A Democrat Warns More Trouble Ahead
By Larry Johnson on April 7, 2009 at 8:40 AM in Current Affairs
(Bumped up from last night . See Larry’s commentary below the fold.)
Roger Altman, Bill Clinton’s Deputy Secretary of the Treasury, presented a sobering and troubling warning about our economic future in the op-ed pages of Monday’s Financial Times. Altman writes (subscription required):
The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out, as are nations such as Japan and Mexico that depend on US demand. The implications for US policy include a likely second round of stimulus, much more federal capital for the banking system and stunning budget deficits that will slow key initiatives for President Barack Obama, such as healthcare and energy reform.
What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years. . . .
In contrast, most postwar recessions had a different sequence – rising inflationary pressures, a monetary tightening to counter them and, then, a slowdown in response to higher interest rates. . . .
None of that happened here. Instead, we saw a housing and credit market collapse that caused enormous losses among households and banks. The result was a steep drop in discretionary consumer spending and a halt to lending. . . . With reduced incomes, only cutting discretionary spending can produce higher savings. This explains why personal consumption expenditures fell at record rates at the end of 2008.
Consumer spending, however, has approximated 70 per cent of US gross domestic product for the past decade and dominates our economy. But household balance sheets will not be rebuilt soon. Home values will keep falling through mid-2010 and there is no precedent for equity markets, still down 45 per cent from their peak, to make those losses up in just two years. It is illogical, therefore, to expect a full snap-back in the consumer sector in 2010 or 2011. This alone mandates a drawn-out, weak recovery.
The second key sector is the financial one. According to the International Monetary Fund, western financial institutions, mostly in the US, have realised $1,000bn of losses on US-originated assets since the crisis began. . . . These losses are eating into banks’ capital and shrinking their capacity to add assets. Funds from the Troubled Asset Relief Program are only replacing lost capital, not increasing it. When might they end? With key categories of toxic assets still losing value, the answer is: not soon. The scale of lending needed to support a normal cyclical recovery will not materialise.
A third constraint on recovery may involve the federal balance sheet. The fiscal and monetary engines are currently on full throttle. But, within two years, concerns over budget deficits and inflation may revive, compelling the Federal Reserve to raise interest rates and Congress to adopt deficit reduction steps. These actions, contractionary by definition, could occur before a full recovery has asserted itself. On that basis, the federal balance sheet would also limit a full recovery.
It also is important to understand that the rapturous European welcome for Barack Obama was at best an empty gesture. Obama did not get a single thing he genuinely needed from what we might charitably characterize as European leaders:
The G20 failed to agree on Obama’s request for stronger fiscal expansion.
NATO members rebuffed Obama’s request for a significant increase in European combat forces.
But hey, why worry about real results when we can focus on meaningless feel good moments, grab-ass photo ops and air kisses with hot models.
, the basis for the Best Motion Picture Nominee (Golden Globes) starring Brad Pitt.
, the novel by John Le Carre, a new motion picture starring Gary Oldman and Colin Firth.
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.by David Fredosso who wrote 2008's 
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