Bernanke. The frame work of the analysis is then used to answer other questions about economic policy in the past and going forward.
The Deflationary Threat?
Price stability/inflation targeting has been center stage of interest rate policy since Japan began its lost decades. Fear of deflation dominated the thinking of the Fed. This was especially evident in the response to the recession of 2001. The decidedly expansionary monetary policy adopted at the time was justified in terms of preventing a deflationary episode like Japan’s. In a February 2002 speech titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Bernanke defined deflation as:
“Deflation is a general decline in prices, with emphasis on the word “general”.
Bernanke was drawing a distinction between changes in relative prices of some goods on the one hand and deflation – pervasive declines in prices – on the other. Later in the speech, Bernanke re-emphasized the point: “Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices register ongoing declines.” However, Bernanke and the Fed allow for exceptions. For example, food and energy inflation/deflation have been ignored even when changes in food and energy prices registered on broad-based indexes.
In the speech, Bernanke also specified the cause of deflation: “Deflation is in almost all cases a side effect of a collapse of aggregate demand –a drop in spending so severe that producers must cut prices…to find buyers.” In a footnote, Bernanke added:” I don’t know of any unambiguous example of a supply-side deflation, although China in recent years is a possible case.”
Bernanke therefore defines a deflation as a generalized, broad-based, widespread decline in prices brought on by a severe drop in spending. The 425 bps of rate cuts in the Fed funds target during 2001 was presented as necessary to prevent a demand-lead deflationary spiral.
However, a simple decomposition of Bernanke’s favorite inflation measure, the PCE, for the bubble years 1996-2006 indicates that price declines were not broad-based, widespread, or “general”, but localized even as they introduced disinflation to the broad-based price indexes. Furthermore, there is evidence that demand by US-based economic agents did not drop below the level implied by full employment.
Chart (I) is of the PCE (and its components) price deflator(s). It clearly indicates that deflationary pressure was far from broad-based or generalized. The deflationary pressure was confined to the consumer durable goods component of PCE. The durable goods component had a weight between 12 to 13% during the period 2001-2006.
Add comment January 16th, 2010
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| Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington |
If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.
In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”
Add comment January 16th, 2010
It’s everywhere at the multiplex these days: religion. Or if that word makes you uncomfortable, you can go with the more general “spirituality.”
In movies as varied as the dead serious “The Road,” the uplifting family picture “The Blind Side,” the biting comedy “The Invention of Lying” and even James Cameron’s sci-fi opus “Avatar,” issues of faith and morality and mankind’s place in the universe are all the rage.
Not all of these movies embrace religion. Some question human gullibility. Some ask for evidence of a higher purpose in what often seems a random universe. But whether they encourage prayer or doubt, they’re all part of the zeitgeist.
But why now?
“There are two schools of thought about that,” said Greg Wright, an editor at HollywoodJesus.com, which examines popular culture from a religious perspective.
“The more paranoid elements of our culture tend to think Hollywood has a proactive agenda, that producers have a grand scheme to use movies to shape the thinking of audiences. I don’t subscribe to that school.
“I believe that Hollywood gives audiences what audiences want to see. If people don’t want to see movies with certain messages, they won’t buy tickets.
“So if there’s a trend out there, it’s one reflecting what people are already thinking and feeling,” Wright said.
No coincidence
And what are we thinking?
Sister Rose Pacatte, who reviews movies for the Pauline Center for Media Studies in Los Angeles, said it isn’t mere coincidence that a new animated version of Dickens’s “A Christmas Carol” came along in 2009. The film was released in the wake of an economic crisis fueled by greedy self-interest on an unprecedented scale, she said.
“Being a good man of business will not save your soul. That’s an essential message of ‘A Christmas Carol’ and one emphasized by this version,” she said.
Dickens’s tale may have little to say about God and Jesus, but it stresses charity and the dangers of poverty and ignorance, she said.
Other current films, while not overtly religious, stress the idea of human beings as dependent on one another and responsible for one another’s well-being.
Pacatte pointed to “Up in the Air,” in which George Clooney plays a loner whose job is to fire downsized employees and who has attempted to insulate himself from all human commitment.
“In some ways it’s a modern ‘Christmas Carol,’ with Clooney’s character becoming a bit more human, becoming more aware of himself and others,” Pacatte said.
“Avatar” depicts humanity as a rapacious race represented by a soulless corporation and largely incapable of appreciating the simple ecological spiritualism of an alien race.
A runaway hit, too
Of course, some films put religion front and center.
“Of these films, ‘Blind Side’ has the most evangelical world view,” said Mark Moring, senior associate editor at Christianity Today. “It’s a movie based on real people who are devout Christians and whose faith clearly played a big part in their reaching out to this young homeless man and turning his world around.” That “The Blind Side” has become a runaway hit should further encourage Hollywood to deal with religious themes, Moring said.
“When ‘The Passion of the Christ’ came out in ‘04, it showed Hollywood they could make lots of money with in-your-face spiritual themes. It taught them they don’t have to be afraid of going with religious if not specifically Christian ideas. ‘Blind Side’ reinforces that,” Moring said.
