The specter of $1 trillion budget deficits may be vociferously opposed by Republicans and other economic conservatives, but Wolf, in so many words, says what other choice does the United States have? What would be the alternative? Simultaneously raising taxes now to lower the deficit? Hardly prudent. Doing nothing? Another dreadful idea. So, it's prime the pump, or sit there at the well and await nothing.
Up ahead: two bigger tasks
What's more, Wolf sees two additional tasks (structural changes) that are just as important to the goal of U.S. economic recovery -- but that may be even harder to implement: removing toxic assets from the banking system and reducing the U.S.'s structural current account deficit (the trade deficit).
The first is the forced write-off of bad assets, fiscal recapitalization of the banks, or debt-for-equity tactic, and it should be done comprehensively and quickly. Slow, gradual bad-debt reduction is not the correct policy, Wolf argues, as it would delay the economic recovery.
Second, the U.S. must reduce its trade deficit, Wolf argues, and the reasoning here is overt and obvious enough: the U.S. can not afford to see demand float overseas (as it did throughout this decade), but needs that commercial activity to remain at home.
Economist Richard Felson agrees with Wolf, except regarding the pace of bank/financial institution removal of toxic assets. "Toxic asset write-downs need not be as quick as Wolf suggests because U.S. real estate prices, although they were high and in a bubble, were not as high relative to GDP as, for example, Japan's during its bubble." The toxic asset write-offs (or capital infusions by the government), should not take 10 years, in Felson's view, but they should not be done in a year, either.
Fiscal Policy/Economic Analysis: To be sure, investors should not expect a return to giddy growth when the U.S. economic expansion resumes. Still, a large fiscal stimulus package (and probably another in 2010), plus toxic asset removal and a lower trade deficit puts recovery in sight. Fiscal Stimulus Package I is on its way, the TARP and/or additional Fed quantitative easing will speed toxic asset removal (or bank recapitalization), and an innovative energy policy will cut the trade deficit by reducing oil imports. Further, the latter illustrates yet another economic benefit of vehicle fuel efficiency and reducing foreign oil consumption.
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Reader Comments (Page 1 of 1)
1-14-2009 @ 6:05PM
Mike said...
This defect hawk has circled the fields for the past eight years, and has now returned to the nest now that Obama has taken charge. Obama's going to double-down on what Bush did wrong, and Larrazo criticized Bush hard for his defects. Now when a Democrat does it he's glowing.
All of this money is being borrowed, we don't have any of it. The laws of math don't really add up here. Ultimately we'll have to repay more than we borrow. Get ready for 70% of our income going to the Federal Government, it's coming...
1-14-2009 @ 9:22PM
Michael Caravella said...
We're screwed. All one can do is just conserve there income and hope for the best. Obama can't fix the problem he can only put us on the right track to recovery, time will tell I suppose.