Wednesday, March 25, 2009

Bad News

We're having some spotty good news on the economic front these days. That happened at the start of the Great Depression as well. One thing I think we can be sure of is that there are rough times ahead - and it annoys me no end that there isn't enough discussion of what's coming and how we're going to deal with it. In particular:

- There will be a series of more shocks to the system. The most likely causes are the collapse of a number of countries' economies - Estonia, Latvia, Lithuania, Hungary, and several others that are teetering at the moment. Each would cause a big negative shock around Europe, resulting in more loan defaults and more collapses in the financial system. This thing is like a wildfire that isn't completely extinguished, and keeps flaring up. If bad enough, who knows what countries will go down - major European economies may be at risk. There will be other sorts of shock as well: more US mortgage defaults, more large corporate collapses, who knows what else.
- Obama's attempt to bail out the US financial system is not going to work. He's spending a ton of money, but his plan is bad. At some point he's going to have to adopt a new approach, but by then hundreds of billions will be squandered, limiting future options. It will take a long time for the US financial sector to rebuild.
- Obama's attempt to stimulate the US economy is not going to be very effective. There is simply too much delay until the stimulus hits the street, and in the meantime the economy will plummet; unemployment will soar; companies will fail. The US congress, lacking good leadership or strong resolve, will continue to react to citizen anger with populist pandering rather than create good economic plans.
- The repercussions from the problems to date will play out throughout the system. Stimulus programs and bailouts have greatly increased debt, and paying that off will dampen economic activity for years to come. Municipal, provincial and federal tax revenue will fall; grants will plummet; arts and charitable organizations will fold up... there will be all sorts of cutbacks that will drag down economic recovery.
- As we emerge from the recession, we will likely be hit by inflation and high interest rates.

I like Obama, and I think he's making a really good effort. But why would anyone think that a young academic with two years experience at the federal level could handle the biggest economic crisis in 80 years? Sure he's doing a better job than the Texas playboy did or that the old man could have done, but that will be cold comfort in the dark days ahead.

In the meantime, you'd think the media, public and government would have learned from our failure to see the developing crisis last year. After railing that we should have seen it coming, everyone has apparently put back on their blindfolds.


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