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Jewish World Review June 30, 2010 / 18 Tamuz 5770 G-20 fairy tales By Robert Robb
http://www.JewishWorldReview.com |
Based upon the statement coming out of the G-20 meeting, global political leaders apparently live in a never-never land where excesses do not have consequences.
They not only believe that their own excesses don't have consequences, but that they can wish away the consequences of excesses in the private sector.
The current global economic malaise began with excesses in the private sector. Lenders imprudently lent and borrowers imprudently borrowed, particularly in housing. Financial institutions imprudently invested in securitized subprime mortgages.
Rather than allow these lenders, borrowers and investors to suffer the full consequences of their imprudence, governments borrowed heavily to bail them out and provide general fiscal stimulus to ameliorate knock-on effects on the rest of the economy.
The U.S. central bank had already been pursing a lax monetary policy that facilitated the imprudent lending and borrowing. It opened the monetary spigots even wider, including becoming a buyer of securitized debt that had difficulty finding other takers.
The European central bank, which had been pursing a more prudent monetary policy, also opened the spigots and, in a more modest fashion, became a buyer of last resort as well.
Now the markets believe that governments have borrowed too much and are putting pressure on sovereign debt, particularly in Europe.
Not to worry, the G-20 statement says, we've got this under control.
We will continue our fiscal stimulus because our economies are still in the dumps. But we will also cut our deficits, as a percentage of GDP, in half by 2013. We will do so, however, in a way that is "growth-friendly."
And while we do that, the countries in the G-20 that have trade deficits will consume less and save more, while those with trade surpluses will buy more and save less.
This fairy tale was concocted to paper over a fundamental disagreement between the Obama administration, which wants to keep the pedal down on fiscal stimulus, and Europe, particularly Germany, which believes that the party's over.
Germany, the object of much frustration when government leaders were trying to suspend the consequences of excess, increasingly looks like the grownup in the world's economy. It went for fiscal stimulus considerably less and has, among developed nations, a relatively low current deficit and accumulated debt load. It also has an unemployment rate of 7.7 percent, compared to 9.7 percent in the U.S. and a Euro area average of over 10 percent.
In the U.S., it is almost universally believed that we have been living beyond our means. We consume and borrow more than we can afford. We save and invest too little.
There's only one way to fix that. We have to consume and borrow less and live more modestly. We have to save and invest more.
Yet government policy continues to promote consumption including, almost unfathomably, in housing. Big tax breaks for buying a house, easy money to keep mortgage rates low, government-guaranteed mortgages with low down-payments, a bankrupt Fannie Mae and Freddie Mac given an unlimited federal checkbook to maintain liquidity.
And the Obama administration wants to disincentivize saving and investing by increasing taxes on capital gains and dividend income.
Recessions are painful. But after they have run their natural course, there is a more fundamentally sound economy to build from.
The United States has endured the pain of recession with high unemployment rates. But because the federal government, under Bush and Obama, has sought to wish away the consequences of excess, we do not now have a more fundamentally sound economy on which to build.
Behavioral changes -- such as consuming less and saving more -- occur during bad times. Perhaps they can make bad times slightly more bad, but then you get the good. When times are good, no one sees the need for change.
The motto of the Obama administration is supposedly not to let a crisis go to waste. They've wasted this one.
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JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.
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