Decade at Bernie’s

By PAUL KRUGMAN, Feb 16, 2009, NY Times

By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.

Unfortunately, that’s a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it’s worth remembering just how many influential voices — notably in right-leaning publications like The Wall Street Journal, Forbes and National Review — promoted that belief, and ridiculed those who worried about low savings and high levels of debt.

Then reality struck, and it turned out that the worriers had been right all along. The surge in asset values had been an illusion — but the surge in debt had been all too real.

So now we’re in trouble — deeper trouble, I think, than most people realize even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.

For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.

And as the great American economist Irving Fisher pointed out in the 1930s, the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.

Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. Government officials understand the issue: we need to “contain what is a very damaging and potentially deflationary spiral,” says Lawrence Summers, a top Obama economic adviser.

In practice, however, the policies currently on offer don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.

There’s hope that the bank rescue will eventually turn into something stronger. It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary. But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely. The odds are that the legacy of our time of illusion — our decade at Bernie’s — will be a long, painful slump.

Obama Riding the Wave

By BOB HERBERT

Listening to President Obama, I was struck by how well he understands that most voters are not driven by ideology and are not searching for politically orthodox leadership. Most want leaders who speak to their needs — especially in this time of economic crisis — and a government that works.

Republicans in Congress — all but completely united in their effort to build a wall of obstruction in the path of President Obama’s economic revitalization effort — seem to be missing this essential point.

In a conversation with a small group of columnists aboard Air Force One on Friday, the president discussed the fight over his stimulus package, which was in the process of gaining final passage as he flew from Washington to Chicago for a brief rest with his family.

He said that the fact that he’d been rebuffed so far in his quest for bipartisanship would not stop him from reaching out for Republican support.

“Going forward,” he said, “each and every time we’ve got an initiative, I’m going to go to both Democrats and Republicans and I’m going to say, ‘Here’s my best argument for why we need to do this. I want to listen to your counterarguments. If you’ve got better ideas, present them. We will incorporate them into any plans that we make, and we are willing to compromise on certain issues that are important to one side or the other in order to get stuff done.’ ”

When I asked him if there was any reason to believe that the G.O.P. had made a good-faith effort at bipartisanship, given the fact that only three Republicans voted for the stimulus plan in the Senate and none in the House, he said he did not want to question the motives or sincerity of those who opposed the plan.

But he made a point of adding, “Now, I have to say that given that they were running the show for a pretty long time prior to me getting there, and that their theory was tested pretty thoroughly and it’s landed us in the situation where we’ve got over a trillion-dollars’ worth of debt and the biggest economic crisis since the Great Depression, I think I have a better argument in terms of economic thinking.”

He also made it clear that he won’t let his desire for bipartisanship undermine important initiatives. “I’m an eternal optimist,” he said. “That doesn’t mean I’m a sap.”

Mr. Obama’s tone and demeanor during the nearly hourlong interview was a duplicate of his nationally televised press conference last week.

He was relaxed and had complete command of a range of complex issues, including the troubled banking sector, health care reform and the need to do more in terms of innovative education initiatives.

But beyond his specific policies (and whether one supports them or not), Mr. Obama is emerging as the very model of the type of person one would want in high public office. He is intelligent, mature, thoughtful, calm in the face of crises and, if the nation is lucky, maybe even wise.

When asked about the sharp drop in the stock markets after Treasury Secretary Tim Geithner announced an expanded bank bailout plan last week, Mr. Obama replied:

“I am not planning based on a one-day market reaction. In fact, you can argue that a lot of the problems we’re in have to do with everybody planning based on one-day market reactions, or three-month market reactions, and as a consequence nobody was taking the long view.

“My job is to help the country take the long view — to make sure that not only are we getting out of this immediate fix, but we’re not repeating the same cycle of bubble and bust over and over again; that we’re not having the same energy conversation 30 years from now that we had 30 years ago; that we’re not talking about the state of our schools in the exact same ways we were talking about them in the 1980s; and that at some point we say, ‘You know what? If we’re spending more money per-capita on health care than any nation on earth, then you’d think everybody would have coverage and we would see lower costs for average consumers, and we’d have better outcomes.’ ”

Near the end of the interview, the president said that there are certain moments in history when significant change is possible.

