On Dec. 7, 2008, President-elect Obama, warned Americans that the current economic crisis while not a repeat of the Great Depression, “is a big problem, and it’s going to get worse,” according to an article by Brian Knowlton in the Dec. 8, New York Times. Obama also announced a new economic stimulus plan to jump start the nation’s struggling economy and help to remedy the country’s current financial crisis.
The announcement was supported many economists. Among them was Paul Krugman of the Times who stated in a Dec. 1, 2008, editorial that “Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations.”
One of the others worrying about America’s ever deepening debt is David M. Walker, former Comptroller General of the United States and now President of the Peter G Peterson Foundation. In an Oct. 27, 2008, speech to the American Council on Technology he painted a dire situation indeed.
“From a policy standpoint: our fiscal house is a mess. In the last year, we went from a $163 billion unified budget deficit to a $455 billion deficit, and that was before all the recent “rescue” and “bailout” actions. That’s also before we began really feeling the effects of the current recession. So the simple fact of the matter is that, as of September 30, 2007, this nation was in a roughly $53 trillion hole. That amounts to over $455,000 per household, at a time when median household income was less than $50,000. And that hole gets deeper every year by at least $2-3 trillion even with a balanced budget, and we are heading in the wrong direction in that regard.”
Despite the perilous state of the country's finances, Krugman believes that the government can and should run large deficits to get the economy moving again.
“Should the government have a permanent policy of running large budget deficits? Of course not. Although public debt isn’t as bad a thing as many people believe — it’s basically money we owe to ourselves — in the long run the government, like private individuals, has to match its spending to its income.
“But right now we have a fundamental shortfall in private spending: consumers are rediscovering the virtues of saving at the same moment that businesses, burned by past excesses and hamstrung by the troubles of the financial system, are cutting back on investment. That gap will eventually close, but until it does, government spending must take up the slack. Otherwise, private investment, and the economy as a whole, will plunge even more.”
But once we come out of the plunge, changes will have to be made. Krugman's assertion that government borrowing is "money we owe to ourselves" is only partially correct. Much of our national debt is owed to foreigners. Should they decide to invest their money elsewhere things could be really bad.
Why do I fear the dark clouds on our fiscal horizon? I think we are having a “Hyman Minsky moment.” What is a Hyman Minsky moment? Hyman Minsky was an economist, who according to Wikipedia,
“Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt. He identified 3 types of borrowers that contribute to the accumulation of insolvent debt: Hedge Borrowers; Speculative Borrowers; and Ponzi Borrowers.
“The "hedge borrower" is one who borrows with the intent of making debt payments from cash flows from other investments; The "speculative borrower" who borrows based on the belief that they can service interest on the loan but who must continually roll over the principal into new investments; and the "Ponzi borrower" (named for Charles Ponzi) who relies on the appreciation of the value of their assets (e.g. real estate) to refinance or pay-off their debt but who does not have sufficient resources to repay the original loan, otherwise.”
Hopefully the United States' government is Minsky’s second type of borrower, the speculative borrower and Obama’s large budget deficits and economic stimulus package will keep us from plunging from recession to depression, but once that is done. I think we should follow David M. Walker’s advice to get us out of the financial hole we’ve dug for ourselves.
“First, when you’re in a hole, stop digging. Secondly, when you’re in a $53 trillion hole that is getting deeper every day, you better have a plan to figure out how you’re going to climb out. And thirdly, once you start making progress on climbing out, you better have some mechanisms and safeguards in place to keep from falling back in.”
According to Knowlton’s Dec. 8 Times article, President-elect Obama was determined and optimistic. “‘I am absolutely confident,’ he said during his afternoon news conference, ‘that if we take the right steps over the coming months, that not only can we get the economy back on track, but we can emerge leaner, meaner and ultimately more competitive and more prosperous.’”
I agree with President-elect Obama, the financial crisis is a big problem and it’s going to get worse. But unlike Obama, I think that it’s going to take more than a few months to get us out of the recession caused by this financial crisis. Can we do it? I certainly hope so. If we don’t it, we’re all going to need some Valium--if we can borrow the money to buy it.
Capitano Tedeschi
30
References
“Hyman Minsky” Wikipedia the free encyclopedia, Retrieved Dec. 9, 2008 from http://en.wikipedia.org/wiki/Hyman_Minsky
Knowlton, Brian. December 8, 2008, “Obama Warns of Further Economic Pain” The New York Times. Retrieved Dec. 9, 2008 from http://www.nytimes.com/2008/12/08/us/politics/08obama.html?_r=1&ref=economys
Krugman, Paul. December 1, 2008. “Deficits and the Future,” The New York Times. Retrieved Dec. 9, 2008 from http://www.nytimes.com/2008/12/01/opinion/01krugman.html.
Walker, David. October 27, 2008. What Would the Founder Say?. Speech presented to the American Council on Technology, Williamsburg, PA. Retrieved Dec. 10, 2008 fromhttp://www.pgpf.org/newsroom/oped/founders/.
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