[Toshi]

http://growth.newamerica.net/sites/newamerica.net/files/policydocs/NAF-The_Way_Forward-Alpert_Hockett_Roubini_0.pdf

Good excerpt to start, with more below:

[This] is not an ordinary business cycle downturn. Two features render the present slump much more formidable than that – and much more recalcitrant in the face of traditional policy measures.

First, the present slump is a balance-sheet Lesser Depression or Great Recession of nearly unprecedented magnitude, occasioned by our worst credit-fueled asset price bubble and burst since the late 1920s. Hence, like the crisis that unfolded throughout the 1930s, the one we are now living through wreaks all the destruction typically wrought by a Fisher-style debt-deflation. In this case, that means that millions of Americans who took out mortgages over the past 10 to 15 years, or who borrowed against the inflated values of their homes, are now left with a massive debt overhang that will weigh down on consumption for many years to come. And this in turn means that the banks and financial institutions that hold this debt are exposed to indefinitely protracted concerns about capitalization in the face of rising default rates and falling asset values.

But there is more. Our present crisis is more formidable even than would be a debt-deflation alone, hard as the latter would be. For the second key characteristic of our present plight is that it is the culmination of troubling trends that have been in the making for more than two decades. In effect, it is the upshot of two profoundly important but seemingly unnoticed structural developments in the world economy.

 

[Toshi]

On the illusory sense of wealth:

In effect, these policies [by the Fed and the Bank of Japan of easy monetary policy and an expansion of credit] amounted to a totally impractical 'supply-side Keynesianism' that led to ever more borrowing meant to compensate for dwindling consumer demand no longer supported by real wages and incomes.

Same topic, different facet:

During the Great Credit Bubble of 2001-2009, real median incomes fell, on both an average annual basis and in the aggregate.

Translation: this past decade of apparent prosperity under GWB was a total illusion, with all of the "gains" and then some fueled by credit, not by true growth.

 

[Toshi]

On the bind we have created by a consumer-demand-dependent economy, high debt burdens and excess capacity:

In a globalized economy with excess capacity and ongoing private sector de-levering, diffuse, as distinguished from concentrated, demand stimulation through tax cuts and income supports can have only limited effect. For indirect fiscal stimulus of this kind is either rationally hoarded in significant part by the individuals who receive it, or goes to pay down their overhanging debt, or leaks out of the economy to buy yet more cheap imports.

Why the US can't weaken our currency sufficiently to get ourselves out of this trap:

In a “normal” debt deflation, debtor economies that must de-lever can substitute external demand for reduced domestic demand. Trade adjustment is aided by a fall in that economy’s currency relative to that of its main trading partners. This is how Sweden and Canada successfully worked off their credit bubbles and debt burdens in the 1990s. But this option is not available to the United States at this time for several reasons. One is that Europe and the United States can’t both pursue trade adjustment simultaneously, and the Euro-zone seems poised to win the battle for the weaker currency. Another is that the United States is locked into a de facto “dollar zone” with China by virtue of China’s continuing policy of pegging the yuan to the dollar. Since the London meeting of the G-20 in April 2009, Beijing has not allowed its currency to appreciate against a basket of currencies, leaving it still undervalued by 25 percent according to some estimates. Finally, there is the reality that while demand is growing in the BRICs and other emerging economies, these economies are not yet anywhere near sufficient contributors to global aggregate demand as to put the United States into actual trade surplus, especially when we factor-in the large surpluses of the petro-dollar economies.

 

[Toshi]

Attention, Ron Paul acolytes: Fiscal austerity is a bad idea. Here's why:

Under existing conditions of weak global demand, austerity would simply lead to a vicious circle of yet weaker demand, weaker investment, more unemployment, and still weaker demand, ad infinitum – the familiar “downward spiral” of all “great” depressions wrought by the “paradox of thrift.” This is especially true if austerity is pursued simultaneously in Europe and the United States, as now is in real danger of happening owing to European measures that are just as wrong-headed as now-voguish American ones.

Attention, Obama-philes: Your preferred plan is also bunk.

