How to prevent a depression …. The latest economic data suggests that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Brothers in 2008. The risks of an economic and financial crisis even worse than the previous one – now involving not just the private sector, but also near-insolvent sovereigns – are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown? – Reuters/opinion by Nourel Roubini (left)
Dominant Social Theme: A great depression can still be avoided if the proper steps are taken and FDR's example is followed.
Free-Market Analysis: Nouriel Roubini – Dr. Doom – has posted an article (see above) at Reuters on how the world can avoid a "fiscal train wreck" and "deeper depression." In this article, we'll review his prescriptions and assumptions.
Roubini is often portrayed as a prescient mainstream economist, someone who doesn't let sentiment or stale thinking interfere with clear-eyed reality. He is thus a kind of human dominant social theme, a metaphorical promotion in-the-flesh, an economic maverick who is supposed to have predicted both the collapse of the United States housing market and the worldwide recession.
Given his track record and maverick tendencies, Roubini has an air of credibility about him. We have thus been "promoted" into believing what he says, and thinks. This, we are led to believe, is an important article because it sums up his conclusions about what needs to be done to avoid an onrushing Depression II.
He begins by pointing out that austerity measures have recessionary effects. He does not dispute the necessity for austerity but writes that larger countries should resist the temptation to adopt such measures. The US, Germany, UK and even Japan should concentrate on what he calls "short-term stimulus" rather than fiscal austerity. He suggests that infrastructure banks "that finance needed public infrastructure" should also be initiated.
Credit easing, rather than just quantitative easing, can be helpful, he suggests, and the European Central Bank should reverse its decision to raise rates. Generally, a policy of loose fiat-money should be followed by all the large central banks including the Federal Reserve. In the upcoming trend toward a deflationary depression, inflation will soon be the last problem that central banks will fear.
Eurozone banks should be recapitalized via a Europe-wide public financing program. Also, "Banks should be given some short-term forbearance on capital and liquidity requirements." And governments should provide credit directly to "small and medium size enterprises" (SMEs).
Even the biggest governments should take care to maintain and expand their liquidity. "It takes time for governments to restore their credibility. Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely."
Roubini warns that such countries as Italy and Spain are at risk for losing market access. They need to have access to additional funds, perhaps through a European facility such as the European "Financial Stability Facility" so as to avoid "disastrous runs."
There must also be an orderly debt restructuring of certain sovereigns, corporations and even households, including debt reduction, and conversion of debt into equity. However, the biggest issue is restoring the competitiveness of countries such as Greece. Roubini focuses on this for much of the rest of his article. He suggests that the only viable option for Europe's PIGS is breaking away from the euro, if not from the EU itself. Here's more:
The sole alternative is an exit from the eurozone by Greece and some other current members. Only a return to a national currency – and a sharp depreciation of that currency – can restore competitiveness and growth. Leaving the common currency would, of course, threaten collateral damage for the exiting country and raise the risk of contagion for other weak eurozone members.
The balance-sheet effects on euro debts caused by the depreciation of the new national currency would thus have to be handled through an orderly and negotiated conversion of euro liabilities into the new national currencies. Appropriate use of official resources, including for recapitalization of eurozone banks, would be needed to limit collateral damage and contagion.
Roubini believes that the West's high unemployment and low growth rates are a direct result of the more vibrant economies of the developing world. Rather than protectionism, Roubini suggests a massive jobs and job-education program abetted by investments in infrastructure and "alternative/renewable energy."
Finally, he suggests that the IMF and World Bank encourage developing economies to embark on a program of loose money and lower taxes. "Emerging-market economies have more policy tools left than advanced economies do."
These prescriptions, Roubini warns, are necessary to avoid a "severe contraction" that could turn into "Great Depression II." The prospects for such a disaster are increased if the Eurozone difficulties prove unmanageable or at least are managed badly.
Wrong-headed policies during the first Great Depression led to trade and currency wars, disorderly debt defaults, deflation, rising income and wealth inequality, poverty, desperation, and social and political instability that eventually led to the rise of authoritarian regimes and World War II. The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now.