Wright at HollywoodJesus.com said, “The market dynamics of film are just beginning to sort out what happened in the wake of ‘The Passion of the Christ.’ Given that film production cycles can take several years, I expect to see more religious-themed films in coming months.”
Not all of these will be big-budget Hollywood productions. Wright noted the box-office success of the low-budget “Facing the Giants” and “Fireproof,” two unabashedly religious dramas made by Sherwood Pictures, which is affiliated with a church in Georgia.
“We’re finally getting some decently crafted movies aimed at the faith audience,” Wright said. “In the wake of ‘Passion,’ lots of titles were rushed to market to take advantage of the religious audience, and they just weren’t very well written or produced. It’s taken a while to get the quality.”
Most likely the big studios quickly will lose interest in faith-themed subject matter, Wright said.
“Hollywood is all about cycles. This one will pass,” he said. “The films that really matter, that actually have something to say, are the indie titles that sneak into the Hollywood distribution system or make their way to home video or the film festivals.
“That’s where the real future of spiritual movies is — with niche independent filmmakers who are finding distribution channels that work for them. Hollywood will always have a huge appetite for big tent-pole films. But that leaves an opportunity for others to make more modest movies about things that matter,” Wright said.
Big-screen offerings
Recent or upcoming releases with religious themes:
“The Road”: Earth is dying. In the wake of an undisclosed disaster, a man (Viggo Mortensen) and his son (Kodi Smit-McPhee) wander a barren land, searching for sustenance and avoiding roaming bands of cannibals. Unrelentingly bleak, this cinematic version of Cormac McCarthy’s novel is about one man’s attempt to preserve what’s left of humanity’s goodness and innocence in his child. Though the film is never openly religious, many see it as a spiritual quest; McCarthy has spoken of his book as a sort of Christian allegory.
“The Lovely Bones”: Life after death? It’s a given in Peter Jackson’s adaptation of Alice Sebold’s novel about a murdered teen (Saoirse Ronan) who, from the afterlife, continues to watch over both her family and her killer (Stanley Tucci).
“The Invention of Lying”: Ricky Gervais’s comedy unfolds in an alternate universe where everybody compulsively tells the truth. But one man learns how to fib, and before long he’s telling whoppers. In an effort to placate his unhappy fellow men, he declares that the world is run by a big man in the sky. He codifies rules of behavior and writes them down on the lids of pizza boxes. (What . . . no stone tablets?) And, having no defense against prevarication, everyone believes him. This comic parable on the origins of religion is biting, but Gervais’s beaming delivery softens the blow. (No longer in theaters; due on DVD this month.)
“The Book of Eli”: Denzel Washington plays a lone man fighting his way across post-apocalyptic America to protect a sacred book that allegedly holds the secrets to saving humankind.
“Legion”: God has lost all hope in humankind and sends his legion of angels to Earth to bring on the Apocalypse in this supernatural action thriller. In a remote truck stop diner named Paradise Falls, the archangel Michael (Paul Bettany) joins a group of strangers to defend the diner’s waitress, who may be pregnant with the Messiah.
“The Last Station”: The eternal battle between spirituality and materialism is waged in the soul of acclaimed Russian author Leo Tolstoy (Christopher Plummer), who is torn between his own need for transformation and the demands of his wife (Helen Mirren) and disciples.
“A Serious Man”: The Coen brothers retell the biblical story of Job, relocating it to the late ’60s Minneapolis suburbs of their adolescence. A Jewish college professor (Michael Stuhlbarg) finds everything in his life — from his marriage to his car — going down the tubes. In the original, God and Satan strike a deal to see how much grief one man can absorb before renouncing righteousness. This being a Coen brothers effort, God is nowhere in sight. Misery is just a universal fact of life; you’ll survive only if you can laugh at it. (No longer in theaters; due on DVD in February.)
“A Christmas Carol”: Charles Dickens wasn’t particularly religious, but he sure knew how to punch our spiritual buttons. This computer-animated retelling from director Robert Zemeckis (with Jim Carrey as a superlative Scrooge) doesn’t diminish Dickens’s message: Devote your life to the almighty dollar (or pound sterling) and you’ll spend eternity in the chains of your own making.
“Avatar”: James Cameron’s futuristic epic is about the efforts of humans to exploit the mineral wealth of a distant moon. Problem is, it’s already occupied by blue-skinned primitives who believe that everything on their world — animals, plants, the very dirt they walk on — is imbued with spiritual power that must not be disturbed. Human greed vs. spiritual enlightenment: a timely theme.
“The Blind Side”: In the holiday season’s unexpected sleeper hit, a homeless boy (Quinton Aaron) is adopted by a wealthy Memphis family (Sandra Bullock is the force-of-nature mom), and with the family’s love, dedication and disposable income, the kid raises his grades and becomes a terror on the football field. It’s the true story of Baltimore Ravens lineman Michael Oher, and writer-director John Lee Hancock lets us know that the family’s charity is rooted in their Christianity. Hollywood movies rarely know how to handle persons of faith; this one does.
– McClatchy Newspapers
1 comment January 10th, 2010
In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.
