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BREAKING NEWS | |
THE ECONOMY:
There is no return to normal because
normal is gone
February 12, 2012
 The economy: this may be the new "normal" for a long time to come.
Well, you can stop waiting because there will be no return to normal as most of us know it.
Normal is gone, according to a new piece in Vanity Fair by Joseph Stiglitz that can be found here
Stiglitz lays out the case that the U.S. is now, and has been for a long time, in a “structural shift” as significant as the shift America underwent when the nation made the move from being a rural, agriculture based society to a manufacturing society replete with massive population shifts to cities.
Even before the U.S. economy changed before our eyes with the explosion of the housing bubble and crash of credit markets in late 2007, America was already in deep trouble says Stiglitz.
By the year 2007 he writes:
“Incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt — debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story.
Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.)
What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation — not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.
The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high.
It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems. The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. “
UNDER THE BEST OF CIRCUMSTANCES IT WILL BE A LONG SLOG
Based on the numbers, a reexamination of the causes of the Great Depression in the 1940’s and the depth of America’s economic fall in the past few years, Stiglitz argues that even if we “correctly respond to the trauma — the failures of the financial sector — it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.”
And one major reason he says we won’t be going back to “normal” anytime soon is the so-called “real economy.”
And the real economy has a huge problem that is rooted in, he says “The kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced.”
Stiglitz reaches several conclusions about what America must do to transition itself to the next phase needed to produce jobs now and jobs in the future and one of them is this:
“If we expect to maintain any semblance of “normality,” we must fix the financial system…what’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.
That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading.
Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know. “
Stiglitz’s piece is a fascinating contrarian read and angle to the usual financial talking heads on TV.
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