The PBS network aired an interview with noted economist Dr. Ken Rogoff that discussed the current and future state of the global economy and financial system. I remember when this crisis began that people said America will do the right thing, quickly. They know what needs to be done. It won't be allowed to fester and extend over decades ala Japan. Well so far, the "taking of the bull by its horns" is still in waiting. A trillion here, and a trillion there is not what is needed. An additional 2 trillion (all at once) is what is needed. Or so goes the interview with Rogoff.There are others in the world of Ameristar economists including Nourbini and Krugman. It has been said that Rogoff has the most credibility. A Harvard professor, former teen/college professional chess player, former Chief Economist with the IMF and one of cum laude spokespersons on where we are headed. The "mammoth" problems with the banking system are manageable. But the financial system has imploded. As so-called unusual this current circumstance might be, his research has shown this to be a "typical super deep financial crisis". In four years, 2011 will equal 2007, unemployment will reach 11-12% (I thought by some measure it already was?), and housing and equities will still tank for another two years. In 4-5 years we will be over this mess. But remember, no growth is not the end of the world, it is only the end of our overinflated debt driven life of the last 10+ years. This will be very tough for the young people. Economic and financial system changes are in progress. They will continue for several years. Social change will also be likely. Maybe that will be the story of 2010. There will be more angry people are at the door before this is done.
There have been good global discussions, between India, China, and Europe. But Dr. Rogoff fears that there is not the "readiness" to do what needs to be done. The US made their rules and walked forward - and they "messed up". Hard rules now will not open the path forward. Capital is needed and wanted. Does that mean "international rules" are in order? Whatever it is it has to be based on transparency. We need a new framework 30 - 40X leverage does not work. Complicated instruments that had no legal clarity, and were traded endlessly are destructive. Such a new framework will not be borne in haste.
But it is not all bad. The fixing will take time. It will be a long and painful path. Country risk is real. Ireland, Hungry, Italy. 3-5X National GDP. This is not sustainable in any form. The response needs to be decisive. This is what has been said now for many many months. The depth of commitment needs to match the depth of the problem. What that means is that there will be ANOTHER 8-9Trillion of debt - that is "normal" for these types of crises. As the clock ticks away - the bill will be mounting. There will be more bad banks. There will HAVE to be some sort of bankruptcy for the large institutional banks. The toxic assets will HAVE to be dealt with. There is no wishing this away. Whatever gets done it is highly likely that it will make things worse for a while. It will be very painful but we have to face the music sooner than later.
Dr. Rogoff spoke of a rethinking of values, a forced rethinking. I wrote in October 2008 about parallels in the natural world and our global financial world (Tranistions of different kinds). That rethinking has not happened.
Dr. Rogoff's personal opinion is that the US will inflate it away. That is the time honoured solution. He emphasises not to misunderstand him, this is NOT normal times, but we do not want to replicate the German hyperinflation of Post WWII. He thinks maybe a 7o's style inflation. As necessary as that might be - it is a VERY sad illustration of our political system - so I ask - maybe its the political system that needs the overhaul. And the financial system will follow.
Previewing the Superpower Summit (2009-03-13)The world's economic superpowers are preparing to meet--will they devise a fix for the financial mess?
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