Monday, December 15, 2008

Will the Republicans lead us into a depression out of good intentions?

Most sensible people have little trouble seeing the wisdom of bailing out the Detroit car companies, as distasteful as that seems, but there are quite a number of Republicans who simply do not get it and seem determined to pursue ideology over pragmatism. Such a bias in favor of ideology is in fact one of the ways that a recession can get turned into a depression. In 1930 the Federal Reserve was determined that "strong money" was the way to go. The so-called liquidationists were determined to take a hands-off, darwinian approach to letting the markets fix themselves. We know how that movie ended. So, a big question is the extent to which these Republican neo-liquidationists will seek to block efforts to stimulate the economy. If they are successful, the current "recession with adjectives" will have the prospect of turning into an outright depression.

Make no mistake, the Republicans have the best of intentions, but that does not make them right. They are simply grossly overly-optimistic about the pace at which a liquidationist approach can succeed. Japan had its "Lost Decade" in the 1990's. I do not think that the average American is ready to sign up for such a cold-turkey approach to economic recovery, even if it is in theory possible.

The real threat here is not the Republican liquidationists ("Let them file for bankruptcy!") per se, but a lack of bipartisanship in Congress. Barney Frank did work with the Bush administration on the Detroit bailout bill, leading House Speaker Nancy Pelosi to claim that it was a bipartisan effort, but they failed to work with enough moderate Republicans to assure that they had a bill that moderate Republicans (non-liquidationists) could support.

So, come January 20, 2009, the test will be to see how committed Barack Obama is to true bipartisanship. I think he is and that he is very good at reading the writing on the wall, but the open question is the degree to which he can "persuade" the more liberal Democrats to comproimise sufficiently to appeal to enough moderate Republicans to garner the 60 votes needed to get anything done in the Senate. I have high confidence that he can do it, but he is going to have to prove that I am right.

A $500 billion stimulus bill may seem like a slam-dunk in the current economic climate, but the liquidationists and their allies won't agree with a lot of the more liberal components of such a bill if it is not carefully crafted to be palatable to center-right conservatives.

In summary, I do believe that Barack Obama will steer us on a course to avoid a depression or "lost decade", but he needs to rack up some time at the helm to convince people.

-- Jack Krupansky


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