Martin Wolf: If the U.S. dares to succeed, it will

Posted Feb 9th 2009 5:20PM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Recession, Financial Crisis

Financial Times columnist Martin Wolf reminds investors that, contrary to some views expressed in the United States, depressions are neither good for us, nor unavoidable.

Further, despite the recent year's many reverberations, the United States remains, Wolf argues (and the U.S. Central Intelligence Agency agrees), the world's preeminent economy in the global economic system it has created and promoted. Moreover, U.S. policy errors had much to do with the current crisis, even if aided by policy errors abroad. By extension, the healing and recovery starts in the U.S. -- with America as the leader of determined, globally-coordinated action.

Wolf suggests the following:

Focus all attention now on reversing the collapse in demand. Comment: Absolutely. The recession is demand-based: policies that increase demand will hasten the economy's recovery.

Hit the demand problem with size. Comment: Valid. Most economists agree, the large decline in output and asset values requires a large fiscal stimulus package (larger than $1 trillion) and extended quantitative easing.

Implement credible fiscal and monetary policies. Comment: Absolutely.The U.S. must live within its means, save, and invest.

Act in union with your allies. Comment: With the start of the Obama administration, the U.S.'s era of offending/neglecting its allies is over. (Hopefully for good.)

Avoid protectionism, and strengthen international institutions to help the weaker. Comment: If there's one thing that would undermine all of the efforts to revive international trade, it is protectionism.

How is the U.S. doing so far, in Wolf's view? Better than in the 1930s, is about all we can say at this juncture, he said. The fiscal stimulus is too small, and not focused enough, and decisive action is needed to recapitalize banks, which should include temporary, public control of insolvent banks. Hence, President Obama and United States must act decisively, in union with allies, and in the case of fiscal stimulus, with size, Wolf argues. And if the U.S. dares to succeed, it will.

Economic Analysis: Timidity is not the friend of economic recovery. And neither is orthodox conformity to ideology, in both Democratic Party and Republican Party power centers. The nation will need both fiscal stimulus and a more-rigorous mortgage application evaluation process to end the recession and to prevent a recurrence of the foreclosure flood. But as Wolf points out, if the U.S. dares to succeed, it will.

Tags: bank bailout, fiscal policy, gdp, Martin Wolf, Obama administration, quantitative easing, TARP, U.S. economy