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The Bailout and the A-word

Posted by: Chris Anderson

JuanEnriquez_RobertLeslie.jpgHere’s a persuasive op-ed in today’s Boston Globe co-authored by regular TED speaker Juan Enriquez … uttering a word neither candidate dare utter:

WITHIN THE billions of sentences about the financial bailout there is one word notably absent, austerity. All talk is of payments, supports, subsidies, incurring more debt, stimulus packages. The thesis seems to be: If only we spend more, the party can go on. True, only if the financial meltdown is a temporary mismatch and dislocation in housing and credit markets. But suppose there is something fundamentally wrong with the US economy. Then spending more will not fix it. Getting the diagnosis right means getting the treatment right. It may save us a trillion or two.

Read the full op-ed below or on the Boston Globe‘s site (registration may be required)

Photo: Robert Leslie

From the Boston Globe, October 1, 2008:

What about austerity?
By Juan Enriquez and Jorge Dominguez

WITHIN THE billions of sentences about the financial bailout there is one word notably absent, austerity. All talk is of payments, supports, subsidies, incurring more debt, stimulus packages. The thesis seems to be: If only we spend more the party can go on. True, only if the financial meltdown is a temporary mismatch and dislocation in housing and credit markets. But suppose there is something fundamentally wrong with the US economy. Then spending more will not fix it. Getting the diagnosis right means getting the treatment right. It may save us a trillion or two.

The subprime collapse is one symptom of years of little regulation, under-taxing, overspending, and massive debt. One way to understand what is happening in the United States is to look at what occurred time and again in Latin America and Asia, hotbeds of financial and banking crises. What we are living through happened time and again in Brazil, Argentina, and Mexico, as well as Korea and Thailand.

If there is too much debt, people lose confidence in the banks, then credit markets, currency, and government.

For more than a decade, the international financial cop, the International Monetary Fund, forecast a hurricane was heading toward US shores. As did many heads of the treasury and the Fed. It is, to paraphrase a great writer, a chronicle of an agony foretold. There are five basic drivers of these crises, all based on excess: high income concentration, too much debt, too much reliance on foreign money, not enough tax revenue, and reckless government spending. Time after time governments believe they are different. They are bombarded by warnings but ignore, postpone, spend even more, and crash.

Over past decades, most US wages have fared poorly. Despite stagnant wages, consumer spending and debt increased, fueled by cheap credit. Companies also went on a debt binge. Careless deregulation allowed financial cowboys to run the system. Responsible CEOs who kept some cash, maintained moderate debt, invested for the long term, got pink slips. Financial chop shops did leveraged buyouts using a company’s own cash and credit. To survive, companies piled on debt.

Many politicians decided reelection depended on cutting taxes and offering more benefits. Increase Medicare, postpone Social Security reform, hire more bureaucrats, and pay for a two-front war. Debt grew to pay for this party. These were not true tax cuts, just postponed debt; now we owe more and the bill has come due with interest.

Complicating this crisis is US economic hegemony. There were few places to park a lot of money. Despite the euro, European policies on debts and deficits are not much to brag about. So foreigners have gorged on US debt. The United States continues importing more than it exports. Middle Easterners and Asians who save and invest bought dollars for decades, but some of this money is now fleeing. The dollar has dropped sharply. Gold and oil have skyrocketed. In financial crises, huge pools of capital cross borders very quickly; a few can make a great deal of money shorting the country’s currency.

The United States requires a massive restructuring to address its debt, cutting back on its borrowing, spending, and wars. The bailout package is essential to keep the credit markets open. But absent sentences that include the word austerity all the bailout will accomplish is a temporary postponement. Bailout and stimulus are a stopgap.

A solution requires the country to begin to spend what it earns, reduce its mountainous debt, and address massive liabilities, restructure Social Security, pension deficits, military, and Medicare. No wonder politicians would rather spend more of your money now rather than address these problems. Because we have been spending 5 to 7 percent more each year than we earn, a forced restructuring, triggered by a currency collapse, would have the same effect on wages and purchasing power that the housing collapse had on housing prices. So let’s learn from our Latin and Asian friends and act before it is too late.

Juan Enriquez, managing director of Excel Medical Ventures, is author of “The Untied States of America: Polarization, Fracturing, and Our Future.” Jorge Dominguez is vice provost for international affairs and a professor of Mexican and Latin American Politics and Economics at Harvard University.

Comments (8)

  • Luc Chase commented on Dec 5 2009

    In the economic system we live in now, No debt == No money. Unless ever higher levels of debt are created the system will collapse.