“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank’s “Bear Case” scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).
The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.
Inflating debt away might be seen by some governments as a lesser of evils.
If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.
The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.
SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”. Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.
Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
SocGen’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.
Mr Fermon said his report had electrified clients on both sides of the Atlantic. “Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried,” he said.
Add comment November 22nd, 2009
One hundred and seventy-nine years ago, a short span in the life of a nation, the representatives of the American people, in arms against the British Crown, proclaimed on a new continent a new philosophy of government. After the end of the military struggle for independence this philosophy was set forth in detail, and with rare insight and erudition, in the Federalist Papers and finally embodied in the Constitution of the United States.
The Fourth of July could well be an occasion for getting a firm grasp on the principles on which the American Republic was founded. Our educational institutions have not coped adequately with the task of communicating these principles to students. I know from personal experience that it is possible to go through a first-rate preparatory school and an excellent college without being impressed by the sheer thrill of political and intellectual adventure associated with the launching of the United States as an independent nation.
For it was an adventure, about which there were many prophets of gloom and doom on the other side of the Atlantic and some in the newly emancipated colonies themselves. Here were thirteen sparsely populated states, more distant from each other in terms of travel and communication than New York now is from London or Tokyo, starting out as a new nation without institutions which most Europeans then regarded as essential to stability without a monarchy, an hereditary aristocracy, or an established national church.
It was easy to imagine a relapse into anarchy, followed by the emergence of a “strong man” as dictator. But apart from the tragic schism of the Civil War (slavery and the right of a state to secede from the Union were two issues which the Constitution left unsolved), the United States has enjoyed almost two centuries of ordered freedom, unmarred by plots, internal sedition and successful or unsuccessful coups d’état.
The ideal of self-government, first proclaimed for the three million Americans of 1776, scattered along the Atlantic fringe of the country, still works for 160 million Americans who have filled up a vast country. The debt which Americans today owe to the men who framed the institutions of the young Republic, to Washington and Jefferson, Hamilton and Madison, Adams and Jay, is beyond estimation.
These men sometimes differed among themselves; but when they differed, it was usually because they emphasized two aspects of a single political truth. The product of their collective wisdom, the United States Constitution, is a mechanism of extraordinarily delicate balance. So far as human wisdom could foresee dangers and provide safeguards, the individual is secured against oppression by the central government, the states are left in possession of all the functions which are not clearly the proper concern of the federal government, and the powers and limitations of the three branches of the federal government are so defined that no one of these branches can dominate the others and become all-powerful.
No form of government devised in history was so careful to avoid the dangers of concentrated power and so favorable to letting the citizen go as far and as fast as his individual capacity would carry him, without state coddling, state regulation and state domination, which always go hand in hand. The Founding Fathers were mindful of the admonition voiced by one of the strongest and clearest political thinkers of the Revolution, John Adams:
The institutions now made in America will not wholly wear out for thousands of years. It is of the last importance, then, that they should begin right. If they set out wrong, they will never be able to return, unless it be by accident, to the right path.
Adams and Jefferson, Madison and Hamilton, and many of their colleagues were men of exceptional learning. They were steeped in the Greek and Latin classics, in the history of medieval and modern Europe, in British and French constitutional theory and practice. At the same time they were not cloistered scholars, but men of action, who played leading roles in overturning an old form of government and setting up a new one. As a result of this double capacity, they possessed a panoramic view of the rise and fall of states in the past combined with a clear, intimate knowledge of the special conditions of America.
A coherent body of ideas figures prominently in the philosophy of the founders of the American Republic and may be studied to advantage in the Federalist Papers. These ideas, incidentally, are not only of tremendous historical importance, but are of the utmost reality and vitality in our own time. For the noble ideal of liberty, the word most often used in the literature of the American Revolution, has been horribly perverted by fanatics and cynically misused by tyrants.
It was not only in Jacobin France that many crimes, as Madame Roland cried on the scaffold, were committed in the name of liberty. As Professor J. L. Talmon brings out in his erudite and stimulating book, The Rise of Totalitarian Democracy (Beacon Press), the ideological origins of Soviet communism are not entirely in the writings of Marx and Engels.
Robespierre and the French Jacobins, nourished on Rousseau and some of the less known collectivist thinkers of the eighteenth century, worked out a conception of a virtuous elite that was morally entitled to persuade the people — with the aid of the guillotine, and for the people’s own good, of course — to hold and express unanimous opinions which would coincide with those of the virtuous elite. This was the Model T version of modern communism, and fascism borrowed something in theory and a good deal in practice from communism.
Against all utopian conceptions, such as Rousseau’s “general will,” which would lead to an absolute concentration of governmental power, the Founding Fathers set their faces like flint. From study and personal experience they knew what liberty was and what it was not. They knew that a mob or political party operating without opposition could be just as cruel, just as destructive of freedom, as an absolute monarch or a military dictator. One of the clearest and profoundest statements of this deep distrust of concentrated state power is that of Madison in Number 47 of The Federalist:
The accumulation of all powers, legislative, executive and judiciary, in the same hands, whether of one, a few or many, and whether hereditary, self-appointed or elective, may justly he pronounced the very definition of tyranny.
