Analysis/Comment Dr Peter Morici: No time to panic - - this is not 2008 again
By Professor Peter Morici
Aug 12, 2011 - 8:01 AM
President Barack Obama waves to an employee in a "clean" facility during a tour of Johnson Controls Inc. in Holland, Mich., Aug. 11, 2011. Elizabeth Rolinski, vice president of operations at Johnson Controls Inc., right, accompanied the President during the tour of the advanced battery facility.
Dr Peter Morici: At times of peril, when
all around are panicking, the person who stays calm can see the facts, act
prudently, and not merely survive, but prosper. No doubt, readers have heard
that before, but this is a good time to remember it. The markets are behaving
like it is 2008 again, but it is simply is not.
The current situation does bear some considerable resemblance in two important
ways. A recession is threatened by anemic growth—the man riding a bicycle too
slowly - - and a fundamental imbalance in demand between Asia and the
West—caused by aggressive exchange rate misalignments a US President and
European leaders understand but lack the courage to confront.
And, a huge debt overhang - - this time sovereign debt in Europe, not private
mortgages - - threatens the viability of critical financial institutions.
European banks hold huge amounts of Italian, Spanish, Portuguese, Greek, and
other European government bonds.
With the bond market pressuring Italy and restive about France, it is easy, but
wrong, to polemic that Greece is Bear Stearns, Italy is Lehman Brothers and
France potentially the next AIG. It is simply not the same.
In 2008, the problem was a massive overhang of poorly understood, faulty
mortgage backed securities created and insured by US financial institutions with
virtually no reliable collateral. This time the principle debtors are sovereigns
with the capacity to tax and restructure debt -- if necessary by fiat. Those
governments’ problems are straightforward and understood, and enjoy the implicit
guarantee of the European Central Bank.
Already, the ECB is purchasing the sovereign debt of the Mediterranean states
and Portugal, and it will purchase more debt as necessary to supplement fiscal
reform to ensure solvency. The ECB may not like it, but like the Fed, it is only
as independent as its creators - - the sovereigns - - will permit.
As an economist, I am fully aware of the consequences for moral hazard and long
term growth of socializing bank losses. Too much harm has already been done on
this side of the pond by the bailout of GM, Chrysler and the Wall Street banks,
and what the ECB will likely be compelled to do -- buy bonds that it may never
fully pay off - - only compounds those harms.
In the near term, 2011 differs from 2008 in that that Rome, Lisbon and other
profligate governments have access to the ECB printing press in a way that the
abovementioned private firms did not to the Fed’s money making machine, at least
not until it was too late.
Inflation is less of a concern - - bonds function as near money - - and the ECB
is merely swapping one form of liquidity for another on the books of the bank.
Also, the iron rule that money causes inflation most applies when economies are
at least near full employment—none of that is around at the moment. Austerity in
the United States and Europe ensures underemployment of resources will persist.
In the West, democracy has gone too far -- the majority consistently votes for
politicians that promise more than societies are producing and borrow against
the future in irresponsibly ways. The most irresponsible among us, under the
banner of disadvantage and social justices, threaten civil collapse when
disappointed—the riots in England are not a new phenomenon. Remember Watts.
Social Democrats on both sides of the pond have turned social responsibility
through government into absolute fiscal irresponsibility.
Now as we unwind it all - - bad private mortgages and bonds governments can’t
honor -- the West is headed for another long period of slow growth. No longer
will debt permit the West to churn paper and live high on Asia’s productivity.
The West will have to accept a diminished place in the world for not limiting
the powers of its banks and politicians to do too many foolish things, at the
consent (demands) of the governed.
This said, markets are behaving irrationally - - global financial markets are
not headed for a second meltdown. But growth is going to be slow until western
leaders correct the imbalance in demand between Asia and the West, and work off
all the debt. Still, 2011 is simply not 2008.
Professor, Robert H. Smith School of Business, University of Maryland,