[A Grand Bargain of short--term stimulus combined with long--term fiscal consolidation] has emerged as the responsible centrist position in policy and media circles in DC – it is, in fact, the essence of the President Obama’s recent proposal (see below). On the face of it, it seems eminently sensible but again it does not fit economic realities. The main problem with this proposal is that the short-term stimulus envisioned by those pushing the idea looks much too much like the three previous stimulus efforts but smaller. It is too temporary, too focused on short-term tax relief and consumer support, and too misdirected to provide the economy more than a modest and temporary boost, as opposed to the bridge to long-term restructuring and recovery that the U.S. economy requires.

This, again, is a solution designed for a typical business cycle downturn. But as we have shown we are facing a much more serious challenge of a multi-year de-levering process. In keeping with the analysis of other de-levering studies, we estimate that it will take at least another five to seven years for households to repair their balance sheets, for unemployment and underemployment to return to normal levels, and for balance to be restored in global demand and supply given the problems we see in Europe and given the length of times it takes for emerging markets to develop domestic demand.

 

[Toshi]

So how do we solve this mess? Here's what they suggest, in a nutshell:

Rather than lurch from one futile ministimulus and quantitative easing to another, we must build consensus around a five-to-seven-year plan that matches the likely duration of the de-levering with which we now live, as well as that of the time it will take for emerging markets to transition to patterns of economic growth driven by domestic demand rather than exports. We believe there are three basic criteria that should guide the construction of such a longer duration recovery program.

The three criteria are then outlined to be concentrated demand, debt-overhand reduction, and global rebalancing.

The first includes "intrastructure investment, development of America's abundant energy sources, and new technological development."

The second "will require creditors to recognize losses and recapitalize" through "debt restructuring, refinancing, and in some cases relief."

The third involves addressing the "warped financial architecture that mis-priced risk and channeled excess savings into housing and other non-productive investments", the global imbalances between export-heavy and consumer-driven nations, the labor-capital imbalances that have led to weak wage growth, and quelling the hemorrhage of dollars to Middle Eastern oil sheiks, in as many words.

 

[Toshi]

I think they hit upon an important point regarding the different roles of corporations and governments, after touching upon the incredibly cheap cost of capital and abundance of labor that are secondary to this very recession:

Governments are the only entities that can abstract economic utility from the present capital glut. Governments are not subject to the imperative to generate equity returns since they are not profit-generators. But they can create value by using this excess capital to make investments in the economic future that will redound to everyone’s benefit.

Finally they outline their plan to meet the above criteria in much more detail for the curious. (Need I state the obvious, that their eminently rational policy proposals will likely never see the light of day in Congress, let alone make their way to the President's desk for a signature?)

 

[stoney]

So how do we solve this mess? Here's what they suggest, in a nutshell:



The three criteria are then outlined to be concentrated demand, debt-overhand reduction, and global rebalancing.

The first includes "intrastructure investment, development of America's abundant energy sources, and new technological development."

The second "will require creditors to recognize losses and recapitalize" through "debt restructuring, refinancing, and in some cases relief."

The third involves addressing the "warped financial architecture that mis-priced risk and channeled excess savings into housing and other non-productive investments", the global imbalances between export-heavy and consumer-driven nations, the labor-capital imbalances that have led to weak wage growth, and quelling the hemorrhage of dollars to Middle Eastern oil sheiks, in as many words.

So what you're saying is that we need to totally change the structure of our oligarchy? Yeah, that's going to happen. I'm going to go ahead and put my long-term shorts into play.

 

[stevew]

where do we drill first?

 

[stoney]

where do we drill first?

Wyoming and the Dakotas are doing a damn good job already.

 

[Toshi]

So what you're saying is that we need to totally change the structure of our oligarchy? Yeah, that's going to happen. I'm going to go ahead and put my long-term shorts into play.

Sadly I agree with you that the structure isn't going to change.

I can only hope that inflation is the path out of this. As the authors point out in their paper, it's a) hard to accomplish when up against the zero bound already; b) unequal in its effects, causing more of a rise in commodity prices than a generalized rise; and c) benefits debtors almost exclusively. A is not my problem since I'm not a policy-maker. B fits with my $20/gal gas theory. C describes me to a T. Remind me to not pay back my mortgage-worth of 4.25% student loans any quicker than I'm mandated to...

More seriously, though, I just hope we don't have a Japan-style decade or two of stagflation. That won't make my loans any smaller, relatively speaking, and will generally suck for the rest of the nation.