Globalization

Still Not An Optimist

David Roche in the FT tomorrow:

When Volker walked into the Fed 30 years ago, the US national savings rate had been relatively static for decades at around 20 per cent of GDP and total US debt to GDP was about 160 per cent. Household debt was 47 per cent of national income. When the credit bubble burst in August 2007, the national savings ratio had fallen to 14 per cent of GDP and debt had risen to 350 per cent with household debt at just under 100 per cent of GDP. Even today, household debt in the US, although now contracting, still exceeds the level at the beginning of this crisis.

The disinflationary forces that drove the switch from thrift to leverage are over. This means the next decade will be one of replacing leverage with thrift. That will hurt retail spending.

The latest increase in the savings rate may be a positive trend in itself. But so far it has only been possible because of the Obama stimulus package. That has accounted for all the 5 per cent growth in household income so far this year. All that has happened is the consumer has saved and not spent the fiscal handouts financed by the Obama debt splurge. From now on, the impact of the stimulus measures will slowly wane and that means any rise in household savings will hit consumption directly.

This will set off feedback loops between the real economy and financial one, in the opposite direction to that we have been experiencing. It will cause consumer incomes and employment to deteriorate, along with the real economy, giving rise to increased defaults on consumer credit, commercial real estate and other loans, as well as, of course, housing mortgages. The default ratio on prime mortgages is already well above the US treasury’s stress test limit set for the banks. And the default rates on consumer debt, including credits, are rising very fast. The credit crisis hit to banks’ balance sheets is far from over.

I am still not yet on the economist optimist's bandwagon.  At the core of so much now is understanding how weak this decade was for the average consumer in America before the Great Recession kicked in.

Next Generation Thinking about the Mortgage Mess

In a post a few weeks ago I argued that policymakers were going to have to attack our core economic challenges we face with much more creativity and vigor than we have seen so far.   The Times today has an excellent op-ed by Daniel Alpert which offers up some such next generation thinking about how to get out of the mortgage mess - a critical part of any emerging national economic strategy - equal in size and scope to the problem itself.   

It begins: 

BY providing financial institutions with enough capital to survive (and even thrive) over the past year, the federal government prevented the global economy from grinding to a halt. But it may also have unwittingly encouraged banks to slow the resolution of delinquent, defaulted and underwater loans secured by homes and commercial real estate. Such “extend and pretend” behavior does little except delay losses — which helps explain the recent crop of prediction-beating, market-rallying bank earnings reports — while prolonging and worsening the damage done by bad loans.

Just this week, the White House met with a gaggle of mortgage company executives to discuss why their loan modification programs have been so ineffective. In fact, a recent study by the National Bureau of Economic Research illustrates that these programs haven’t been ineffective so much as unused: only 8 percent of seriously delinquent borrowers have received any form of mortgage modification and fewer than 3 percent of such borrowers received a concession on principal or interest payments from their lender. By contrast, about 50 percent of those seriously delinquent loans had foreclosure proceedings initiated against them. That’s a record rate of 1.9 million foreclosure filings in the first half of this year.

Banks, of course, typically lose more money by foreclosing on a home than by renegotiating the principal of a loan — but, as foreclosure timelines often run 12 to 18 months, that loss takes far longer to show up on their balance sheets. As a result, banks are pushing the mess (and the attendant additional losses) well into 2010 while they maintain the fiction that borrowers will be able to repay severely underwater loans in full. Banks are even beginning to turn down borrower requests for immediate “short sales,” in which homeowners sell for whatever they can get and then give all proceeds to the lender, because this, too, means that the bank must record a principal loss at once, rather than down the road.

The sheer magnitude of the debt bubble — doubling to $11 trillion in home loans and adding tens of trillions in total American debt in the past decade — along with the collapse of real estate prices, make it extremely unlikely that any of these houses will recover their value soon enough to mitigate the losses embedded in banks’ balance sheets. And by stretching out the time over which banks will continue to have their capitalization hit by losses, banks cannot soon fulfill their mission of providing new capital for the recovery and growth of the economy. Fearing for their own solvency, banks are instead salting away enormous, record-setting reserves.

