UNENDING RECOVERY

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Chapter1


INTRODUCTION: VIEWFINDER

The moving finger writes; and, having writ,
Moves on: nor all thy Piety or Wit
Shall lure it back to cancel half a line
Nor all the Tears wash out a Word of it.

The Rubaiyat of Omar Khayyam (1048-1131)
Persian philosopher, mathematician, poet, astronomer
(Translated by Edward FitzGerald)



1.1 The Real Problem

Raise the Curtain

How much of the following can be believed?

Things are looking up, after going so badly wrong. Expectations are rosy because the United States is on a comeback trail, with recovery in the bag. A resurgent America is leading the ailing Western economies out of the woods of a blistering economic recession. With a durable turnaround firmly underway, it is only a matter of time before the American revival, when buttressed by Asian growth, will enable the European economy to rise from the ashes and pull its weight – thereby finally enabling a recovery that is sturdy and widely enjoyed throughout the West. 
 
Further descent into a terrifying abyss has been averted in America and Europe by pragmatic policy-induced market buoyancy in stocks and housing – smart measures that lift hopes for recovery in the real economy.  Prospects are brightened by tax increases and cutbacks in government expenditure for belt-tightening austerity, along with cheap and easy loans for businesses and consumers. Such a winning policy concoction has coaxed hopeful stirrings in the real economy; formerly listless businesses are now rising from the doldrums and unleashing investment for pepping up economies toward their former glory.

The unfortunate circumstances that brought Western economies to their knees were allegedly caused by bankers and others of their type, whose greedy dispositions are said to have gone from bad to worse. The good news is that these wrongdoers, having repented and reformed, are now doing the right thing. With financiers demanding balance-sheet discipline in increasingly “financialized” economies, how can things go wrong? The American economy is beginning to regain its swagger – a comforting development that suggests that the West’s brightest days still lie ahead. All of this nourishes a hopeful future for everybody.

Is there really hope? While some may recognize a ring of truth in the above cheery statements, others may see a strawman.  Those aware of the speciousness of the message would likely regard the promise of good times rolling again soon as overblown – even as a setup for a bad joke. Persons who can read the conflicting signs in telltale fundamentals would be able to see the difference between the uptrend of an ingrained recovery and stimulated upticks with shallow roots. The latter may only be delusive interludes because of fundamental imbalances and underlying market mutations that have moved the economy into unknown territory. If so, the condition behind the headlines would tend to instill more a sense of uneasy disquiet than blossoming optimism, as concern for the future takes hold among those who see plenty to fret about in the hidden reality behind the curtain of spin.


Plug a Gap
This book is written with the objective of better explaining something that does not seem to be going away fast enough; is deceiving many with false dawns; and can, at any time, take a turn for the worse. Getting to the bottom of things requires identifying the right questions in the first place and then framing them in broad terms to see the much-needed, and hitherto elusive, big picture; understanding a multifaceted phenomenon requires a multidimensional approach. While economics is the centerpiece of this narrative, a wide-angled view requires that the scope of the analysis be extended beyond the keystone of economics to the financial, the business, the psychological, and the political-legal. This enables a synthesized perspective that is unrestricted by artificial disciplinary boundaries. 

This book ambitiously attempts to fulfill the unmet need for a comprehensive analysis of the global economic downturn, by providing an integrated perspective. The exercise is based on the belief that a panoptic analysis, that crosses disciplinary boundaries, offers the best chance of setting the record straight, and laying one’s finger on what the future may have in store for us all.

This time round, Western economies are not just on the ropes. They seem to be down and at risk of being out for the count. The Keynesian “animal spirits,” that should have enabled economies to get back on their feet by now, seem extinguished. Many less-than happy anniversaries of the collapse are in prospect as the current piece of theater ceases to follow a familiar script. Taking a good look behind the curtain reveals an economic condition in the West that has lost its shine and is, in fact, darkly uncanny.

Waxing lyrical about a recovery ignores its exclusive nature, its shallow roots, and the European albatross. It is
understandable if the proclaimed recovery continues to feel like recession for the weary majority in America and Europe,
for whom the fog of recession has yet to lift. A recovery that bypasses the majority, including much of the middle class
who are the backbone of the economy, is an uninviting prospect, since it lacks both robustness and inclusiveness. A
recovery that dispatches much of the middle class to join the ranks of the underclass would arguably be unworthy of its
name.

