New Jersey CFO

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

“FBI director Robert S. Mueller III announced Monday that the entire manpower of his increasingly disillusioned agency has been diverted into a massive nationwide search for some semblance of genuine, concrete truth,” The Onion reports. “ ‘After years of investigating all the things people do to one another, from murder to mail fraud, every agent at the bureau’s disposal has been reassigned to track down something — anything—that could still be considered pure and true,’ the world-weary Mueller said. ‘If some inkling of truth is out there, the FBI will find it.’ The existential hunt, under way across all 50 states, is the largest initiative launched by the FBI to date. So far, nearly 8,000 federal agents have been mobilized to search for the intangible concept, with several units being deployed to watch the setting sun, walk barefoot through fields of grass, and ‘listen — truly listen’ to the laughter of children in hopes of tracking it down.” See, also, an Onion Interactive Graphic: “How Do Drugs Cross The Border?” Source: CQ Homeland Security

Tax cuts on consumption and government consumption have a relatively immediate impact both on aggregate demand and on the rate at which balance sheets are repaired, and income tax cuts along with spending on infrastructure are better at enhancing long-run growth. Thus, my view is not that the tax cut component in the current stimulus package was a complete mistake, tax cuts can help to shorten recessions as described above, and this effect occurs both because tax cuts help to repair balance sheets when the tax cuts are saved, and because they stimulate consumption. But the effectiveness of the tax cuts in the short-run could have been improved by targeting consumption rather than income, and government consumption may have had an even larger effect. What I haven’t been able to determine, however, is which type of tax cut, income or consumption, has the bigger effect on balance sheet repair (saving) rather than aggregate demand (consumption), though I suspect that income tax cuts would have the larger balance sheet effect.

The biggest mistake is that the government consumption component was much too small. The package should have been much larger, and proportionately more of the package should have gone to government consumption measures (which do not have to wait until projects are “shovel-ready” before they can be implemented) rather than income tax cuts and infrastructure. The package contained more than enough measures devoted to long-run economic growth, but far too few devoted to simulating aggregate demand immediately.

Spending Versus Tax Cuts by Mark Thoma

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

By ROGER C. ALTMAN

Only five months after Inauguration Day, the focus of Washington’s economic and domestic policy is already shifting. This reflects the emergence of much larger budget deficits than anyone expected. Indeed, federal deficits may average a stunning $1 trillion annually over the next 10 years. This worsened outlook is stirring unease on Main Street and beginning to reorder priorities for President Barack Obama and the Democratic congressional leadership. By 2010, reducing the deficit will become their primary focus.

Why has the deficit outlook changed? Two main reasons: The burst of spending in recent years and the growing likelihood of a weak economic recovery. The latter would mean considerably lower federal revenues, the compiling of more interest on our growing debt, and thus higher deficits. Yes, the President’s Council of Economic Advisors is still forecasting a traditional cyclical recovery — i.e., real growth of 3.2% next year and 4% in 2011. But the latest data suggests that we’re on a much slower path. Probably along the lines of the most recent Goldman Sachs and International Monetary Fund forecasts, whose growth rates average about 2% for 2010-2011.

A speedy recovery is highly unlikely given the financial condition of American households, whose spending represents 70% of GDP. Household net worth has fallen more than 20% since its mid-2007 peak. This drop began just when household debt reached 130% of income, a modern record. This lethal combination has forced households to lower their spending to reduce their debt. So far, however, they have just begun to pay it down. This implies subdued spending and weak national growth for some time.

In a March 27 forecast, Goldman Sachs estimated average annual deficits of $940 billion through 2019. If this proves true, deficits would remain above 4% of GDP through the next decade and the national debt would reach a whopping 83% of GDP, a level not seen since World War II. The public is restive over this threat: In a recent Wall Street Journal/NBC News poll, Americans were asked which economic issue facing the country concerned them most. Respondents chose deficit reduction over health care by a ratio of 2 to 1.

Mr. Obama and his economic advisers understand this deficit outlook and undoubtedly view it as unsustainable. They also understand that increasing deficit concerns complicate their efforts toward universal health-insurance legislation, which is clearly a top priority of this administration. According to the Congressional Budget Office, which released its latest forecast June 16, such legislation would mandate more than $1 trillion of new federal spending over 10 years. Winning support for that much new spending — in the face of record deficits — will be a challenge.

This explains why the president is stressing the importance of a deficit-neutral bill. In other words, that any new spending be fully offset by a combination of Medicare and Medicaid cuts and new tax revenues. Key Senate leaders have echoed this requirement. Fully financed legislation probably will emerge after a lengthy struggle.

The poor budget outlook may impel the administration to follow up health-care legislation with an effort to fix Social Security. The shortfall in Social Security’s trust funds — which adds to the long-term deficit — is much smaller than the companion problem in Medicare funding. Public anxiety over deficits may make this fix possible now even though it has been elusive for years. If this could be done, confidence in Washington’s capacity to address its debt challenge would rise.

But even with a Social Security fix the medium-term deficit outlook will be poor. Sometime soon, perhaps in 2010, Main Street and financial markets will exert irresistible pressure to reduce the deficit.

The problem is the deficit’s sheer size, which goes way beyond potential savings from cuts in discretionary spending or defense. It’s entirely possible that Medicare and Social Security will already have been addressed, and thus taken off the table. In short we’ll have to raise taxes.

We’ll Need to Raise Taxes Soon – Roger Altman, Wall Street Journal

The Two Sides of the Inflation Debate – Richard Berner, Morgan Stanley