To put the bubble behind us, we need to place mortgage lenders on a path to settling up with underwater homeowners. One of the few viable ways to do this is for banks to accept the voluntary surrender of deeds and then lease the homes back to their former owners. The former homeowners should then retain a right to purchase their homes back at fair market value, after, say, five years, during which time they would need to get their financial affairs in order.

Congress could pass legislation, within the bounds of constitutional protection of contracts, that would require lenders to provide such a lease-back arrangement to any borrower who wants one. The former homeowners would pay rents set in accordance with local rates (which in almost all cases would be considerably lower than the total of their former bubble-era mortgage payments, taxes and insurance premiums).

Count me as one of those who believe that for the national to see broad-based prosperity in the years ahead the banks will have to take some kind of "haircut" on consumer debt. Restructuring, deleveraging, or whatever we are going to call the process of lessening the debt load of consumers will at some point become seen as a requirement for the future success of the American economy and not some malevolent form of "moral hazard."  Until American consumers can get back in the economic game "recovery" will be more wish than reality. 

For Demos and Open Left: Meeting the Challenges of the 21st Century

Demos, a London-based think tank, asked me to contribute a short essay on what it means to be on the center-left today.  It is one of a series of essays running as a part of a new Demos project called Open Left.  You can find the essay, Meeting the Challenges of the 21st Century, and other interesting essays here.  I've also posted it below.  Feedback, as always, is welcome.

I’m on the left because only the progressive moments in our history, and the progressive leaders who forge them, ensure that prosperity is shared more broadly and our country more prepared to face the future. The last century has seen an ebb and flow between right and left. In America we’ve had three broad periods. The first ran between the two Roosevelts: a battle to lock-down a new reform-minded politics born in the aftermath of economic upheaval in the “progressive era.” It was eventually captured by the Democrats. The second went from FDR to Reagan: an era of Democratic consolidation, which built America’s (still unfinished) social contract. The third began in 1980: a conservative ascendancy that saw its greatest triumphs in 1994 and 2004.

It’s worth remembering that until 2007 the conservative movement had achieved more political and ideological control over my country than at any time since the 1920s. Under President Obama that moment is passing, we hope for good – although battles, such as those being fought over the economy, healthcare, climate changes and immigration as I write, must be won to truly turn back the two-decade march. But the most important question from America’s recent past was – would conservatism mature to provide a credible alternative governing philosophy to replace 20th century progressivism? The Bush era answered that question. The answer is no. It is a lesson that the United Kingdom should learn carefully, as it toys with returning a once-discredited party of the right to political office.

But this next progressive era will not be dominated by the two-tired conservative and liberal ideologies of the past. So it falls to the progressive side to build a reinvented governing agenda capable of tackling the challenges of our time, and new political arrangements built around the capabilities of our fast-changing economy, media and people. Three challenges standout; three that are quite different from those we faced even a few decades ago when Bill Clinton and Tony Blair rethought what it meant to be on the centre-left.

Just as FDR tamed America’s industrial society, so now we must make the transition to a low carbon society-a societal transformation which if anything has been understated by our leaders. Everything from how we build and drive to how we power our mobile devices must change. This transformation will requires a great deal of money, innovations yet unimagined, and a public ready and willing not just to follow but to lead. It also needs a strong moral vision, and a role for the state unsuited to conservativism. And while the proposals offered by Ed Miliband and the Brown government this month are a good start, managing this transformation over the next three decades will make or break political careers and parties. Getting this right is a prerequisite for center-left success in the 21st century.

Second, we must re-imagine politics and government for an age when we are all connected. At some point in the next ten years just about everyone in the world will become knitted together through mobile devices and online. All that we know – communications, commerce, learning, socialising, politics, governing, even the concept of free and open societies themselves-will be changed by this powerful and ever more ubiquitous network. Harnessing the promise of this new age of mobile, and the radical democratization of information, knowledge and power it offers will be one of our the great projects of the center-left in the years to come.

Finally, we must come to terms with “the rise of the rest” as Fareed Zakaria has defined the emergent geopolitical reality of our day, this inexorable trend of developing nations like China, India, Mexico and Brazil taking their seat at the global table. In the years ahead these countries will surely produce Chinese Microsofts and Indian Nokias. Their economic maturation will mean that our countries will compete with both their inexpensive workers and a whole new set of globally competitive corporations, further intensifying already virulent global competition for our businesses, workers and students. Producing rising standards of living in the West will require much more investment in infrastructure, knowledge, skills and schools, and our people’s full partnership in understanding that success will require us to do more, to raise our game, or risk being left behind.