Far from deifying the state, the Founding Fathers regarded government as a necessary but dangerous instrument, which required many safeguards against abuse. Although they were accustomed, especially in New England, to the grassroots local democracy of the town meeting, they drew a careful distinction between the terms democracy and republic. Madison states the distinction in Number 14 of The Federalist:
In a democracy the people meet and exercise the government in person; in a republic they assemble and administer it by their representatives and agents. A democracy, consequently, will be confined to a small spot. A republic may be extended over a large region.
It is evident from the tone of The Federalist and other political writings of the time that the Founding Fathers were not devotees of unlimited majority rule or of over-strong government. They recognized that minorities and individuals have rights, such as life, liberty and property, which no majority may lawfully take away. It is significant that the Constitution devotes at least as much attention to telling the government what it may not do as to telling it what it may do, and its prohibitions are expressed in plain, unambiguous, uncompromising language:
Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.
It is worthwhile to contrast these simple flat assurances with the long-winded resolutions of the United Nations on these subjects, full of escape clauses, weasel words, and loopholes for evasion. The Declaration of Independence takes its stand on “the laws of Nature and of Nature’s God”; and belief in natural law and inalienable rights which men possess independently of government and which no government may lawfully deny, withhold, or abridge is one of the cornerstones of American liberty.
In the literature of the American Revolution there is no demagogic attempt to set human rights against property rights. In the Federalist Papers and in other publications it is recognized that the right to acquire and own property is a basic and very important human right. As John Adams wrote:
The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.
Here, then, are the foundations of the free society of the American Republic: belief in natural law and inherent, inalienable human rights, intense distrust of any concentration of power in government, a suspicious attitude toward tyranny, whether of monarch or mob, including tyranny of the majority. Insofar as these foundations have been respected, America has prospered and grown great. It is where they have been most eroded and whittled away that some of the clearest danger signals in our national life are flying.
Some of these danger signals were clear as early as the 1830s to the most profound and clear-sighted observer of the young American Republic, Alexis de Tocqueville. His work, Democracy in America, is a double masterpiece. It is a most penetrating study of the United States, its political institutions, its psychological traits, at the time of Andrew Jackson’s presidency, and it contains some strikingly accurate predictions of the American future. It is also a most searching study of the positive and negative sides of the leveling democracy which was beginning to prevail in the Western world. And it is written in a style that is always lucid and readable and often strikingly brilliant. For understanding the main political and psychological currents in the American history, de Tocqueville’s work is a worthy companion of the cogent, close-knit reasoning of the Federalist Papers.
As an observer of American life, de Tocqueville steers a middle course between sentimental gush and the squeamish repulsion which some cultivated Europeans like Mrs. Trollope felt for the free-and-easy frontier manners, with the copious expectorations of tobacco juice and the habit of calling all and sundry colonel or captain. He notes the self-reliant individualism of the American character:
The citizen of the United States is taught from his earliest infancy to rely upon his own exertions in order to resist the evils and the difficulties of life; he looks upon social authority with an eye of mistrust and anxiety, and he only claims its assistance when he is quite unable to shift without it.
As an authentic nineteenth-century liberal, de Tocqueville approves this tendency; he notes that the sum of private undertakings far exceeds all that the government could have done. He notes that there is no such thing as an American peasant and that although education is spread thinly, there are no pools of total illiteracy and stagnation. Again and again he praises the vitality of local initiative which builds excellent schools and churches and keeps the roads in good repair without any meddling interference from a centralized bureaucracy. And he pays to America of that time two compliments which are more impressive because he does not spare criticism on other points:
The European generally submits to a public officer because he represents a superior force, but to an American he represents a right. In America it may be said that no one renders obedience to man, but to justice and to law….
All commodities and ideas circulate throughout the Union as freely as in a country inhabited by one people. Nothing checks the spirit of enterprise…. The Union is as happy and free as a small people, and as glorious and strong as a great nation.
De Tocqueville is not blind to the fact that Americans possess the defects of their virtues. He notes a considerable downgrading of intelligence in high places since the formative years of the Republic. There is a memorable picture of the restless materialism which causes Americans to pursue illusions to the end of their days:
A native of the United States clings to this world’s goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications…. Death at length overtakes him, but it is before he is weary of his bootless chase of that complete felicity which is forever on the wing.
A source of fascination in de Tocqueville is his rare gift of accurate prediction. Some of his observations fit America, and the world, in the middle of the twentieth century even better than the conditions of his own time. There was no income tax in the America which de Tocqueville visited; but he foresaw the shape of things to come:
Universal suffrage invests the poor with the government of society…. Wherever the poor direct public affairs and dispose of the natural resources it appears certain that, as they profit by the expenditure of the State, they are apt to augment that expenditure…. I have no hesitation in predicting that, if the people of the United States is ever involved in serious difficulties, its taxation will speedily be increased to the rate of that which prevails in the greater part of the aristocracies and monarchies of Europe.
