Reich's Assessment of the Economy Has Been Spot On

"2009 is likely to be a very hard year."

Robert Reich could have easily uttered this sentence within the last week. Instead, he used those words to describe the prospects for the economy during a September 2008 speech at The Commonwealth Club.

Of course, any cynic or chronic pessimist could have seen the worsening of the economy persisting into this year or longer, but the former labor secretary under President Clinton and current professor at Cal has been one of the few sounding the alarms over the economy for some time.

His assessment of the then-pending $700 billion bailout to Wall Street sounds dead on today. “The bailout will not ultimately do much," said Reich, "It will provide a one-shot shot of confidence. It will stop the bleeding, but it will not end the underlying problem.”

Indeed, today, many wonder what the initial half of the bailout money went toward. Without reliable accounting of the dollars, some wonder whether financial institutions are hoarding the relief money while credit markets still languish. Reich pointed out that the financial dilemma the country faces is actually a "crisis of trust" and, though the bailout in September was a message to investors that the government is willing to do something big to alleviate the problems, it will not fix the long-term problems with the economy without substantial oversight and a strong monetary policy.

He did focus on one interesting unintended consequence of the bailout: a resumption of avarice. “You take greed away from Wall Street and what you have is pavement,” he said to a round of guffaws.

Reich says corporate leaders and their earning are predicated on the short term. In this situation -- where the government has, in effect, subsidized the down side to investing -- he says the "risk is greater" that corporations will continue to dabble in seizing the quick buck.

Today, as President-elect Barack Obama attempts to push another large round of stimulus benefits through Congress, Reich's 2008 words are useful; he urged listeners not to view the next president's capacity to apply his agenda in Washington as being depressed.

Reich recounted how during the beginning of Clinton's term in 1993, the discovery of larger deficits forced the new president to pare back some of his campaign promises. Don't necessarily believe it this time around, said Reich, because the September bailout is technically not an expenditure. The money will be borrowed from Asian and Middle Eastern countries, he said, which are more than happy to invest in relatively safe Treasury bills, something that has indeed occurred.

Because many in the Obama administration believe expanding the deficit to stoke the poor economy falls in line with the Keynesian mantra of infrastructure spending, balancing the budget is far from the most important policy objective and should allow the incoming president to hold his campaign promises intact.

Robert Reich will try his hand again at making sense of the economy while peering into the future this Wednesday at The Commonwealth Club of California's Annual Bank of America-Walter E. Hoadley Economic Forecast. The event will be held at the Hotel Nikko at 222 Mason St. with lunch at 11:45 a.m. and the program starting at 12:30 p.m.

Fighting Deflation By Printing More Money

Investors in Treasury bills today did the equivalent of betting on the thoroughbred running at even money in every race.

The interest rate in T-bills fell to -.01 percent and the government came away with a no-interest $30 billion loan.

Aaron Pressman at BusinessWeek says that T-bills, regardless of their worth, are still the safest bet in these chaotic financial times, yet the reason for the seemingly poor investments is the padding of year-end quarterly reports.

It implies that investors are so worried about the safety and possible decline in value of most investments that they’re willing to lend merely on the assurance of getting their principal back intact. While some analysts fear runaway inflation from all the government bailouts and borrowing, the T-bill market at least is giving a pretty clear signal that’s not what is on big investors’ minds. They’re worried about the opposite, widespread deflation from the ongoing credit crisis, like the falling prices that occurred during the Great Depression.

The specter of deflation, the reduction of the money supply and credit, is forcing some to urge the U.S. Treasury to alter its monetary policies to deliberately jolt the prices, namely by simply printing more money.

Michael Kinsley, who spoke tonight at The Commonwealth Club of California, espouses this idea in the current issue of Time, though it rests on former Fed chair and Obama adviser Paul Volcker reversing course on the idea of tamping down inflation.

It would seem one of the problems with merely stoking the economy with new money in addition to a robust stimulus package is the issue of timing, along with pinpointing how much is enough. As many economists believe, adding too much money just as the economy begins to heal could lead to inflation when the economic caffeine of the stimulus finally kicks in. Conversely, not enough of a stimulus could further prolong the doldrums.

Conservative voices on the issue understandably believe in a more hands-off way of fixing the economy. John McManus at the New American faults Obama for choosing Tim Geithner and Lawrence Summers for this economic team, writing, "Each strongly supports another stimulus package that will have government print or borrow some more money to dispense to the American people. Each will seek to manage the economy when what is clearly needed is for government to get out of the way."

Thomas Mayer, writing in the notoriously conservative opinion pages of the Wall Street Journal, is denying that deflation is around the corner but says little to assuage feelings that a deep recession is likely.

Economics is a tricky, multi-headed Hydra where the monster could easily be slain by one method at one time, while utterly invincible later to the same plan. If that's true, some critics may worry that so many of our economic leaders are wedded to the textbook response to fighting deflation that they may overlooking something better.