Marshall Auerback here. Now that Barack Obama has been inaugurated, we should actually look back to 1933 to get a sense of perspective. How did Americans see the economy at the Inauguration of Franklin Roosevelt? The short answer is that Americans were actually anticipating worse to come in 1933, but Roosevelt delivered on his promises? I do not expect the same from Obama.
On Inauguration Day, 1933 (then March 4), there were machine-gun nests at the corners of the great government buildings in Washington, for the only time since the Civil War. All banks in 32 states had been closed sine die. Six other states had closed almost all their banks. In the other 10 states and D.C., withdrawals were limited to 5 per cent of deposits, and in Texas to $10 a day. The New York Stock Exchange and Chicago commodity exchanges had also been closed indefinitely. The financial system had effectively collapsed, and was threatening to take the life savings of millions of people and what was left of the world’s financial system with it.
In a fever of activity, Roosevelt guaranteed bank deposits, made the federal government a temporary non-voting preferred shareholder in thousands of suddenly undercapitalised banks – more than half the banks in the country – refinanced millions of residential and farm mortgages, tolerated cartels and collective bargaining to raise prices and wages, increased the money supply, effectively departed the gold standard, repealed Prohibition of alcoholic beverages (wrenching one of America’s largest industries out of the hands of the underworld), and legislated reduced working hours and improved working conditions for the whole work force. In the next two years, in what became known as the Second New Deal, he set up the Securities and Exchange Commission, created the Social Security system, and broadened the powers of the Federal Reserve to equal those of other national central banks.
What FDR did, however, was inculcate hope and I don’t think the same can be said for Obama. In fact, I would go further. I don’t think that Obama has the moral strength to institute the equivalent of the SEC that FDR did and then use the act to hit hard where it is deserved. His limpwristed reaction to Thain’s thievery (yes, that is what it is, no matter how “legal”) and his appointment of Wall Street’s friend, Timothy Geithner, tells me otherwise.
Obama spent too much time between Nov 8th and Jan 20th pretending that he was going to be like Lincoln and FDR when indeed he was far different. He actually fooled me at the beginning.
We will get the equity rally (led, in my opinion by commodities) (take a look at crude after having been lower on the day) but the smash up in the Treasury market and more Thain-type problems that are not dealt with forcefully will render his time in office to look much like the late 1970’s sooner than later.
As for China, I disagree with Albert Edwards at SocGen. You can’t rely on a strategy of export led growth in this kind of environment. This is in fact what China did in 1992-94 and it destroyed the Southeast Asian economies in the process (making them vastly uncompetitive and running large current account deficits which went as high as 9% of GDP). What he is in fact suggesting is a return to Bretton Woods II and I think we all agree that this is the last thing required. You want to get rid of these imbalances.
And I still believe that one has to distinguish between a coastal export driven economy, which comprises about 140m people, and what is happening in the interior, which is very different. It will ultimately be self-defeating (which is probably Susan’s point, when she argues that surplus nations, such as the US in the 1930s, get really screwed in this kind of environment. I think China has to turn massively toward infrastructure projects.