“It’s not a certainty,” he said, “but it’s possible.”

He said he believed that it’s very difficult for any single individual to actually set that kind of “momentum” for change in motion. But when that historical wave is there, he said, “I think you can help guide it.”

When asked if we are in one of those moments now, he said, “Yes. I firmly believe that.”

Palinpalooza - How Can We Miss You If You Won't Go Away?

From Salon.com, Joan Walsh
How can we miss her if she won't go away? The Sarah Palin rehabilitation tour began as soon as the election ended, but so far, I'm not being won over by her attempted charm offensive. I expected Fox's Greta van Susteren to pander to her, given her employer, but I was a little surprised at Matt Lauer's friendly, supportive probing as he ate dinner with the Palin family in the kitchen in Wasilla, and tried to help the former Veepzilla tell her side of the story.

Let me say first: I agree with Palin on one thing: the anonymous McCain advisors who've savaged her since she became a drag on their ticket are cowards and jerks. Whatever her flaws, McCain is to blame for all of them, because he's the one who "went rogue" and picked her with inadequate vetting. I've said that before. But Palin isn't particularly helping her case with these interviews. If you like her, you'll like what she has to say. If you don't like her, or more relevant, don't think she ever had what it takes to be vice-president: Well, nothing in either interview will reassure you.

Hands down her worst performance came in a "Web-only" video where Lauer asks Palin about the infamous Katie Couric interview, and whether it took a toll on her confidence. She tells Lauer no, but adds: "I think it also showed, though, that certainly as a Washington outsider and not one to just I guess play even the campaigning media game that is played, in just repeating, perhaps, memorized lines in a, in a interview, that's not me." Read that again. Trademark Palin grammar, and totally unconvincing. Answering questions about foreign policy and Supreme Court decisions isn't a matter of rote memorization, it's a matter of knowledge, depth, intellectual curiosity and experience that she clearly doesn't have.

She was also borderline dishonest about the issue of whether she looked into banning books while she was Wasilla mayor, using as "proof" the fact that some people claimed she wanted to ban the "Harry Potter" series, even though it was written after she was mayor. In fact, Salon interviewed a Wasilla minister who said his book, "Pastor, I Am Gay," was on Palin's hit list. Palin can say Howard Bess is lying, but she's choosing to address only the most ludicrous claims against her. Not convincing.

She was also unconvincing when she downplayed talk of campaign infighting and dysfunction -- and then gave Lauer a great example of it. She told the story of working with two speechwriters on a version of a concession speech to give in Phoenix. But she admits she didn't know until she was walking up to the stage that she wouldn't be allowed to give it. That's dysfunction. And even though I'm sympathetic to Palin's complaints about McCain advisors' anonymous claims that she sent aides out shopping for her, her defense won't rise beyond "he said, she said" sniping until she's willing to name some names, herself. Who bought the clothes? Who does she think is behind the leaks? I'm sure she knows.

But the saddest part for me was the interview with little Piper, who tells Matt Lauer she didn't like campaign rallies, missed her friends and fell behind in school. But when Mommy asks if she'd like to do it again in 2012, Piper says sure. I found myself asking: Why wasn't Piper home attending school, like the Obama daughters did most of the time? Was Todd Palin enjoying the campaign trail too much to stay home with the family?

I'm hoping I can put Sarah Palin behind me, although she's got a big star turn Wednesday at the Republican Governor's Association meeting, including a press conference. Clearly she thinks she's ready for prime time, and that the McCain campaign hid her light under a bushel. So we'll be seeing more of her in the weeks to come. Given her plummeting poll numbers at the end of the campaign, it's just more good news for Democrats that she's fighting to emerge as a party leader in the wake of McCain's shellacking.

-- Joan Walsh