Wednesday, November 5, 2008

MONEYGALL - Change - Yes we can?

Only hours before Obama's win was certain, some Republican senators were still claiming the pollsters were entirely driven by wishful thinking and high turnout would favour McCain and in the booth voters would recognise the value of experience over feelgood rhetoric, or something along those lines? More professional psephologists blamed McCain for losing it by running a petty negative campaign that backfired on his better chance of striking a more seasoned statesmanlike stance that was only recovered in his dignified and generous concession speech. Yet, it should have been clear to most psephologists that McCain had little or no chance of winning; there was no precedent in electoral history for a McCain upset win, for a junior candidate from the same party as a deeply unpopular President and a generally discredited governing party. That would have required an extraordinary reversion to deep white racism infecting a dominant percentage of voters, which is unthinkable in modern America of the last quarter century. Nevertheless, the symbolic importance of a black President on all of America's underclasses, whether black, vaious non-WASP ethnic minorities, hispanics, 'red men', or even poor 'whites', is hard to over-estimate. Arguably, Obama's win in turning the US world upside down and right way up exceeds possibly even that of a white woman winning through to the Oval Office. The symbolic message for all those who have hitherto cosseted themeselves with the thought that their relative lack of success or poverty is simply political because of colour or ethnic discrimination will now have to question this and accept there is now some doubt in the matter, and that alone should have a massive positive impact on every aspect of American society, including the economy. Obama's win may owe a great deal to those who risked all for civil rights, it may stand on the shoulders of the Black Caucus leaders, the tears of this historic moment streaming from Jesse Jackson and many others at the Chicago victory celebration in Grant Park, and building no doubt too on the success of Hollywood's black stars, black miltitary, business, sport and cultural icons, maybe even hip hop played an important role too? Another view is that Obama is 'post-racial' representing many millions who have moved beyond distinctions based on colour. In recent years Hollywood produced probably half a dozen big screen political thrillers and tv blockbusters with black (and one hispanic) US Presidents. Obama's victory validates and provides a final healing of a great divide in US history that of the struggle against slavery and for civil rights, which is not to say the issue is over or finally solved. Neither is it, of course, the only gaping wound that needs healing. The North South divide within the USA shows little change. (See interesting map for newspaper endorsements: It is noteworthy that the last three Democrat Presidents to succeed at the polls have had to come from the Southern States in years when the sunbelt economy outpaced rustbelt economy and small voting shifts in the south and bible-belt fly-over states dictated the final results. Obama is the first Northerner elected President since Kennedy (Ford wasn't elected but appointed). This time parts of the South won by Democrats included key states (e.g. N.Carolina, Florida and Virginia, and that usually strong Republican state in the North, Indiana - and majority black and hispanic counties and some cities in 'the South' where the resurgent black vote made the difference. Arguably, much of the Southern vote ostensibly remained along racial lines, but again here surely is a wound Obama can part-heal. See the population adjusted map of the US states below in which the finely balanced states marked pink and pale blue in the final result turned dark blue and big surprise was Virginia (here marked red) that turned blue. Obama will restore the USA's damaged image in the world as best he can and may also, after other more urgent domestic economy matters, lead on the African dimension especially of the global North-South divide, another issue alongside the financial crisis where common cause can be led alongside Gordon Brown(Prime Minister of the UK, which I consider to be as integrally part of the US economy as California, Texas no less, and as much of course as Canada). Many old, current, and future, international crises are stalking the world's political-economy. The US and Europe urgently need to restore their ability to positively re-balance world economic and trade relations and thereby also political and social welfare re-balancing between the minority rich and the vast majority poor, to put it mildly and crudely. For Obamanomics see where the first 3 essays descibe in detail the direction of economics thinking that is now in place. Although Obama appears to respresent a US world turned somewhat upside down, it may be worth recognising that Obama has immense Patrician credentials and if ancestry counts for aught qualify him perhaps paradoxically as the most eligible member of the US elite by his family ties on his Mother's side (related to 8 Presidents, umpteen senators and governors etc. see It is hard to over-estimate any nuances in Obama's makeup given the dominance of the USA in the world. See the interesting map below indicating the economic power balance of 2000 that still operates little changed today. Some international diplomats will say the key to the USA's international image is how Obama now deals differently with the two wars, though a new attitude to global Climate Change may be also quite mood-altering. In this respect the external and internal divides are connected. The US Democrat and Republican parties are less ordered and disciplined than European parties and the ideological divide between liberal and neo-liberal remains strong, probably stronger than in Europe, and also revolving in a misty fug around perceptions of patriotism and religion. The economic crisis is on such a scale, however, that these issues of passion could only manage second billing to economic and financial fears. Now, with majorities in both Houses of Congress, Obama and his team, fully intent on bipartisanship whether they need it or not, are very firmly in the driving seat. What are the immediate economic decisions and problems. They are, to be financially and economically technical for a moment about all this:
1. fearlessly setting a $1 trillion 7% budget deficit to boost the economy's growth (GDP of over $14tn = 20-25% of world output) by over 2% annual growth against trend
2. putting a floor on losses arising out of $14.7 trillion mortgages by providing protection from foreclosures (something both parties in Congress are very keen to do)
3. helping the banking system recapitalize to survive inevitable $1 trillion losses arising from $21 trillions in business loans, corporate bonds, commercial mortgages and households' non-mortgage debts.
