Latilla's Blog: Operational Risk related thoughts and discussions

U.S. Economic Stimulus: The Dr. Doolittle Approach to Risk Management

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There are to be another round of stimuli from the U.S. Treasury this time to the tune of $600 billion, though I have heard that with other incentives it may well be approaching the trillion dollar mark. Now I am a Keynesian. Call it my benevolent nature or my love of history but I cradle Keynesian theory close to my chest when I harken back to the dour days of the thirties. But if I let the historian in me come to the fore then I have to be pragmatic and say that the New Deal didn't bring about the U.S. recovery, far from it. In fact I hasten to add that Adolf Hitler had more to do with the American economic recovery than John Maynard Keynes. What deficit spending did do was buy time, alleviate the pain of the immediate effects of the Depression and make it seem as if the government was trying something, anything, to prevent the complete collapse of the American Dream.  In the thirties, deficit spending offered hope but in reality did little to effect real change. Spending was up slightly, but there was little substantial growth and long term unemployment had languished in the mid to high teens for most of the decade. Keynesian economics was an untested theory and a leap of faith with little immediate data to prove the hypothesis.

Seventy five years later and we are supposed to know better, right? We have real time information, regulation is place that never existed before, risk procedures and analysis...but the same problems are happening under the current administration as they did under FDR. Endlessly priming the pump doesn't appear to be working. Europe is rising out of the malaise due to spending cuts but even that seems to be a sluggish return to prosperity (with the notable exception of Germany fuelled by its manufacturing sector) but the U.S is not. Why not?

This humble blogger and observer notes that it is the mindset of America that is the root cause of America's slow drowning. America loves a deal and hates to save. It relishes the notion that there is no such thing as a free lunch and needs to spend as much it feels it is getting a square deal. But spending without giving America the opportunity to buy anything simply doesn't work. It does elsewhere in the world because the rest of the world is happy to sit back and take a breath in its desire to make a profit, but immediacy is part and parcel of the American Ideal. The rest of the world will grumble but accept cuts in spending and achingly gradual growth. The rest of the world will also accept Keynesian deficit spending at the cost of higher debt and eventual prosperity. America will not! And so a two pronged approach is necessary: spending to ease the pain and encouragement to spend like never before. And this lays with the banks not the government.

There is simply too much money sloshing around in the system. Dumping another $600 billion plus will only exacerbate the problem. The banks are the key to releasing funds to promote buying but they are gun shy in the aftermath of free wheeling lending in the too recent past. Risk management solutions and procedures are in place and America should be in the perfect position for recovery.

However it isn't, and not because of the government or even the banks, not really. America is stumbling because it cannot reconcile itself with the fact that its ideology isn't compatible with its economics at a time of crisis. Europe will suffer and recover when things get tough. Asia will do the same. The emergence of South America is due also in its perception that there is a communal benefit to communal suffering when the sailing gets rough. But the U.S. cannot accept that notion. The American Dream is inextricably linked to its economic methodology and they are both founded on the immediate individual struggle and immediate individual success. And that goes for individual banking institutions as well. 

Deeper debt will not help the American recovery but neither will failure to release the funds to allow Americans to do what they do best- spend it! 

 There has to be a pushme-pullme recovery for the U.S. like no other place on earth. Of course this sounds so simple, but it isn't the mathematics that is the stumbling block but the lack of willingness to recover on non-American terms. It needs a fantastical mind-bending desire to accept the incredulous for real and speedy recovery. If the people won't listen, maybe we should do as Dr Doolittle suggests and talk to the animals instead?