This is Roubini's final conclusion – but we cannot escape the impression (as disappointed as we are to conclude this) that his solutions are both unoriginal and mundane. It makes one wonder how he acquired his nickname "Dr. Doom."
In fact, Roubini's nickname implies someone who sees thing as they really are and is not afraid to speak out even if it is unpopular. Yet every part of the prescriptions that he offers to "fix" Western economies involves massive government aid and interference.
In fact, when one boils it down, it becomes evident that what Roubini is offering is a kind of repeat of FDR's leveling New Deal program. Almost every prescription involves massive government action and all of his underlying assumptions include supporting the system as it is.
Roubini basically wants governments – via the EU especially – to forgive massive amounts of debt in every sector while embarking on pan-regional make-work programs that include the creation of infrastructure and green jobs. He wants central banks to flood the world with cheap liquidity that would allow businesses to borrow and banks to recapitalize.
At the end of the article, he even claims that if his prescriptions are not followed – if radical Keynesian/Fabian solutions are not implemented – that the result will be renewed authoritarianism and war.
He neglects to explain, of course, what modern history now firmly tells us, that the foundations of World War II were laid by the Anglosphere power elite and funded by Western banks and Wall Street. World War II was not an OUTCOME of the Great Depression but a result of the very elite forces that had caused it in the first place.
Additionally, there is not a word in Roubini's screed, as presented above, that proposes that the system itself may not be salvageable or even worth saving. Every part of Roubini's solutions have been suggested before within a mainstream economic context and the only surprising elements have to do with how aggressive he is prepared to be.
Roubini doesn't just want governments to help private industry, he is suggesting a comprehensive worldwide program of government pump-priming and infrastructure building.
What an epiphany! Dr. Doom, the hard-hitting, speak-your-mind economist that the mainstream media presents as a kind of uncontrollably honest maverick, turns out to be FDR on steroids! He is not interested in dismantling a dysfunctional system but in preserving and expanding it.
Everything that Roubini suggests revolves around salvaging the West's money center banks and promoting government activism. The only parts of his program that can be seen as even nominally unique have to do with the acknowledgement that sooner or later the PIGS will have to leave the EU.
Roubini is perhaps to be commended for speaking bluntly about what is bearing down on the West and the world – a Great Depression II. But this is as far as it goes. Not from Roubini, apparently, will we hear any fundamental criticism of the system.
Roubini could have been honest in his editorial. He could have admitted that the world is run by a cabal of banking families enabled by corporate, religious, political and military interests. He could have admitted that the great families are preparing the world for a great war, and that this military conflict is likely the way that the upcoming Depression II is going to be "solved."
He could have admitted, even, that the upcoming Depression II, if it comes, is a kind of planned depression intended to usher the world into a long-awaited global government complete with a global military, judiciary and monetary union. He could have admitted that central banking doesn't work but has been kept afloat precisely because it is dysfunctional and is paving the way for global governance.
He does none of this. Dr. Doom turns out to be Dr. Dismissive. Dr. Stick-his-head-in-a-hole-in-the-ground. He is not interested in a real analysis of the way the world really works. His prescriptions for solutions sound like something out of an FDR fireside chat.
Dr. Doom certainly is NOT "telling it like it is" in this editorial. He begins with the assumption that the West's current dysfunctional and rotten banking system is worth salvaging. He compounds the confusion by suggesting that governments use a Keynesian pump-priming approach to "create jobs" – when government in fact is incapable of creating a single job of any value.
And finally, rather than explaining how the West's central banking economies have brought only destruction and ruin on a cyclical basis (see business cycle), Dr. Doom wants those same central banks to print even MORE money. His idea is that this will guarantee there is enough "liquidity" to fool people once again into equating fiat currency with wealth, when it is nothing but a distortive price fixing that ruins commerce and bankrupts small businesses.
What a disappointment he turns out to be! Dr. Doom is, after all, a kind of radical Keynesian. His reputation as an out-of-the-box "rogue" thinker – a principled critic of the central banking, fiat money system – is nothing but a public relations ploy. He has royalist sentiments and central banking sympathies. In today's environment (what we call directed history) even the critics of the system turn out to be its secret backers.