There is the famous and remarkable forecast of the era of the American-Russian Cold War:
There are, at the present time, two great nations in the world which seem to tend toward the same end, although they started from different points: I allude to the Russians and the Americans…. All other nations seem to have nearly reached their natural limits…but these are still in the act of growth…. The Anglo-American relies upon personal interest to accomplish his ends, and gives free scope to the unguided exertions and common sense of the citizens; the Russian centers all the authority of society in the single arm; the principal instrument o£ the former is freedom; of the latter servitude. Their starting point is different and their courses are not the same; yet each of them seems marked out by the will of heaven to sway the destinies of half the globe.
De Tocqueville was alarmed not by “excessive liberty” in the United States, but by inadequate securities against tyranny. For, like other nineteenth-century libertarians who were democrats only with reservations — like Burckhardt, Acton, Mill — he realized that there was danger in the tyranny of the majority and sensed that the dykes which the framers of the Constitution had erected against this kind of tyranny were being weakened by the upsurge of democracy in the raw.
He realized that the day of the absolute hereditary monarch and of the privileged aristocrat was gone; but he saw new perils to liberty on the horizon of the future. With remarkable perspicacity he foresaw two developments which became realities in the twentieth century: the totalitarian society of communism and fascism and the paternalistic Welfare State. Regarding the former, he noted the likelihood that
those hideous eras of Roman oppression, when the manners of the people were corrupted, their traditions obliterated, their habits destroyed, their opinions shaken and freedom, expelled from the laws, could find no refuge in the land
might recur. Certainly the crimes of a Stalin, a Hitler, a Mao Tse-tung, far exceed anything that could be laid to the charge of a legitimate ruler in the era of royal absolutism.
Still more vivid and eloquent is de Tocqueville’s imaginary sketch of a paternalistic state which would not practice the bloody oppression of dictators, but would reduce each nation “to nothing better than a flock of timid and industrious animals, of which the government is the shepherd,” that would undertake “to spare its subjects all the care of thinking and all the trouble of living.” The American Republic was, in the winged phrase of Lincoln, conceived in liberty.
But liberty is one of the most complex, as it is one of the most precious, of human conceptions. It flourishes best in the kind of equilibrium between government and citizen, individual and society, majority and minority which the Founding Fathers wrote into the Constitution. The dangers to true liberty vary from generation to generation; but it can never be maintained without constant struggle. There is no surer guide to the principles of political liberty than the Federalist Papers; no more penetrating and imaginative study of the forces that may wreck or sap liberty than de Tocqueville’s great classic.
There could be no better Fourth of July reading than some of the outstanding passages in both these works.
This article was originally published July 1955 in The Freeman.
An MP3 audio file of this article, read by Floy Lilley, is available for download.
Add comment October 11th, 2009
The Future of Investing
FT writers join major world figures in examining the implications of the credit crunch on our investment system.
Add comment October 10th, 2009
“It was at Rome, on the 15th of October, 1764, as I sat musing amidst the ruins of the Capitol, while the barefooted friars were singing vespers in the Temple of Jupiter, that the idea of writing the decline and fall of the city first started to my mind.”
- Edward Gibbon
Warren Buffett famously says that people do not make money by betting against the US economy. But two years ago we decided to take a chance.
“We are short the United States of America,” we announced from the comfort and safety of our headquarters in London. “Sell its stocks. Sell its bonds. Sell its money. Sell its real estate. Sell the equity. Sell the debt. Sell everything.”
What we saw was an over-stretched empire getting ready to snap. But we were also allowing ourselves to be lazy. Rather than deconstruct the capital structure of the world’s largest economy, we decided to sell the whole damned thing.
All Hell broke loose in September 2008. Since then, US stocks have gone down about a third. Real estate too. Unemployment has doubled. Consumer prices are going down at the fastest rate since the ’50s. And the economy is in the worse recession since WWII.
Meanwhile, Americans’ per capita wealth has fallen from $172,000 in September from $212,000 two years earlier. And the UN reports that the quality of life in America has gone down too…from #5 on its list in 2000, it fell to #13 in 2007. No doubt it is below #20 now.
Buffett has lost billions betting on the US economy while our gold positions are handily up; gold was the most profitable major asset over the last ten years.
So you see, we were right; America was a sell two years ago.
-Bill Bonner
Add comment October 10th, 2009
We have seen the folly in this policy, euphemistically known as ‘the Greenspan Put’ as gigantic asset bubbles ballooned out of control following cuts in 1998-1999 and 2002-2003. Fisher, a well-known inflation hawk, might be speaking for himself. Or he might be signaling there will be no Bernanke Put.
Source
Fisher Sees Limit to Fed’s ‘Life Support’ for Housing
– Bloomberg
Add comment October 3rd, 2009
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| Notes about this image: | Yet a longer breadline during the Depression. |
| Citation: | US Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210. In M.B. Schnapper, American Labor, 1972, p. 462. 11.6.3 |
The 1930s has become the sole object lesson for today’s monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there’s been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.
Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.
Taxes and Devaluation Ruined the ’30s – Arthur Laffer, Wall Street Journal
Add comment September 22nd, 2009
Sept. 22 (Bloomberg) — That’s it, then. The global recession is over. At least that’s what Federal Reserve Chairman Ben Bernanke says.
