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Bernard Madoff, convicted of running an $65 billion Ponzi scheme, was sentenced to 150 years in jail. What’s your take on his punishment?
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Peter Morici is a professor at the University of Maryland's Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission. He is a frequent contributor to Kiplinger Recommends.
Ever since major money houses began collapsing in the fall and the credit crisis and recession started galloping worldwide, the word "depression" has repeatedly crept into dialogue and news stories, as in "the worst financial crisis since the Great Depression."
A depression? We at Kiplinger believe this oft-repeated comparison to the 1930s is a misnomer, and the country is in a recession that will begin easing in the last half of 2009. But economist Peter Morici argues that we are "in the jaws of a depression" already. His contention: The debate is not about coming up with the appropriate descriptive word, but developing effective policies to deal with a severe, prolonged downturn. Addressing a depression, he argues, will require an approach far more aggressive than anything being contemplated by President-elect Barack Obama and the Congress to date.
While recessions can be softened and shortened by government intervention along the lines of the stimulus package being drafted now, economies ultimately self-correct. Depressions, Morici says, are different. They can't and don't end on their own because they are caused by severe structural economic problems. In this case, he sees two such problems that will prevent a recovery until they are tackled: lousy management practices at large banks and the huge foreign trade deficit. "These problems are not self-correcting," he says flatly.
"Obama must ensure that the banks use the trillions of dollars in federal bailout assistance to renegotiate mortgages and make new loans to worthy homebuyers and businesses" instead of on executive bonuses, acquisitions and new high-risk ventures, he warns. The trade deficit, Morici says, has to be tackled in two distinct ways:
• Reduce reliance on foreign oil by tapping available domestic resources and helping automakers produce high-mileage vehicles.
• Attack China's huge trade advantage by requiring it to stop manipulating its currency "to prop up its exports and shift Chinese unemployment to the U.S." If China refuses, the U.S. should slap a tax on dollar-yuan transactions.
Without taking such aggressive steps, the positive effects of a stimulus package will be temporary and the economy will resume a downward spiral, Morici argues. "The choices for the incoming president are simple," he writes. "It’s either recovery or depression. Fix the banks, energy policy and the trade situation with China or become America’s Nero."
POSTED BY: Paul (January 13, 2009 01:51 PM)
One has to wonder what the reaction of the youth of our country will be as we attempt to pull out of this quandary? Will those education & skilled jump in and rebuild? Or will they look at facing paying back massive deficits and the enormous challenges with regards to education and health care, and choose a different tack? We're really at a crossroads at this point in time. I'm not sure what I would do if in my youth, and were in that position.
POSTED BY: Riverdrinker (January 13, 2009 06:31 PM)
The favorite forecasting tool of scientists and economists, as well as investors, is to extend current trends in a straight line endlessly into the future.
I like to say that the fallacy of extending trends in a straight line into the future is illustrated by the fact that the world hardly ever comes to an end. Yet for centuries ‘trend-extending’ has regularly predicted the likelihood of such an outcome – based on everything from holy wars and black plague, nuclear warfare, depletion of the ozone layer, global warming, and communism taking over the world, to fears of an AIDS pandemic, SARS, and bird-flu pandemics.
In the 1940s, it was scientific fact that by the year 2000, there would not be enough land to feed the growing U.S. population. Large scale starvation would have the country in ruins. Statistics were completely supportive of the projection. It took a fixed amount of land to grow enough food and support enough livestock, to feed a given number of people. The population was growing at a fast pace, while land was actually being taken out of agriculture to provide housing space for that growing population.
By simply extending the line of population growth, and the decline of available farm land, the result was obviously inevitable. By the year 2000 the U.S. population would be reduced to hungry masses living in conditions similar to those in undeveloped countries, in other words, would be in the next Great Depression.
However, trends continue only until conditions change.
There are always those who see opportunity in large problems, and their efforts result in major changes in conditions, and therefore a reversal of the trend. So farmers were taught new soil management, new cattle-feeding and breeding techniques. Science developed healthier seeds. Farm machinery manufacturers provided more efficient equipment. Oblivion was not only avoided and the trend reversed, but the pendulum swung to the opposite extreme, of food surpluses and overflowing government food warehouses.
Think cycles, not endless trends.
As conditions swing back and forth from one extreme to the other. Sometimes the pendulum catches a tailwind, and a trend lasts longer than usual. But at some point, the pendulum reaches an extreme and begins to swing in the opposite direction.
The sky is not falling and the world is not coming to an end.
POSTED BY: Bob (February 17, 2009 05:48 PM)
Talk about your flip-flops. Recently Mr. Morici wanted Detroit to go bankrupt and now we need to assist the automakers develop higher fuel mileage cars. He also railed against protectionism but now advocates that we "...require a tax on dollar-yuan transactions..." Isn't that often called a protective tariff??? He suddenly seems concerned about the outsourcing of more U.S. jobs. Does he finally get it that our current trade policies are not fair? Hopefully, Mr. Morici has seen the error of his former opinions.
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