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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 6, 2009 at 10:22 AM

Misreading the economy, then and now

Top of the News: The voluble Vice President Joe Biden made a remarkable statement over the weekend, saying the administration in January “misread how bad the economy was.”

Remarkable because in the fall and winter, economists and politicians alike were agreed that we were seeing the worst collapse since the Great Depression. Defensible? Only in the narrow sense that the Obama administration’s projections selling the stimulus didn’t foresee unemployment rising so high so fast.

But it smells as if economic policy was being crafted by the very brainos who engineered the bubbles and the crash. The Republicans had their Goldman Sachs alums, notably Treasury Secretary Henry Paulson. The Democrats have theirs, the proteges of Robert Rubin.

Even if you don’t buy the harsh assessment of Matt Taibbi in Rolling Stone, of Goldman as “the great American bubble machine” (I do), the Wall Street establishment figures of Larry Summers and Tim Geithner present Mr. Obama with two problems.

First, their policies have tended to protect their friends in the financial sector — even as banks jack up fees, raise their executive comp and have months before modest credit-card reform kicks in. All the while they sup from from government bailouts and safety nets, change accounting rules to suit their fancy and continue to present huge systemic risks to the economy.

Second, these men and their staffs are extremely well-compensated prisoners of the conventional wisdom that has driven the economy over a cliff. It means they are fundamentally unprepared for discontinuity. As in: when debt, financial swindles, bubbles and the erosion of the productive economy becomes unsustainable. It’s a mindset that inevitably leads to “misreading.”

The stimulus has yet to fully kick in. I’ve been a skeptic because so little of it has gone to forward-leaning infrastructure projects, especially rail, transit and green energy, that would create ongoing jobs and enhance productivity. And, so much treasure has gone into self-dealing for the banks and AIG. If Obama’s team is still misreading the economy, there will be more of a price to pay than the mere political.

The Back Story: “The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery.” So writes the New York Times, which for all its excellence has been clueless on many energy issues.

While speculation in the markets may have some role in the price swings, they are mostly a result of the new energy paradigm. Call it peak oil if you wish, but it’s another reality of discontinuity that puzzles the conventional wisdom. Thus we have the yo-yo effect (exaggerated by speculation and unwinding of leveraged contracts). Oil prices rise as there’s a chance the world economy is reviving, and with it demand again outstripping production; they drop back as that hope is dashed, as happened with Friday’s unemployment report.

Dmitry Orlov provides a solution just as plausible as today’s denial.

Today’s Econ Haiku:

The judge to GM:

I’ll buy that bankruptcy plan.

Where’s the warranty?

Comments | More in Bailout, Energy


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