September 28, 2010

Obama's Catch-22, Or Can A Good President Do Much About A Depression? It's Time to Talk about Reality

Some voters have been trained over the years to believe that Presidents have a decisive influence on the American economy.

Presidents influence the economy much like the captain of a out-of-control supertanker who commands a small auxiliary engine and rudder.

As the tanker itself powers forward, or not, under control of sea conditions and of its own massive engine and sea-spirit-guided rudder.

In calm sea conditions, the captain can gradually have an effect on the tanker's direction if the main engine and rudder aren't pushing in the opposite direction. Or, he can get more influence if he can convince the crew to break open that mysterious door deep in the bowels of the ship and activate the emergency engine in compartment zeta.

The captain might be able to reverse the direction of the supertanker during a full day (a full 4-year Presidential term), if he/she is lucky enough for the large engine and sea spirits to cooperate.


So, can Obama, faced with the beginning of a full-scale great depression, do much about it?

Not unless he can talk about actual economic reality, instead of the normal-to-date practice of hoping for the best and sounding optimistic.

President Roosevelt was able to take dramatic actions in 1933-1935 only and exactly because the Great Depression had so hammered the American economy during 1930-1933 that no one could pretend it was only another slowdown or deny the downward feedback loop.

Today, it is easy for political opportunists and demagogues to pretend that the economy only needs tax cuts, deregulation, etc., to just recover normally (as if it could just roar back to full steam ahead).

This is Obama's catch-22.

President Obama could not safely talk about being in an incipient depression or "lasting downturn" during 2009 because the psychology of everyone suddenly seeing the actual abyss we've entered into would only have intensified the downward plunge.

Talking about reality in 2009 or during the first half of 2010 might have caused the deeper collapse we feared, and have so far avoided.

But not talking about reality -- the known effects on nations of financial bubbles that burst -- prevents us from being able to do anything about it.


So the question, now, is whether it is time to talk about getting out of this Depression no. 2. Diplomatically. For instance, about being "still within the powerful hangover from the collapse of the housing bubble and its financial effects on everyone -- savers, businesses and lenders. This is a slump that can continue for years if left to its own slow processes of economic unraveling and rebuilding."

Is it too soon? Will voters be able to understand this isn't just a strong recession or do they need proof, 1932-1933-style proof like we'll get if we have deficit reduction/austerity starting anytime soon?

Do we need to continue to pretend a recovery is soon to lift us upward, in order to maintain some confidence?

I think the right time to talk about reality is now, because most people have already lost confidence in an oncoming recovery.

There is little real confidence to protect.

Obama should address the nation, from the oval office, and explain exactly where we are, using such economic history as Rogoff and Reinhart on the normal outcome of financial crises. He should explain what happens in every nation consistently when a credit or asset (housing) bubble inflates then collapses.

He needs to lay out this knowledge clearly to the American people, so that we can start to talk about the way things actually are, and not be caught any longer in illusions.

It would help greatly to talk in ways that cut through the jargon and create understanding -- he should explain to Americans the savings conundrum and why is it necessary for the government to reinvest the excess private savings to prevent a continuing downward spiral. He should talk of investing in America for our future, until economic growth picks up strongly enough to significantly raise the demand of businesses for new loans as shown by natural interest rates.

President Obama should explain how we can increase future productivity and economic growth by investing to produce a stronger economy 2, 3 and 10 years from now.

Obama needs to lay out for the American people a road out of depression.

Of course, he needs to use language more along the lines: "Reinvesting in our future to restore the growth and optimism America has known since the huge investments of the 1940s, 50s and 60s."

This is a key point -- that the tremendous prosperity America has known has been the result of massive federal investments in the 1940s, 1950s, and 1960s.

That's reality, and not enough Americans know it.

We need to cancel the distortion field by talking about reality.

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