Answering questions last week, the world’s most powerful central banker said the U.S. recession was “very likely over at this point.” Much the same story is being played out in the rest of the world, with the German, French and even U.K. economies gradually recovering from their own slumps.
And yet the biggest shock to the global financial system since the 1930s won’t just leave us with a legacy of lost output and higher unemployment. The recession will reshape the way we think about the economy for a generation. Over time, we will see that the credit crunch caused shifts of power and influence between industries, professions and countries.
So who are the winners and losers from the recession? Here are five places to start: Historians have triumphed over economists; hedge funds over bankers; Germany over Britain; the right over the left; and the frugal over the spendthrift.
One: Historians won out over economists. No single group of professionals took a worse battering during the economic slump than economists. Not even bankers. A science that has disappeared up a mathematical dead end couldn’t see the crisis coming, couldn’t explain it to anyone once it broke, and couldn’t come up with a way forward after it happened.
Lessons of History
Instead, people turned to lessons of history to make sense of it all. Niall Ferguson, a history professor at Harvard University in Cambridge, Massachusetts, is now listened to on economic issues. Likewise Nassim Taleb, a professor of risk engineering whose book “The Black Swan” dipped into the history of rare, high-impact events to describe how we didn’t see this storm brewing. At this rate, investment banks will be building small, dusty libraries in the basement, and filling them with in-house historians. It will be a long time before economists are listened to again.
Two: Hedge funds over bankers. If Lehman Brothers Holdings Inc. had a dollar for every time someone warned that hedge funds would bring the financial system to its knees, the bank wouldn’t have gone bust. While hedge funds took plenty of criticism, and are still facing calls or more regulation, the simple fact remains that they didn’t blow up the way many predicted. It was the mainstream banks that caused the crisis. That will influence regulators and investors for many years. Whatever people say now, it’s the banks that will face more scrutiny, not hedge funds. The result? The lightly regulated, cash-rich hedge funds will grow in importance, while the tightly controlled, capital- constrained banks stagnate.
Baseless Fears
Three: Germany over Britain. For much of the past decade, the fast-growing U.K. was gaining on Germany for the role of Europe’s most influential nation. Almost 20 years after reunification, fears of a resurgent Germany turned out to be baseless. It was Britain, with its financial center, that was emerging as the leading European nation. The credit crunch will throw that into reverse. The U.K. is condemned to a decade of struggling with a fiscal mess, while Germany should bounce back quickly from the recession with an export-led recovery.
Four: The right over the left. The credit crunch was probably the perfect moment for left-wing, anti-capitalist and anti-globalization movements to make their mark. After all, if this wasn’t a failure of capitalism, it is hard to imagine what might be. Vladimir Lenin would have led the overthrow of a dozen governments presented with an opportunity like this. But his heirs on the left failed to advance any cogent arguments. Nor did they develop any alternatives to free-market, finance-led capitalism. The plate was empty, but the anti-globalization movement failed to step up to it.
Running on Empty
The result? The left looks like it is running on empty tanks. Center-right parties will remain in power, as in Germany or France, or recapture it, as in Britain. And it will stay that way for a long time.
Five: Frugality over extravagance: The nub of the credit crunch was an attempt to load more and more debt onto people — mainly in the U.S. and U.K. — whose real wages were stagnant or growing very modestly. That will be thrown into reverse, and for the next decade, people will be paying down debt rather than accumulating it. House prices will be subdued as finance remains scarce, and household budgets will be tight. The result will be that companies will thrive if they offer value, drive down costs, and make themselves the lowest-cost supplier. Anything that smacks of luxury will suffer. Think about McDonald’s Corp. triumphing over Starbucks Corp. — and then multiply that effect a thousand times over.
The Great Depression of the 1930s dominated the way people thought about the economy for the next 50 years. The great recession of 2008 and 2009 may not have such a long-lasting impact. But in those five ways, it will dominate policy for at least a decade.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
Hedge Funds & Historians Win the Recession – Matthew Lynn, Bloomberg
Add comment September 22nd, 2009
“Do we take a lot of risk? Yes,” Mack told the shareholder. “I think the firm has the capacity to take a lot more risk than it has in the past.”
What a difference a financial crisis makes. Mack has spent much of the past year putting Morgan Stanley on safer ground. He has dramatically lowered borrowing and shut down the firm’s proprietary trading desk. He changed Morgan from a Wall Street dealer to a bank holding company, and more than tripled the firm’s deposit base, which is a safer source of capital. And in a major break from the bank’s 70-year history he de-emphasized investment banking as the driver of Morgan Stanley’s profits. In June, he completed the purchase of a majority stake in Salomon Smith Barney’s brokerage division, instantly turning Morgan Stanley, once an élite white-shoe institution, into the largest brokerage house in America. (See TIME’s special report “The Financial Crisis After One Year.”)