Although this downturn is not anywhere as deep as that of the Great Depression, it is, in fact, much worse – and not just because it is more intractable. To offer the explanation of intractability is to beg the question. The prior question is whether the intractability is due to a problem that, although seemingly economic, is something much more than that. Of course, the symptoms are economic: investors are spooked by gloom; consumers are tightfisted; debt has soared to queasy levels; and confidence is sapped by threatening wild cards, both domestic and foreign. But the scale and nature of the recessionary downturn lacks an obvious parallel, giving it a cloak of mystery and making it hard to fathom. The applied economic medications have improved appearances to deceive the trusting but have not had much effect on the underlying malaise – raising the logical and sobering question of whether the treatment suits the ailment. This implies that the dosage could be wrong or that the medication has treated only the symptoms of a deeper and larger problem, one that lacks familiarity and defies diagnosis.

If the problem is misdiagnosis, this book might prove useful in suggesting where to look. More specifically, it will suggest places for policymakers to look where they have not looked before. The competitive capitalist free market has been the vehicle for delivering prosperity that is unprecedented in human history, and must necessarily be the vehicle for delivering future recovery. The central issue is whether the market mechanism that has worked like a charm in the past is up to the job of delivering recovery in the future. This includes the questions of how markets failed and brought about the crisis, why they failed, and what it will take to get them going again. A related matter is why conventional policies have repeatedly proven to be damp squibs, incapable of firing wilting real economies into genuine resurgence. Band-Aid solutions cannot be expected to do more than buy time if the underlying condition is insidiously cancerous. This means that if economies have not been living up to the expectations of policymakers, it is a more a reflection on the policymakers than the economy.

Several unanswered questions remain about the true nature of the current crisis and its future path. Questions that have been swept under the carpet will be retrieved for close examination. Proper answers will require an investigation of fundamentals that reaches deep enough to get to the bottom of things. Only deep-lying explanations can shine a light that is bright enough to penetrate the current murky condition of an “unending recovery.”  The answers to the following suite of ambitious questions will hopefully adequately fill the bill.


1.2 The Big Picture

It takes the right questions to get right answers. No less an eminence than the Greek philosopher Socrates has demonstrated the importance of asking the proper questions for enabling focus in search of truth. The three sets of questions to be presented are prompted by the worrying condition of a Western world hobbled by the weight of an economic burden that does not show convincing signs of lifting. Loitering questions are gathered and presented in the following three-part suite that sets the tone and scope for the rest of this book.

The following questions are not designed for comfort. While we see symptoms of an acute economic crisis and a drawn-out downturn featuring an ambivalent recovery, are we fooling ourselves that is all it is? If it is not a case of history repeating itself with a run-of-the-mill business cycle downswing, can old policy tools work in new misjudged conditions? Will doggedly trudging forward with tired policies, involving borrowing, printing and spending money to stimulate the slumped economy have what it takes to deliver real recovery, or are policymakers unwittingly prescribing palliatives that hamper the desired outcome?  Will the pursuit of belt-tightening austerity through cutbacks in government expenditure and raised taxes really prevent the economy from going up the proverbial creek, or facilitate the process? If self-interest-based profit maximization is the driver of the free enterprise system, can bankers and others of their ilk be found at fault for doing what they are there to do? Why find fault with risk-preferring speculator sorts endowed with bullfighter nerves, when they perform the necessary role of bearing risks that the risk-averse fainthearted want to avoid? 

The set of questions at the next level goes beyond being uncomfortable to being disturbing, and unravels as follows. If the allegedly greedy bankers were out of bounds, why were they permitted to be so, particularly in so-called democratic societies with supposedly civilized safeguards, including prudential regulation? If business leaders, who are expected to contribute to the public good, instead did bad things, can they be blamed for rational responses to distorted incentives? If political representatives had trouble understanding complex matters like financial deregulation, did they seek the expert advice of economists to preempt socially undesirable outcomes? If they indeed did so, did they get bum steers because the so-called experts, stuck in sub-disciplinary foxholes, were part of the problem?