This “rise of the rest” will also require a remaking of the global institutions of governance and power. We have seen this process play out this year as the G20 begins to replace the G8, and the debate over how to remake the International Money Fund has begun in earnest. With only about 15 percent of the world’s people today of European descent, the ability for the governments of the West to be the primary managers of global affairs is coming to an end, a process that will not be easy for our governments to manage, or perhaps our people to accept.

The challenges in front of the center-left political parties of the West today are extraordinary, the greatest we have faced since the rise of European fascism seventy years ago. Today, as in the past, only a progressive vision is fit to meet them. Facing them forthrightly, and showing the courage to tackle them head-on will be perhaps the greatest test of them all.

Coming To Terms With the Deteriorating Economy

Having worked in Washington for 16 years now, I've learned a bit about how an idea moves from the periphery of the debate here to its center.  And this week you could feel that happen for the rising concern about our economy.  Despite the President's emphasis on health care and climate change of late, there is a new and growing sense of urgency here about the worsening economy and whether the government's response so far has been adequate or effective.  

Unemployment in Michigan is over 15 percent now, and the US unemployment rate is now higher than the EU's.  In a Senate hearing on Thursday Chris Dodd publically criticized the President's mortgage foreclosure plan as not having delivered on its promise.  A new study finds dramatic drops in state government revenues, which foreshadow both what will happen at the federal level later this year and significant troubles again with state governments themselves.   While there was what appeared to be good news with the financial sector, a deeper analysis predicts significant troubles ahead even for banks who showed profits in the 2nd quarter.   Twice as many banks have failed this year already as failed in all of 2007 and 2008 combined.   Many friends of ours have talked in alarming terms about what is likely to happen to the commercial real estate market later this year, a coming crisis which could also devastate local and regional banks who have escaped the worst of the financial crisis so far.  Add to that what could our first national flu pandemic in a generation, which if it is virulent as some predict, could slow economic activity and productivity even further.

The President is clearly paying attention to all this, and has begun to address these growing concerns head on.  Last Saturday he devoted his weekly address to the economy.  On Sunday he offered up a thoughtful op-ed on the economy in the Washington Post.  On Tuesday the President proposed a compelling new community college plan which spoke directly to the struggle of existing American workers.   On Friday NEC chief Larry Summers gave a speech reviewing the Administration's economic progress so far, and where it hopes to go in the months ahead.   And next Wednesday night the President will hold a prime time press conference where one can be certain he will address the growing concerns about the economy to a national audience.  

As he prepares for his remarks next Wednesday, he would be wise to heed the warning from a new letter offered up by 21 freshman Democratic House members this week.  The NYTimes provides this summary

Representative Jared Polis, a freshman Democrat from Colorado who voted against the bill approved Friday in the Education and Labor Committee, said he worried that the new taxes “could cost jobs in a recession.”

To help finance coverage of the uninsured, the House bill would impose a surtax on high-income people and a payroll tax — as much as 8 percent of wages — on employers who do not provide health insurance to workers.

Mr. Polis said these taxes, combined with the scheduled increase in tax rates resulting from the expiration of Bush-era tax cuts, would have a perverse effect. “Some successful family-owned businesses would be taxed at higher rates than multinational corporations,” he said.

In a letter to the House speaker, Nancy Pelosi, Mr. Polis and 20 other freshman Democrats said they were “extremely concerned that the proposed method of paying for health care reform will negatively impact small businesses, the backbone of the American economy.”

There have been calls from some quarters for a 2nd stimulus plan, an acknowledgement that what the first stimulus has not done enough to stop the current economic deterioration.  This may be necessary, but I think what will need to be done is much more comprehensive than just a new stimulus plan.  Future action could include a much more aggressive action against foreclosures, a more honest assessment of the health of our financial sector, an immediate capping of credit card rates and a rollback of actions taken by credit card issuers in the last few months, a speeding up of the 2010 stimulus spending, a completion of the Doha trade round and a much more aggressive G20 effort to produce a more successful global approach to the global recession, the quick passage of the President's community college proposal, enacting comprehensive immigration reform which will bring new revenues into the federal and state governments while removing some of the downward pressure on wages at the low end of the workforce, and recasting both the President's climate and health care initiatives as efforts which will help stop our downward slide and create future growth.

