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Jon Talton

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

October 24, 2012 at 10:26 AM

What we should fear in the economy

With Halloween coming up and the stock market having taken us through three queasy sessions, let’s take a random worriers’ stroll.

This is not four years ago. Then, we were in the middle of a financial panic not seen since the Great Depression. The world economy was on the edge. It was stopped, however imperfectly, by the Bush and Obama administrations using tools and knowledge put into place and learned during and after the Depression, and the Federal Reserve not making the same mistakes it did in the 1930s.

The financial system remains dangerous: Too Big to Exist Banks, opaque derivatives, a largely unregulated shadow-banking system, lobbying that has prevented effective regulation, etc. The Obama administration’s failure to impose the rule of law on the banksters has increased moral hazard, i.e. the banksters think Uncle Sam will bail them out next time. Still, there’s no speculative bubble as in 2007 waiting to bring the house down. Yet.

Four years ago, the entire edifice of a financialized real-estate bubble was tumbling down, just as it did in the Depression. The worst didn’t happen with commercial real estate. It did with residential. But now housing is finally recovering. It won’t feel like a recovery for millions, and it will take years to recover the lost, false values of the boom in most places.

The business cycle has finally started upward again in the United States. But it’s very slow — recovering from a financial collapse always takes much longer than from a recession caused by the Fed raising interest rates, etc. It’s fragile and a shock could send the country back into recession. And it’s two-tracked, with places such as Seattle, New York City and Houston booming and others with narrow and legacy economies still lagging. Beyond that, America has recessions every seven to nine years, so the clock is ticking. We still have a jobs crisis, which has complex roots, including globalization, technology, bad trade deals and companies discovering they can raise profits even higher with fewer people. Consumer debt is still too high.

Unfortunately, the cycle is headed down in the eurozone and China. This is what the stock market — nowadays not a good measure of the overall economy — has been reacting to. China’s slowdown, leadership transition and civil unrest carries particularly big stakes for the Pacific Northwest. Whether it manages a soft or hard landing is what to watch. Also pay attention to the diplomatic tussle with Japan, and also claims over energy resources that are contested by its neighbors. The big danger of a shock comes from overseas.

The fiscal cliff, with automatic budget cuts kicking in, would cause another recession, too. This is totally unnecessary. Federal debt is not our immediate concern. We borrow in our own currency and could be doing more of it at historic low rates to put people to work. Short of that, after the election Mr. Obama needs to grow a pai…ooops, show some spine and kill the sequester. Just think, “What would LBJ do?” House Republicans need to get back to the formerly routine work of raising the debt ceiling, rather than risking the nation’s security and living standards with political games. We can’t cut our way out of red ink — although stopping the imperial adventures and corporate welfare for fossil fuels would be a good start — we must grow our way out.

The most pessimistic economists worry that we face prolonged slow growth. If so, we also face continued political instability and with it economic dangers. On the other hand, betting against the American economy has never been a smart move. Just breaking up some heavily consolidated industries and putting in place more incentives to deploy capital to productive, job-creating industries, rather than gambling, would help. So would a transaction tax on the Wall Street boyz.

Boo!

And Don’t Miss: Busted — 75 percent of the biggest home lenders no longer exist || The Atlantic

Today’s Econ Haiku:

It’s shares get a lift

Did Facebook go to Scottsdale

And have some work done?

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