Summary: In the past few posts I have discussed a possible solution to this crisis. Unfortunately, it will not work. The reasons why are both depressing and technical, so let’s defer them until the next post and instead concentrate on what must be done by the new President. A reminder: we can only speculate about these things, as they lie beyond both fact and theory.
Old Recommendations
For a summary see A solution to our financial crisis. This series of posts took you to the cutting edge of insights about the crisis. Now we will attempt to go beyond that.
(1) Stabilize the financial system — Being attempted, probably now it’s too late.
(2a) Stabilize the economy with monetary stimulus— Rates are coming down and money printed, but probably with relatively little effect.
(2b )Stabilize the economy with fiscal stimulus — Just now being considered; will work but slow to implement and slow to have effect.
(3) Arrange long-term financing for steps #1 and #2 with our foreign creditors — Unacceptable to our leaders at this time.
None of these will work, in the sense of having full effect before next Fall. That does not mean they are not worth attempting (i.e., the Fed and Treasury have programs included in numbers 1 and 2 ). Or worth doing, to help at a future date (number 3, recently advocated by Pelosi). Or worth advocating, hoping it will done before disaster strikes (number 4).
However, we must prepare for the possibility that the economy will be in a severe recession — or even depression — when the new President takes office in January. A depression does not mean like the 1930’s — the Great Depression. There is a large gap — usually ignored by analysts — between the severe post-WWII recessions (1973-75 and 1980-82) and the horror of the 1930’s. The frequent depressions of the late 1800’s lie in that gap, and for various technical reasons we may now be experiencing one of those.
The challenge
The new President must be prepared to immediately take action after inauguration. There is no time for the usual drill: search for staff, redecorate the Oval Office, have meet-and-greets so the new officials get to know each other, schedule meetings to formulate a plan and build support. The damage to the economy will be terrible by that time these things are completed, and (worst case) the economy still might be sliding downwards. Also, any plans will require time for Congressional approval and implementation, and plus lag times until results appear.
Then there is is the bad news. The conventional solutions which the new Administration could easily put into effect — fiscal and monetary stimuli, plus devaluation of the dollar to stimulate exports — probably will not work (in the sense of sparking a recovery of the economy). Let’s defer the reasons why until a later post, and consider the implications. We have two alternatives (not exclusive):
- Wait it out. Rely on conventional mitigation efforts to cushion the downturn until the economy’s natural recovery begins.
- Explore the fringes of economics, seeking some smart people who can take us beyond the now-exhausted standard Keynesian theory. We need new ideas.
New Recommendations for the new President
These are things to do, not arranged in a sequential order.
(1) On November 5 start assembling your “shadow cabinet”, and their key assistants. Get them working together ASAP. This poses all sorts of operational and marketing problems, plus the risk of conflict with (or undercutting of) the existing guys running the show. Deal with it.
(2) Get a small team searching for solutions outside the conventional beltway consensus. This is America, the brainstorming center of the world. There are new ideas out there.
(3) Prepare a plan. It will be complex.
(4) After the election, start building support among key political and business leaders for the plan. Coordinate to the maximum extent possible with the outgoing Administration.
(5) Once in office, move immediately to implement it.
We do not know if these things are even possible, esp (2). An unprecedented crisis requires extraordinary responses.
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these, such as the causes of the present crisis. I have been writing about these events for several years; since November 2007 on this site. As you will see explained in these posts, the magnitude of the events now happening is beyond what most Americans have — or can — imagine.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
Some FM posts about the current crisis
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Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
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High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
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Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
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Another voice warning about the nationalization of AIG, 18 September 2008
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A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
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A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
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Another step away from our Constitutional system, with applause, 19 September 2008
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What do we know about the financial crisis? What are the key questions?, 20 September 2008
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Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
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America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
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Legal experts discuss if the Paulson Plan is legal, 21 September 2008
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Essential steps to surviving the current crisis, 23 September 2008
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How should we respond to the crisis?, 24 September 2008
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A solution to our financial crisis, 25 September 2008
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Is the US economy in good shape, or in terrible shape?, 27 September 2008
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A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
A few of the most important posts warning about this crisis
This crisis has long been forecast by many, including in articles on this site. Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results. To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime. Here are some of those posts.
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A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
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The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
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We have been warned. Death of the post-WWII geopolitical regime, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
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Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
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Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
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The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
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The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
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“The changing balance of global financial power”, by Brad Setser, 22 August 2008