The worsening economy has become the nation's number one problem.   We will need a new language to talk about it, moving beyond the words stimulus and recovery which no longer seem to speak to the gravity of the economic moment we are in.  This is the most important work in front of the government now, and I look forward to hearing the President on Wednesday night about his plans for the remainder of the year.

For more on this be sure to read this excellent Thursday essay from Rob Shapiro.

And Doha too

Over the past few days the Obama Administration has begun a new effort to re-engage on what is the most important subject for the American people today, the economy.  This is a welcome development from where we sit, and have been pleased at both the language and proposals coming from the White House.  As the President gears up for a sustained discussion on the economy, two issues will need to be woven into his evolving narrative - the role of both immigration and global trade flows in creating broad-based prosperity here at home and a more prosperous and safer world aboard.

We've written extensively on how immigration reform should be better woven into the core Obama economic argument (see here for a recent video presentation of our argument).  The NYTimes this weekend did a very good job at reminding us of the opportunity the nearly completed Doha trade round offers the President to reassert America's role as the main advocate for a global economic liberalization, and why it also matters to American workers here at home.  A quick excerpt:

There are few things that could do more damage to the already battered global economy than an old-fashioned trade war. So we have been increasingly worried by the protectionist rhetoric and policies being espoused by politicians across the globe and in this country.

Against this bleak backdrop, it is especially good news that the world’s leading developed and developing nations have committed to complete a stalled global trade agreement (the so-called Doha Round) by next year. For that to happen, leaders — especially in the United States, Europe, India, China and Brazil — are going to have to muster real sense and political courage.

The World Trade Organization forecasts that exports from developed countries will fall 14 percent this year, while exports from developing nations will contract 7 percent. The collapse is particularly damaging for poor countries that are heavily dependent on exports. But it is also intensifying the downturn in many rich countries. Reviving trade is essential for economic recovery.

The talks, begun in Doha, Qatar, in 2001, had long been in limbo. They broke down last year after big developing countries — China and India, in particular — rejected demands from the wealthy nations that they lower tariffs on imports of agricultural and manufactured goods and open service sectors to more competition.

But there are signs that the collapse in trade and the rising protectionist rhetoric have awoken many leaders to the advantages of strong international rules to keep trade channels open. This is particularly true of China, which has suddenly found its exports on the receiving end of tariff increases and antidumping suits.

There is no guarantee that a deal can be pulled off. President Obama will have to provide lots of leadership to convince developing countries to make serious offers on market access, and to convince reluctant members of the United States Congress — notably those within his own party — that they will have to make concessions, too.

Obama Refocuses on the Economy

Even while he was abroad this week the President started a new and important message track, once again putting the focus on where it needs to be right now - on the economy itself and the increasingly difficult struggle of every day people.   His weekly address spoke to it yesterday, and today the President offered up an economically focused op-ed in the Washington Post, Rebuilding Something Better.  

I offered my thoughts on the need for the President to more forthrightly engage the economy in this recent essay, Not Taking the Presidential Eye of the Economic Ball.  And of particular interest to NDNers today is the new emphasis the President puts on our nation's community colleges as a key part of a 21st century economic strategy.  This spring NDN was proud to partner with Rep. John Larson in offering a bill, HR 2060, which would do just that.

Barack Talks the Economy in His Weekly Address

You can find the text itself here, and be sure to read this recent essay I offered on the challenges of the current economic moment, Not Taking the Presidential Eye Off the Economic Ball.   You can find more of our recent economic work here.

Kristof: "Tear Down This Cyberwall!"

From Nick Kristof's NYTimes column today:

The unrest unfolding in Iran is the quintessential 21st-century conflict. On one side are government thugs firing bullets. On the other side are young protesters firing “tweets.”

The protesters’ arsenal, such as those tweets on Twitter.com, depends on the Internet or other communications channels. So the Iranian government is blocking certain Web sites and evicting foreign reporters or keeping them away from the action.

