Monday, February 23, 2009

Gathering dangers

While the sorry state of the economy occupies us, we tend to lose sight of other gathering dangers. Pakistan's takeover by Islamist militants is now a distinct possibility. This would be a disaster unlike any other we've faced before. And it's entirely preventable.

Here's a touching story about the shutting down of a girls' school by Taliban in Pakistan's Swat valley (15-minute video on the New York Times web site).

What is to be done? Here's a report in the Economist, suggesting why the Pakistan army is failing and what to do about it. (Link: In the face of chaos, Economist, Feb 19, 2009). In particular, let's not start giving in to those who say that the war in Afghanistan is unwinnable. It must be our top foreign policy priority.

Monday, February 2, 2009

Stop betting on the consumer

The U.S. consumer is saving more and spending less, says today's New York Times:
Americans cut their spending for a sixth month in December and, perhaps more significant, put more into their savings accounts, the government reported Monday, as they worried about losing their jobs and earning less in a deteriorating economy. [...] "If households are shying away from spending, what’s going to cause businesses to start spending again?" a senior economist [at Moody's said].
(See article in New York Times)

Well, Boston Brahmin is not an economist, but surely the fact that U.S. economic growth has been led by consumer spending in the past doesn't mean it needs to continue this way in the future? Now that we have discovered that Wall Street's unrealistic "growth" in the past decade was based on a Ponzi scheme, the great unwinding we're all living through is inevitable. Clearly, the rest of the economy is adjusting to the new realities, which include expensive credit.

Given all of this, isn't the government's insistence on bailing out the big banks that made bad loans just tilting at windmills, and a tremendous waste of taxpayer money? It's trying to make credit easier to obtain, but the fundamental problem is not the lack of credit, but the lack of trust. It's no wonder that those banks that have already been bailed out in this way are just sitting on the capital, not lending. They have no rational incentive to lend given the poor visibility into future cash flows, just as consumers have no rational incentive to borrow when their jobs are in jeopardy. Why blame them?

What the government needs to concentrate on is two things:

1. Increase the safety net for people who are laid off. For example, COBRA benefits will be extended in a bill being worked on in Congress last weekend. At about $40 billion, this is money well spent.

2. Stop the bleeding in home mortgages, which we are told is the root cause of the current losses. For example, the Obama administration says it favors giving bankrupt homeowners foreclosure relief by letting them have their mortgages modified under court protection. This won't cost the taxpayers a cent, and it will encourage lenders to rework the loans voluntarily.

On top of the above, any spending that improves the infrastructure of the country should help. What will not help is trying to artificially get borrowers and lenders to act against their own best interests.