The scale required is roughly $2 trillions to replenish US banks' reserve capital twice, of which Government one way or another may need to supply half. Tax credits, mortgage relief, and Federal insurance (largely at a cost to banks), plus direct capital infusions in return for preference share-holdings can secure the banking system. It then has to sell assets and make cost savings (via mergers) to restore the balance betwen capital reserves and risk exposures in a manner that will enable it to cope with more normally expected recession losses. The anxiety involved is to make this happen quickly enough that recession is short-lived and unemployment does not mushroom. And too that banks do not act selfishly and deleverage so hard that the recession is worsened and prolonged. Then too there are impacts via global economy dependencies. For this USA actions will need to be coordinated with Europe especially. The prospects for this appear very positive, except for the appearance that banks are not on-message. Bankers believe themselves to epitomize the adage 'private good, public bad'. They resist public policy conditions and want to be free of government shareholdings and funding and insurance cover as quickly as possible to return to the freebooter culture of the past. The public's cynical and angry, if not also dispairing, perception, however, is of banks putting the interests of internal management before shareholders and private before public good, and in a period of such deep and general crisis, much like trading with the enemy in wartime. They, like many, dare I say neo-cons, still don't get it that for the foreseeable future there cannot be a return to private good public bad ideology. The medium to long term business environment has changed dramatically and therefore so too must business culture. And by that I mean taking more systemic responsibility for the economy and changing business ethics accordingly. This is easy to say, but few corporations, banks or others, know how to do this and still make money. The perception too of how to avoid making short term false economies given the current climate of extreme 'swings and roundabouts' and how to productively focus on profiting longer term by restoring customer loyalty, belief and faith in big business ethics is something for which we long ago lost the academic literature or practical models. What crisis on today's global scale shows is that we live in a three-dimentional system, not a two-dimensional zero-sum game where my profit is your loss. Re-reading Adam Smith's Theory of Moral Sentiments (1759) which preceded Wealth of Nations (1776) may for some be a good place to start. Otherwise, I recommend reading Keynesian economics of which the best modern examples may be the global economic models of the UN (a much vilified idea among modern neo-cons). The problem in all this, to make an academic comment, is that welfare economics has not moved from the micro- to the macro- in economics, or beyond moral imperatives of socialism, or of social security understood in the broadest sense, to see the actual and powerful economic engine that capitalism has enjoyed entirely from having a large does of socialism within it, operating mainly via the recycling of spending power from rich to poor and back again. Nobel prize-winning economist, Edmund Phelps (FT Nov.5) argues somewhat awkwardly that "Keynes had no sure cure for slumps" for three reasons: one that public sector infrastructure investment spending (to create employment) lacks productive innovation according to "capitalism theory", and two, that near the end of his life he told "his friend Friederich Hayek" he was going to revise his theory in his next book (never completed), and three, that Keynes failed to distinguish a fall in asset prices "springing from...autonomous increase in demand for money", which in Phelps' iew is solvable by simply increasing the money supply (whereas Keynes, according to Phelps, only focused on non-monetary reflation measures). Phelps' view carries weight and reflects an ideology with a lot of political resonance in the USA especially. Phelps says of 'capitalism theory', "stresses how important it is that owners of financial and business enterprises be accountable to no one (except their own consciences) - thus free to use their intuition." This is extraordinarily bare-faced given that ownership of major enterprises are not discrete but dispersed, that intuition and conscience have clearly failed spectacularly this time round and presupposes that Government has no rights and obligations that may prevail in recession conditions!? It is also a surprise to read that Keynes did not recognise the role of monetary measures when deficit spending is at least that and for which Keynes is widely recognised as being the dominant exponent. There is also no such thing as 'capitalism theory'. There are theories of markets and commercial firms, which are micro-models only. The macro-economy of capitalism to include the role of Government, finance, security, stabiliy, social goals and international trade and payments relations globally are not a fixed theory within some purist or fundamentalist definition of capitalism. It is a strength of capitalism that it is not religiously defined or that there should be no other gods but it, however defined.
In the US Presidential election it is claimed that the super-rich voted Democrat while the aspiring rich voted Republican. Given the still strong ideological divide, to ardent Republicans this looks like turkeys voting for Thanksgiving while common business sense votes for Freedom. It is Obama's task to confound those perceptions, something Clinton tried but failed at. Below is the classic conservative view of the social-liberal brain. It is I think fair to say that while ideology may be helpful in gaining perspective, it is often unrealistically disproportionate by crudely characterizing opposing views and motives. McCain or his supporters made this mistake in seeking to cartoonize Obama in the guilt by association witch-hunt style of House Unamerican Activities Committee (McCarthyism of the late '40s). McCain also tried desperately to hold onto big Government & taxes bad, small government & lower taxes on rich much better, which few could believe, probably not even a majority of those who voted for him?
If the past is any guide the biggest changes in economic orthodoxy occur when all Western or OECD countries' economies are on the floor together e.g. the Great Depressions of the 1880s and 1930s, again just after WWII and at the time of the first great Oil Shock of the early 1970s. It seems that the end of the noughties is another such time. But, who are the big brain Keynesian economists who will take the lead in this? And will bankers buy it and will Obama prove himself another FDR who can sell it with Europe's support? Some are calling Obama the first Global. World or UN President because he has multi-ethnic, multinational roots (including Kenya) and spent parts of his childhood outside of the USA (including Indonesia). The 299 population of the village of Moneygall in County Offaly, Ireland are getting ready for an official visit by President Obama (O'bama) who has signalled his desire to see also this one of his many ancestral homes! Obama's is the 44th Presidency but 43rd President and the 23rd to have Irish roots (among whom 17 had Ulster-Scottish roots)! His victory is celebrated round the world. Even among his political opponents at home there is recognition of the symbolic importance of all of this, 40 years after the shooting of Rev. Dr. King and fulfilling a 40 year prophecy by Robert Kennedy. Comparisons have been made with the emotion felt when Nelson Mandela walked free or the Berlin Wall was pulled down, events that many people believed they would most probably never see happen in their lifetimes.

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