The push to remove witnesses may be the prelude to a Tehran Tiananmen. Yet a secret Internet lifeline remains, and it’s a tribute to the crazy, globalized world we live in. The lifeline was designed by Chinese computer engineers in America to evade Communist Party censorship of a repressed Chinese spiritual group, the Falun Gong.

Today, it is these Chinese supporters of Falun Gong who are the best hope for Iranians trying to reach blocked sites.

“We don’t have the heart to cut off the Iranians,” said Shiyu Zhou, a computer scientist and leader in the Chinese effort, called the Global Internet Freedom Consortium. “But if our servers overload too much, we may have to cut down the traffic.”

Mr. Zhou said that usage of the consortium’s software has tripled in the last week. It set a record on Wednesday of more than 200 million hits from Iran, representing more than 400,000 people.

If President Obama wants to support democratic movements on a shoestring, he should support an “Internet freedom initiative” pending in Congress. This would include $50 million in the appropriations bill for these censorship-evasion technologies. The 21st-century equivalent of the Berlin wall is a cyberbarrier, and we can help puncture it.

I had more on this yesterday.

Obama: No Realist He

I'm not going to have enough time to get this all out this morning, but to start, I want to agree with folks like Fareed Zakaria and Zbig Brzezinski that the central dynamic driving global politics today is the "rise of the rest," or the powerful aspiration of the rising peoples and nations of the world to have their shot at a version of what we call the American Dream. That dynamic, which Barack Obama began to address in his Cairo speech, involves many other strands of history - the end of colonialism and the Cold War, the transformative cultural impact of globalization, rising standards of living around the world, the rapid spread of the Internet and mobile devices putting ever more powerful tools in the hands of the world's people, the emergence of a global Millennial Generation comfortable with these tools, more affluent and educated and globally aware than their parents, eager to seek a better life for themselves and their countries. 

Informing and inspiring this global transformation of course is the radical promise of equal opportunity for all offered by the America's founding fathers. Obama discussed it this way in his recent Cairo speech: 

....Just as Muslims do not fit a crude stereotype, America is not the crude stereotype of a self-interested empire. The United States has been one of the greatest sources of progress that the world has ever known. We were born out of revolution against an empire. We were founded upon the ideal that all are created equal, and we have shed blood and struggled for centuries to give meaning to those words - within our borders, and around the world. We are shaped by every culture, drawn from every end of the Earth, and dedicated to a simple concept: E pluribus unum: "Out of many, one."

......I know there has been controversy about the promotion of democracy in recent years, and much of this controversy is connected to the war in Iraq. So let me be clear: no system of government can or should be imposed upon one nation by any other.

That does not lessen my commitment, however, to governments that reflect the will of the people. Each nation gives life to this principle in its own way, grounded in the traditions of its own people. America does not presume to know what is best for everyone, just as we would not presume to pick the outcome of a peaceful election. But I do have an unyielding belief that all people yearn for certain things: the ability to speak your mind and have a say in how you are governed; confidence in the rule of law and the equal administration of justice; government that is transparent and doesn't steal from the people; the freedom to live as you choose. Those are not just American ideas, they are human rights, and that is why we will support them everywhere.

There is no straight line to realize this promise. But this much is clear: governments that protect these rights are ultimately more stable, successful and secure. Suppressing ideas never succeeds in making them go away. America respects the right of all peaceful and law-abiding voices to be heard around the world, even if we disagree with them. And we will welcome all elected, peaceful governments - provided they govern with respect for all their people.

This last point is important because there are some who advocate for democracy only when they are out of power; once in power, they are ruthless in suppressing the rights of others. No matter where it takes hold, government of the people and by the people sets a single standard for all who hold power: you must maintain your power through consent, not coercion; you must respect the rights of minorities, and participate with a spirit of tolerance and compromise; you must place the interests of your people and the legitimate workings of the political process above your party. Without these ingredients, elections alone do not make true democracy.

As Obama alludes to in his speech, the way President Bush attempted to "spread democracy" did much in recent years to undermine and degrade the American championed vision of democracy just as an enormous part of the world was awakening to its possibilities. This disappointment with the perceived anti-democratic leanings of an American President acting on the global stage - at this point in history - itself became a very powerful global dynamic, and was central to the global rejection of Bush and the neocons by peoples and governments around the world. 

