No Time for Certainty

10/03/2011 10:53 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

There’s no perfect precedent or answer to our woes, and it’s time we stopped pretending otherwise, writes senior editor Igor Greenwald.

We live in miserable and fractious times. The economy is in its worst predicament since the Great Depression, and there is no consensus on the way forward.

Congress is stalemated by the inability of the major parties to agree on the color of the sky, much less a coherent economic policy. The Federal Reserve is more polarized than ever as well, reliant on a two-vote majority to administer leftover medicine that no one’s mistaking for a cure.

And the split within the Fed merely mirrors the spreading divisions among the rest of the dismal scientists, as well as voters. Some of us believe the real problem is lack of demand, as individual attempts to pay down debt snowball into persistent sales shortfalls and ultimately into more debt via the paradox of thrift.

Others see salvation in austerity, and refuse to accept that you can ever solve a debt crisis with “more debt,” even if the “more” merely offsets higher private savings.

With the economy teetering on the brink of a new recession, the divide has only grown wider as new and more radical solutions are proposed. Keynesians like Paul Krugman of The New York Times and Martin Wolf of the Financial Times now argue that the Fed should monetize debt, buying up government bonds so that government can increase spending.

Meanwhile, hard-money fans like Dallas Fed President Richard Fisher and Congressional Republicans retort that even the limited easing the Fed is now pursuing will be counterproductive, clamoring instead for more deregulation.

Frustration is now driving each side to demonize the other. Keynesians see the laissez-faire “Austrians” as apologists for the moneyed class, unwilling to help the millions of unemployed lest vast fortunes lose some of their value.

The right retorts that further money-printing will stoke inflation most harmful to the poor and the middle class, to the benefit of an entrenched bureaucracy in Washington.

I wouldn’t want to take this even-handedness too far: I’m squarely with the Keynesians, because there’s ample evidence that austerity is only aggravating our problems.

But it’s also true that there is no economic remedy that will help everyone equally.

It was hard enough to divvy up the economic pie when it was growing. (During the latter stages of that growth, the very rich garnered the bulk of the income gains, while most of the rest kept up as best they could by taking on more debt.)

Now that the pie is shrinking (when adjusted for inflation and population growth) someone’s ox is sure to get gored no matter what, assuming anything at all is done. It’s time for everyone to acknowledge that and move on. There are no perfectly fair solutions out there.

It would also be helpful if everyone stopped displaying such unconvincing certainty in the middle of an unprecedented crisis. Comparisons to the 1930s will only take us so far. There’s about as much chance that we’ll end with hyperinflation as there is of Nazis coming to power should austerity drag out the depression.

Extremism and dispossession are real risks. But the world has changed enough in the last 75 years that our bad outcomes will not be cribbed wholesale from the History Channel.

I’m with those who argue that we need to print and spend money on a heroic scale to deal with what Fed Chairman Ben Bernanke has just called the “national crisis” of unemployment, because the longer it lasts, the greater the long-term damage to the economy.

But Bernanke and his supporters need to do a much better job of explaining why those wouldn’t cause inflation to soar, and how they would prevent that possibility while making sure the recovery really takes root. It’s a delicate balance, and saying “No problem, we’ve got it” isn’t enough.

It’s time to more honestly acknowledge and address the risks harped on by the likes of Fisher and Paul Volcker, because otherwise this policy will never marshal popular support.

On the flip side, it’s high time to admit that hiring is being held back by the lack of demand, rather than excessive red tape. And if austerity is really the answer, its advocates need to explain why it’s working out the way it is in Greece and the UK, and why the US will be any different.

Right now, each side of the argument is preaching to its own choir and failing to take the other’s concerns seriously. Perhaps the gulf is simply too wide to overcome; perhaps narrow majority rule is the best that can be hoped for under the circumstances.

But we’ll never know until we try. And even if no minds get changed, a genuine engagement with the concerns of political foes beats the alternative of enmity.

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on MARKETS

Keyword Image
2 Ways to Bet on BDCs
2 hours ago

Business development companies (BDCs) lend money to private companies in the form of fixed and varia...