Newsweek’s Zakaria on the Economy

Fareed Zakaria, one of the best observers of the global landscape, suggests that if we curb some of our bad borrowing and spending habits we may emerge better and stronger from the current fiscal crisis:

If we wanted a bigger house, a better TV or a faster car, and we didn’t actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years.

I’m not as optimistic as Zakaria that after the current crisis ends we’ll return to the what appeared to be a vibrant economy because of the other issue he discusses – failing to address the herd of elephants in our finanacial room – a 10 Trillion and growing budget deficit with an annual deficit that continues to skyrocket after the disasterous spending recklessness of *every administration* since Reagan with the possible exception of Bill Clinton (when we did not borrow nearly as much as we had been, I think largely thanks to the huge increasee in Tax revenues that came from the positive investment climate.)

My take is that our economy has been challenged for some time, with prosperity manufactured to some extent by simply pushing expenses forward to our kids.    McCain’s call for a balanced budget in four years is admirable in this respect, and it is unfortunate that so few truly think that is realistic.    It is actually realistic but would require massive cuts in military spending- the sacred cow of fake conservatives who are (correctly) willing to slash entitlements but (stupidly) think that military money is spent wisely (news alert fake conservatives – it is NOT spent wisely and this is *totally* well documented). Not only have we been living on debt as individuals, but we’ve been living on debt as a society.   This is not sustainable for the long term, and we may be seeing the early signs of the massive challenge we’ll face if the world starts to lose faith in the US economy.

That won’t happen anytime soon, but unless we bring debt and spending into focus both individually and collectively it’s going to happen eventually. It’s easy to predict we won’t change our habits all that dramatically, but hopefully enough for a soft landing as we come down from our lofty heights as the world’s key economic and power player.

Fareed Zakaria in Newsweek

7 thoughts on “Newsweek’s Zakaria on the Economy

  1. In my comments yesterday on the human costs of the Iraq War I failed to mention the financial costs. The U.S. is in a real bind in part because of the enormous outlays we have made for that conflict; it leaves the Treasury & the Fed in a tighter corner than they might be otherwise.

    Zakaria makes excellent points, the gravy days are over and the financial fallout for many Americans will be painful and severe. The average American has too many expensive toys, too few assets and far too much debt. The values our parents and grandparents learned in the Great Depression about saving for the future and living within ones means are lost and forgotten, but I suspect they are about to undergo a great popular revival.

  2. There is no doubt we need massive reform on Wall Street and on E Capital Street.

    We need a massive halt in spending. We need deep cuts across the board including military.

    The tools and measurements need to be created to bring accountability back into the picture – right now it is a runaway train.

    When we had a deficit around $5 trillion it was bad but it was manageable but now we are quickly approaching a deficit level that will become near impossible to recover from.

    The budget has to be balanced within 4 years.
    Our dependence on foreign oil needs to be reduced significantly within 4 years.

    Until we clean up this mess and get the proper checks and balances in place we are doomed to repeat these incredibly stupid policies like we saw with mortgage lending.

    Te decisions we make in the next 4 years especially in regards to spending may affect us for a lifetime.

  3. Gee shocker…the economists who predicted our economic crisis exactly lays the blame on Fannie and Freddie.

    Nouriel Roubini: Dr. Doom.

    While the economic sun was shining, most other economists scoffed at Roubini and his predictions of imminent disaster. They dismissed his warnings that the sub-prime mortgage disaster would trigger a financial meltdown. They could not quite believe his view that the US mortgage giants Fannie Mae and Freddie Mac would collapse, and that the investment banks would be crushed as the world headed for a long recession.

    Yet all these predictions and more came true. Few are laughing now.

    But it was a meeting of the International Monetary Fund (IMF) in September 2006 that earned him his nickname Dr Doom.

    Roubini told an audience of fellow economists that a generational crisis was coming. A once-in-a-lifetime housing bust would lay waste to the US economy as oil prices soared, consumers stopped shopping and the country went into a deep recession.

    The collapse of the mortgage market would trigger a global meltdown, as trillions of dollars of mortgage-backed securities unraveled. The shock waves would destroy banks and other big financial institutions such as Fannie Mae and Freddie Mac, America’s largest home loan lenders.

    “I think perhaps we will need a stiff drink after that,” the moderator said. Members of the audience laughed.

    What does his objectivity tell him now? No end is yet in sight to the crisis.

    “Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG [the giant US insurer that had to be rescued], and after [the $700 billion bailout plan]. Each time they have called the bottom, and the bottom has not been reached.”

    Across the world, governments have taken more and more aggressive actions to stop the panic. However, Roubini believes investors appear to have lost confidence in governments’ ability to sort out the mess.

    The announcement of the US government’s $700 billion bailout, Gordon Brown’s grand bank rescue plan and the coordinated response of governments around the world has done little to calm the situation. “It’s been a slaughter, day after day after day,” said Roubini. “Markets are dysfunctional; they are totally unhinged.” Economic fundamentals no longer apply, he believes.

    “Even using the nuclear option of guaranteeing everything, providing unlimited liquidity, nationalising the banks, making clear that nobody of importance is going to be allowed to fail, even that has not helped. We are reaching a breaking point, frankly.”

    He believes governments will have to come up with an even bigger international rescue, and that the US is facing “multi-year economic stagnation”.

  4. Again Glenn, the Fannie Mae and Freddie Mac reform of 2005 had nothing to do with the regulation of subprime – what Rabani is talking about.

    In 2003, Frank said he saw no crisis at Fannie and Freddie. There was also no crisis at Lehman Brothers, or Wachovia.

    Starting 2003, Alphonso Jackson used his authority at HUD to force Fannie and Freedie to start buying up large amounts of exotic/predatory subprime.

    In 2004 F&F got a Republican CEO. In the next two years he oversaw the purchase of will over 500 billion in exotic/predatory subprime – almost all of which has gone into foreclosure/soon will go into foreclosure.

    GW’s CEO buddies in the private sector originated and bought up far more than that. Those entities started going belly up long before F&F went into receivership.

    In 2006 Bernanke was named Chairman of the Fed. In 2006, using REGULATORY AUTHORITY that had been granted to the Fed in 1994, he wrote guidelines that virtually ended the practice of exotic/predatory subprime lending.

    The existing regulator, who is constantly portrayed as being weak by the press, instantly ordered Fannie and Freddie to discontinue obeying Hud’s orders to buy exotic/predatory subprime.

    No act of congress was required. The White HOuse said not a word. It had been there in the law since 1994 – waiting for just one Republican with a brain. His name was Bernanke – 2006.

    Unfortunately, 2006 was way way too late.

    Almost all of the foreclosures originated and foreclosed within a 3-year time frame starting in 2003.

    How can it get any clearer? It’s squarely on the Republicans.

  5. read and weep:

    “Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.

    The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.

    He fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.”

    The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

    Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.

    Adamant that the only solution to the problems posed by Fannie and Freddie was their privatisation, the White House attacked the bill. Mr Greenspan also weighed in, saying that the House legislation was worse than no bill at all. …”

  6. (5) Oxley…LOL…he is a huge part of why the firms are crashing his most idiotic bill has nearly destroyed this country. Of course he wants to blame de-reg. His bill was supposed to stop this kind of stuff happening but his bill failed miserably.

    Freddie and Fannie are part of the direct cause that caused this whole thing to fall apart and Oxley’s brilliance only made it worse.

    Seriously JCH…

  7. Apples and oranges, as usual.

    Sarbanes Oxley is not this bill.

    This is the house version of the s-190, the bill McCain signed onto that he insists, incorrectly, would have averted the credit crisis.

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