The financial crisis and its aftermath have dramatically changed investor perceptions, particularly with respect to the soundness of our financial system. In response, big financial firms are changing, but few firms have changed more than Morgan Stanley. The latest sign of Morgan’s transformation came two weeks ago when the firm announced that James Gorman would replace Mack in January. Unlike Mack, and nearly every other head of Morgan Stanley, Gorman has never been an investment banker. Gorman, a former McKinsey consultant, joined Morgan three years ago from Merrill Lynch, where he had run that firm’s brokerage force. At Morgan, he was in charge of revamping the firm’s brokerage division, and recently integrating the Smith Barney acquisition. Observers say Gorman’s background will likely move Morgan further away from its roots.
“When Gorman was named CEO that was a defining moment in Morgan’s history,” says Charles Geisst, a Wall Street historian and author of the book Collateral Damaged. “The large brokerage force is going to change Morgan. People begin to see you more as a distribution business than in the investment-banking business.”
How the Financial Crisis Changed Morgan Stanley – Stephen Gandel, TIME
Add comment September 22nd, 2009
Pittsburgh protesters demand G20 do more for jobs
Forbes
“We’re not going to accept a jobless recovery,” said Larry Adams, a postal worker who came from Jersey City, New Jersey, for the protest. …
1 comment September 21st, 2009
The expansion of international “supply chains” from Asian factories to American consumers has certainly created global trade imbalances and international currency flows that are not necessarily sustainable over the long run. A readjustment of the world economy, not a slackening demand for inexpensive consumer products, strikes me as the greatest threat to the Wal-Mart business model. And, for its part, the chain is already adapting to new circumstances. In recent years, Wal-Mart has expanded well beyond the borders of North America into Europe, Mexico and Asia. It imports factory goods from China and also operates its own retail stores there. But the stores look very different from their American counterparts. In Kunming, near the border with Myanmar, Wal-Mart rents space inside its store to independent vendors, who pay $1.20 per day to hawk Yunnan coffee, tobacco bongs filled with local rice wine and condiments made from eggplant, soybeans and ginger. The atmosphere is “festival-like, even chaotic,” as vendors shout out their wares, sometimes through loudspeakers or while pounding on drums, and customers crowd a stall to fish pears out of a solution of sugar, salt and licorice root–”a Wal-Mart store sans Wal-Martism,” according to sociologist Eileen Otis. Another Chinese employee explains his loyalty to the company by suggesting that Sam Walton was, in fact, a student of Chairman Mao who “adopted the revolutionary strategy of ‘the countryside encircling the city.’&nthinsp;” And so the revolution continues.
How Wal-Mart’s Ruthlessness Led to Its Undoing – Jefferson Decker, Nation
1 comment September 18th, 2009
In Bank Leverage: Forever Blowing Bubbles Part Two, Edward Harrison considers the consequences of massive global liquidity, which to Harrison look like inflation and malinvestment. Also see Stephen Roach is Talking Double Dip Again by Edward Harrison.
Add comment September 4th, 2009
Drug Promises Fix for Radiation Poisoning
Dirty bombs are one of the biggest threats to the world’s urban populations. Now an American molecular biologist has developed a drug that may protect against the effects of radioactivity. Military officials are thrilled, and the discoverers could make billions.
Add comment August 17th, 2009
Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »
1 comment July 25th, 2009
Arrests include Assemblyman Daniel Van Pelt, Hoboken Mayor Peter Cammarano, Secaucus Mayor Dennis Elwell and Jersey City Deputy Mayor Leona Beldini
Get more on the story, including video, photos and more at www.nj.com
Add comment July 24th, 2009
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.
The US Federal Reserve has moved faster but already seems to think the job is done. “Quantitative tightening” has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of “exit strategies”.
Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed’s doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.
Fiscal Ruin of Western World Beckons – A Evans-Pritchard, Daily Telegraph
Add comment July 21st, 2009
July 15 (Bloomberg) — Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans.
The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at “potentially inflated values” should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are “inflated,” that again calls into question the quality of banks’ results.
Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices — and behavior — than truly getting markets back on their feet.
Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages.
Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market.
The losses are “a big part of the toxic asset issues facing banks,” Miller added.
Balk at Losses
A first mortgage on a house often can’t be restructured without the agreement of the holder of the second loan, which would entail writing it down in value. Banks have balked at doing that, due to the losses that would result. And why shouldn’t they? Congress, the Obama administration and regulators all told them earlier this year to hope for the best when it came to valuing their assets.
Let’s review. Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better.
Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported, according to a report last month by Jack Ciesielski, editor of The Analyst’s Accounting Observer.
The rule changes allowed companies to sidestep some impact of mark-to-market accounting on securities, many of them backed by mortgages, that have fallen in value for an extended period.
Saved From Losses
The “maneuver saved eight of the firms — Prudential Financial Inc., SI Financial Group Inc., First Commonwealth Financial Corp., National Penn Bancshares Inc., Bank of New York Mellon Corp., Zenith National Insurance Corp., Sun Bancorp Inc. and American Equity Investment Life Holding Co. — from reporting first-quarter losses instead of net income,” Ciesielski wrote.
Another rule change allowed companies in some cases to ignore market values and use their own estimates for troubled assets. That helped Wells Fargo & Co. avoid what may otherwise have been a $4.5 billion hit to its capital.