  • Deonte Burn commented on May 15 2009

    One of the biggest buzzwords over the last six months or so is the term bailout. Bailout payments have been made to a lot of huge companies, and Chairman of the Federal Reserve Ben Bernanke insists that it’s the right thing to do, even though it’s with taxpayer money. Part of the recovery plan isn’t an explanation why the money wasn’t just given to the American People, to decide how best to use the payday loans their leaders made out themselves. In the effort to save our homes, many of us have turned to payday loans instead of traditional short term loans from banks that no longer will lend to the people that paid for their bailout to begin with.

  • Melissa Len commented on Mar 27 2009

    All talk is of payments, supports, subsidies, incurring more debt, stimulus packages.

    A large share of counselors had estimated the been demise of the US dollar, thanks to the financial-sector bailout and weakening business but its top notch upside has surprised many. The dollar’s latest climb is half of a impressive reversal of durable investing
    trends (due to the overseas boom slowdown) this kind of as obtaining emerging-market stocks or wagering on skyrocketing commodity prices.

    Besides, a good number of European loan authorities constructed up extended US dollar positions vis-a-vis non-banks and funded them by inter-bank borrowing and via FX swaps, exposing them to financing risk. When heightened charge gamble subjects crippled these types of supplies of short-term endorsing , the chronic US dollar endorsing needs became acute.

    Given the dollar’s credentials as guarded haven, its unchallenged role as worldwide reserve currency, additonally the reality the present the sell keeps on to produce US fiscal and monetary policy action the godsend of the doubt, getting the dollar on dips exists the strategy of choice.

  • Melissa Len commented on Mar 27 2009

    When markets recover, the key lesson is that the industrial countries need to focus on moral hazard, public and private, as the source of the problem and apply the prudential regulations they already have to financial entities that are too large to fail. It is not sensible to try to limit international trade and capital flows, to ask central banks to abandon inflation targeting, to stifle financial innovation, or to regulate entities such as hedge funds that do not generate systemic risks.

  • davon P commented on Feb 13 2009

    Financial crisis is getting worse, affecting consumers, businesses and banks. Many people have wondered how safe their accounts really are, after they heard the issue on the failure of California-based IndyMac Bank. It seems that banks all over the country is falling. That’s why the government created the $750 billion TARP program to bailout troubled financial institutions in order to stave off a possible depression. This is like how getting a payday loan in order to hold you over until your next payday can also stave off a possible depression. A string of catastrophic bank failures would just make things worse, but it seems hard to justify giving the banks funds after they use those funds to give out corporate bonuses and buy corporate jets. You don’t see people doing this with a payday loan now, do you?

  • Darina Stoyanova commented on Oct 2 2008

    Even if the benefit of ANY bailout package & rescue activities may be way smaller than their long term impact and damage, austerity is definitely something to focus on and practice locally & globally.

    The significance of the economic crisis which is part of a much bigger global crisis on all levels, is not limited to the US, but is global in scope and too disastrous to allow to happen and deepen in severity. The call and need for ALL of us to think AND act differently has never been louder and more urgent. We really have to SEE ourselves and the world around us in radically NEW ways and resolve our challenges in new, deeper and smarter ways. We need to SEE things, events and ideas from a holistic perspective, from a higher awareness of their impact on each and all of us, AND ACT accordingly so that this set of new values, higher consciousness and respons-able behaviors can transform the prevalent current toxic way of thinking, living and being.

    What is really needed is for each and every one of us to do AND bring their best, to summon his/her highest self and BE the change by example and by sharing the deepest and brightest of our ideas in finding solutions that will be aligned with the future we want to co-create for us and the generations to come.

    I think, feel AND believe that we as humanity can avoid all the doom and gloom scenarios that we are bombarded with on an hourly basis, by being and acting together like we never did/have before, fusing our inner knowledge of who we are and acting from the wisdom of our interdependence all-together.

    I envision that we can turn the planetary alarms from being the real concern of the few to being the daily action of the many and thus facilitate the transition through co-operation and learning rather than through disasters and pain.

    We all know the saying about the trees and the forest and I am tempted to take this analogy even further. Amid the falling trees and the dying forest we sometimes fail to see the avalanche and the volcanoes threatening to erupt from the top of the mountain which happens to be Gaia and our global economy and living space. My view is that we should let the dead trees BE the catalysts and nutrients for the new growth just like it is in nature that leads to the sustainability of the old forests and the harmony of the mountain.

  • Gerry Snakpe commented on Oct 1 2008

    All we can hope is that government regulation of activities on Wall Street will prevent this type of crisis in the future.

  • Bradley Cochran commented on Oct 1 2008

    Timely words, and thought provoking.