1-06-09 Where Do We Go From Here

A Republican friend (I do have them!), asked me how bad things are and if the economy will ultimately recover. This is what I wrote him back.

Sure, "the economy will ultimately recover." This is not the end of our empire. It is not 410 AD and the sack of Rome. Think rather the Battle of Adrianople in 378 AD when the Roman army lost it first major battle to the barbarians. It is not the end but it is not the same as it was. The real question is where do we go from here.

Change, whether or not it is change we can believe in, will be full of surprises. Look at the economy and what happened to the rock-bottom principal of ownership. Milton Friedman have mercy on them, the Republican Socialists are ready for the government to take ownership in almost anything.

We will never think about money and the economy the same way that we did. Wall Street, the guts of this capital-oriented economy, just isn’t there anymore. All of the great investment houses, some of which we have known since the 1800s and are what we thought of as Wall Street, are gone - acquired, merged, bankrupt, or morphed into commercial banks. Secretary of Treasury Paulson even suggested a federal corporate charter for all financial entities.

But who can believe anything Paulson says now. He gave away $350 billion with no strings attached and to no effect. With that money, his banking buddies bought banks, held parties and gave dividends and bonuses with nary a thought for the people they were supposed to lend to.

Our politics will likewise never be the same, even if no one wants to explicitly recognize the fact. President George W. Bush so empowered an Executive Presidency that he could ignore habeas corpus, order "enhanced interrogation" and warrantless wiretaps, force banks to sell ownership to the government, give money to the auto industry after the Congress had explicitly said no and, in effect, do absolutely anything with a simple signing statement. And he wasn’t impeached!

Now, Barack Obama could call on all the same powers but, hopefully, he won’t need unconstitutional powers to do what he is talking about. So what will he do?

The guy was more than a constitutional authority; he was a social worker and community organizer. He knows the problems of the disenfranchised, the poor, the working stiffs and one should expect that he will try to do something for them. They are, after all, the ones who gave him almost $500 million to campaign with and voted for him.

He’ll give unions back their bargaining rights, tax away the money that the super rich skimmed over the past 30 years and make markets work for those who produce the goods and services. If that isn't a change from tax cuts for the rich, I don't know what is.

In the meantime, look out for a president who promises radical action -- like supporting sit-down strikers! -- and then appoints superb technicians. They will be relentlessly efficient in getting him what he wants. Especially when previously unacceptable ideas, like a single-payer, universal coverage healthcare system, fit with the newly discovered role of an efficient government.

It will not be simple. There will be no straight-line extrapolations. At this point, as things get worse -- very much worse, people are getting really ticked off at all of our leadership elites. Obama is going to have to be very adroit at controlling that anger to keep things from getting out of hand.

Obama, in his guise of an outsider, seems well placed to do a good job with his presidency, but it is a problem that George W. Bush and, ultimately Ronald Reagan, gave him that chance. They pushed the ideological pendulum so far to the right that I fear it could come careening back out of control.

We should all be concerned about the changes that are going to happen and that even Obama and his moderates may not be able to control. Compared to that, when this "great recession" will be over is almost trivial.

But my best answer to that question is: It depends. I am a two armed economist. If, on the one hand, they go at it right as a middle-class solvency problem and attack the lack of wages and purchasing power, then it can end as early as the 4th quarter of 2009.

If, on the other hand, they treat it as a financial liquidity crisis then I have to think that it will be a long slow pull off of the bottom. It will be the infamous "L" shaped recession where the economy will stop falling but will have only barely perceptible growth that could last into 2015.

We live in interesting times.