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Jon Talton

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

February 4, 2014 at 10:32 AM

The bumpy ride is only beginning

No disrespect to the Associated Press, but when I read a story saying that turmoil in emerging markets is essentially “no big deal,” and backing it up by “many economists say they’re optimistic that the troubles in emerging markets won’t infect the global economy as a whole…” Well, I want to run to the bomb shelter.

I would like to believe this is correct. Nothing to see here, America, get back to your “recovery.” Unfortunately, this is the same bunch that saw the housing bubble and subprime mortgage collapse as no big deal, things that wouldn’t infect the global economy. One of the worthies at the time was new Federal Reserve Chairman Ben Bernanke.

Now Janet Yellen is the new Fed chairman and the moves she makes in the coming days will be critically important. Whatever U.S. stocks are doing today, I am with Tim Duy in wondering if the recent GDP numbers overstate the strength of the American economy. However much record profits the multinationals make or income is redistributed up to the top 10 percent, the economy remains extremely fragile. This is a recovery unlike any seen in the post-World War II era, and in all the worst ways.

Also remember, most modern recessions — and they come along about every seven years — have been caused by Fed missteps. In the immortal words of longtime Fed boss William McChesney Martin, it is the job of the central bank “to take away the punch bowl just as the party gets going.” Unfortunately, that often goes badly. And in our times the party didn’t include most Americans.

Before he walked out the door of the temple to head to a new job at the Brookings Institution, Bernanke presided over a meeting that reduced the Fed’s bond purchases to $65 billion a month from the $85 billion that had been constant through 2013. This is the “tapering,” where the central bank wants to get out of the business of unconventional stimulus as the economy heals. One problem is basing it on a falling unemployment rate, even though that measure doesn’t align with the actual health of the labor market.

Another is that it has helped push several very large emerging markets, already destabilized by political trouble and slower growth, into an economic crisis as it hastened the exit of dollars. So one question becomes contagion. In our interlocking world financial system, Brazil’s problems will become ours if the mandarins of Wall Street have made too many dodgy bets on one side or the other. Remember JPMorgan’s $6 billion London Whale fiasco was connected to the eurozone troubles.

In that case, the contagion was contained and CEO Jamie Dimon even got a raise. Back in the 1994 peso crisis and 1997 Asian financial crisis, Alan Greenspan at the Fed and Bob Rubin at Treasury got credit for “saving the world.” But it was a very different American economy then, much stronger, not yet totally given over to the toxic financialization that this duo (along with Bill Clinton, Phil Gramm, Jim Leach and a cast of thousands of lobbyists) brought on with deregulation. China wasn’t sitting on a banking and debt time bomb of its own.

This is new territory. It’s too early to be declaring victory just because optimism is the religion of the lazy.

And Don’t Miss: How the U.S. exports global warming | Rolling Stone

Today’s Econ Haiku:

Microsoft sea change

Wall Street wants to feed like sharks

Local jobs are bait




Comments | More in Federal Reserve | Topics: Emerging markets


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