This was all part of ongoing and often unsuccessful efforts to push prices in a particular direction.
Last fall, the Securities and Exchange Commission instituted a temporary ban on selling financial stocks short — or betting they would decline in value — to try and prop up the value of bank shares. Talk about reining in speculation in commodity markets, meanwhile, is designed to keep prices for oil and some foodstuffs from rising too high. And all arms of government have tried since the credit crunch began to keep home prices from falling.
Buyers Don’t Play
Efforts to direct prices usually fail because buyers aren’t willing to play along. Financial stocks continued to fall despite the short ban.
And the congressional flip-flop on how banks should value assets shows that such efforts can backfire.
The logjam in the drive to modify troubled mortgages is vexing the Obama administration. It is in some ways a problem of the government’s own making. To try and undo it, the House’s Frank and the Senate’s Dodd wrote late last week to banking regulators complaining about valuations of home-equity loans.
The chairmen said, “We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value.”
Fudging Confirmed
Throughout the crisis, investors have worried that banks are fudging their numbers. Now congressional leaders are confirming those fears.
Underlining the political nature of their request, Dodd and Frank didn’t call for an investigation of the supposedly “inflated” values.
That’s no reason for the SEC to stand pat. The agency needs to act, now that it has an allegation from top legislators that potential financial-reporting abuses are taking place at banks.
Failure to follow up will send a message that it is all right for banks to cook their books, so long as the resulting values are seasoned to suit the current political taste.
(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)
Barney Frank, Chris Dodd Do Banking Back Flip – David Reilly, Bloomberg
Add comment July 15th, 2009
What’s the best way to express just how bad the job market is? You could look at the soaring unemployment rate, or perhaps the ever-shortening work week. How about this: Total nonfarm payrolls, notes economist James Hamilton, are now back to where they were in mid 2000, and in a few months they’ll certainly be back to pre-2000 levels. 21st century job creation: gone.
All Jobs Created in the 21st Century Are Now Gone – Clusterstock
Add comment July 10th, 2009
Over the past few decades, many in business and government bet that the US could transform itself from an innovative, export-orientated powerhouse to an economy based on services and consumption – and that we could still expect to prosper. For a time, it looked like a can’t-miss bet.
Then we missed – badly. Trillions of dollars vanished, along with America’s competitive edge. An economic hurricane shook our financial system to its foundation, leaving our middle class hurt, bewildered and looking for cover. General Electric was not perfect through all of this but, throughout our 130-year history, we have adapted and remained competitive.
The challenge ahead is not impossible. The first step is recognising that we cannot simply go back to the way things were. This downturn is not simply another turning of the wheel but a fundamental transformation. We are, essentially, resetting the US economy.
An American renewal must be built on technology. We must make a serious national commitment to improve our manufacturing infrastructure and increase exports. We need to dispel the myth that American consumer spending can lead our recovery. Instead, we need to draw on 230 years of ingenuity to renew the country’s dedication to innovation, new technologies and productivity.
GE plans to help lead this effort. We have restructured during the downturn, adjusting to market realities, and have continued to increase our investment in research and development. We are reinvesting in American jobs in places such as Michigan and upstate New York. We plan to launch more new products than at any time in our history.
One place where GE is reaping the benefits of this strategy is our plant in Greenville, South Carolina, where we make turbines for gas and wind power generation. We are now selling their products around the world. In fact, their biggest customer is Saudi Electric Corporation.
Some people subscribe to a Darwinian theory of economic evolution – that America has naturally evolved from farming to manufacturing to services. We should pay attention to the example of countries that are growing rapidly by emphasising technology and manufacturing, especially China. They know where the money is and where the opportunities reside and they aim to get there first.
America has to get back in the game. Renewing American competitiveness will not be accomplished through protectionism, but by rebuilding American technology, manufacturing and exports. To get back to making great things, we should clearly strive for a manufacturing workforce that is growing.
To do this, the US government can play a catalytic role. America has a long history of spending that prepares new industries to thrive for generations. Today, my country needs an industrial strategy built around helping companies to succeed with investment that will drive innovation and support high-technology manufacturing and exports. And it needs a robust trade policy that seeks to open markets abroad for US companies while being fair to international competition.
I consider myself to be the chief executive of a global company that is headquartered in the US. We are firmly committed to globalisation. Our employees – in India, in China, in the US and the UK – deserve to be able to compete and win around the world. At the same time, American business leaders have a responsibility to drive competitiveness in their own country.
On a personal note, I would hate to think that the lasting impression of this generation of American business is the one that exists today. We can do better. We have made our companies globally competitive; now we must do the same for our country. We can help solve difficult problems and create an optimistic future.
The reset economy has clarified the scope of the American challenge and offered us a chance for renewal. The best companies will concentrate on real value and real needs and invest for the long term, creating a firm, new foundation on which a stable, strong economy can grow.
The US has faced difficult odds many times. We have beaten them throughout history. With a commitment to technology and manufacturing-driven exports leading the way, America can do so once again.
Innovation Can Give U.S Back its Greatness – Jeff Immelt, Financial Times
Add comment July 9th, 2009
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