Another factor in this "rise of the rest" is race, the emergence of non-white European global powers and peoples. Only about a billion of the world's seven billion people are of white European heritage, and there can be little doubt now that this century will see the America-European dominated global order give way to one more representative of the people of the world and its emerging demographic realities. We saw some of the first manifestations of this in the recent G-20 meetings with the discussion of how to reorganize the IMF.   The seats at the tables of power will be increasingly occupied by non-white, non-Europeans, which in and of itself will become a powerful visual, or as we call it, "optic," in the emerging global order of the 21st century. 

Which brings me to Barack Obama, a self-described racial "mutt," a man who grew up in multiracial societies in Indonesia and Hawaii, and who was elected with the very potent high-tech and democratizing "new tools" of the 21st century. In ways that I think we are only beginning to understand, he has himself become the extraordinary global symbol to those aspiring for more for themselves and their countries everywhere - the story of an outsider, a member of an oppressed class made good; of the overthrow of a oligarchical oppressive power through a popular democratic uprising; of the use of powerful new tools to give regular people a voice in their own futures; and one of the most powerful parts of this story, the emergence of a non-white leader as the leader of the most important nation in the world, at this time of the "rise of the rest." 

For all of these reasons I don't think Barack Obama has the option of becoming an advocate of the realist school of American foreign policy. He has already been cast in a different role by history - one of inspiring champion of all those throughout the world who need someone to speak for them. I will not argue that what we are seeing in Iran today is a direct result of the Cairo speech, or of Obama's direct inspiration to the forces of modernization and democratization inside Iran. But there can be no doubt that Obama's rise has injected a new inspiring dynamic into the rising world, and these forces, unleashed, have the potential to remake the world for good or ill. Our President, as chief global advocate of free and open societies, cannot sit on the sidelines as people attempt to throw off the shackles of old and anti-democratic regimes. This moment is too important, this particular leader too powerful, for America not to ambitiously re-assert itself as the great global champion of universal aspirations of all the world's peoples. 

Where this takes us it is too early to tell, but go there we must, as are witnessing the birth of a global "new politics" of the 21st century very different from the global politics of the century just past. And in Barack Obama, this "new politics" has found its first global leader and inspired champion. May he have the courage and vision to seize this global opportunity, as this may be, more so than any other, his ultimate calling.

Should We Try to Save the Damaged Brands?

As the American government struggles with what to do with its new ownership stake in storied corporate brands like AIG, Chrysler, Citigroup and General Motors, one of the fundamental questions that must be asked now is, can these brands - after months of stories about their insolvency - be saved?

I'm not so sure. 

Consider this passage from a NYTimes piece by Keith Bradsher about AIG's struggle with their damaged global brand:

Less than two months after changing its name, the biggest and best-known unit of American International Group is preparing to change its name again, in the latest sign of damage to one of the world’s most famous brands.

A.I.G. changed the name of the worldwide holding company for its property and casualty unit to American International Underwriters in early March.

The renamed A.I.U. quickly began issuing new business cards to employees and printing promotional materials, particularly in Asia. But A.I.G. has now decided that the A.I.U. name does not represent enough of a change, and is in the final stages of choosing a new one, said Leslie J. Mouat, A.I.U.’s regional president for Southeast Asia.

“The advice we’ve received is A.I.U. may be a bit close to A.I.G. — we don’t want to appear as the same leopard with different spots,” Mr. Mouat said in an interview, adding that he was told only Saturday of the decision to change the name again, which has not been publicly announced.

The question facing the Obama Administration now has to be not whether these companies can be saved, but what is the best way for valuable parts of the company to succeed and provide return to their investors (in this case the government).   One way is to prop up the companies, as we are doing now.  But there is a strong argument that these companies are so damaged now that their brand itself is permanently insolvent, and that the best course would be to break the companies up and sell their parts off to other stronger less damaged brands. 

AIG may be changing its name, but I think it will have to do much more than that to convince future customers that this not the same enterprise which made some of the greatest corporate blunders in the history of commerce.   All things being equal, would you buy a car from General Motors now, or or insurance from that company formally known as AIG, or open a new account with Citigroup?

The answer to this question needs to be an important part of what comes next in this difficult debate.

Syndicate content