Next, the questions go beyond being disturbing to being distressing, and are as follows. Why is there disconnect between how businesses are doing and economies are faring, with companies able to thrive within national economies that wilt? Is this peeling away of company profitability from economic recovery symptomatic of a mutation of the capitalist market system into something outside the bounds of economics as we know it? Are policymakers deluding themselves by thinking that the old order is still alive and kicking, when in fact it is dead or going? Are economists failing to get the results they want because of misplaced faith in stale policies that have passed their expiration dates? Does the stubborn economic problem reflect failure in the cherished institutions and foundations of Western civilization, due to the ideological blindness of Western societies and their leaders about plutocracy cross-dressed as democracy?

These far-ranging questions frame the overarching nature of the problem for a new take in a crowded field. The range of assembled issues alerts readers to a collage of perspectives. The merging of several fields of knowledge will better equip the analysis to eschew fantasy and get down to brass tacks. It would shine a brighter light on why the slogans “Global Financial Crisis” and the “Great Recession” might miss the point by the proverbial mile. To view the crisis as a severe business cycle downswing brought about by an acute financial crisis, may not be just narrow, but also shallow. Such a perspective conveniently blocks out unpleasant facts by stopping short of addressing the critically important deeper and broader questions asked earlier. Consequently, it denies the analysis the perceptual depth required to identify deeply ingrained systemic vulnerabilities. Misdiagnosis would derail prognosis.


1.3 The Carnival is Over

Darkness settled. Suddenly, in a spectacular flame out, the world’s shining examples of free-market capitalism lost their sparkle. The almost-forgotten fairytale was denied its proverbial happy ending when the reality of unyielding market forces kicked in – more specifically, kicked most people in the teeth. The unreal world that promised a golden age of endless prosperity fell apart in grand fashion. The Great Moderation” (the official description label that Ben Bernanke, the former chairman of the Federal Reserve Board, gave to the fairytale condition of tranquil stability before the calm shattered), turned out to be “The Great Bubble” that blew the lid off Western economies when it burst and sent firms reeling, several biting the dust.

The carnival was over in the West. The moment of truth from the burst of this bubble pitched economies into recession, dealt the public a body blow, and revealed the alarming insolvency that meant goodbye to good times. Although the party took place in finance, the hangover continued everywhere in the economy. What started as a meltdown in the United States in 2007 has snowballed and morphed into a persistent, full-blown, global, economic mess of a wrenching nature. The grim reaper of economics has had a prolonged field day inflicting a smorgasbord of damage, including a brutal cull on supposedly reputed businesses and leaving several once-admired societies in reduced circumstances. The trials from the unforgiving elements of the crisis has put a strain on the link between body and soul for many, denied opportunity for much of the middle class, and left a bypassed majority disgruntled on the rack. 

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1.4 Nature and Scope

What’s on offer?  Although the dismal science of economics (the mother discipline with a glum Malthusian streak) does not readily lend itself to lightened expression and breezy fluency, an adventurous move in that direction will be attempted all the same – encouraged by its yawn-discouraging potential. 

Because there is no sense in writing what others have before, this book seeks originality in more ways than one. For one thing, originality is sought by using old knowledge as a basis for developing new insights; the new insights come from using neglected information to fill gaps in the currently disjointed narrative on the economic crisis. For another, originality is sought by capturing synergistic upshots from juxtaposing ideas in arguments being haphazardly tossed about in the public domain. Moreover, the overall intention is to provide a wide-ranging narrative to ensure that nothing relevant is too remote to the topic in hand. Such comprehensiveness is considered unprecedented enough to qualify as something original.
 
     While acknowledging some hesitancy in staking a claim to being avant-garde, this book seeks differentiation by occupying the lonesome middle ground that is a veritable “no man’s land” between the journalistic and the academic (at the acknowledged risk of falling between two stools).This chance is taken with a view to benefitting from the strengths of both: readability from a friendly idiom and rigor from logical reasoning, respectively. 

     It is a non-academic book that nevertheless strives to retain the controlling scholarly influences of logicality, factuality, and objectivity. It seeks simplicity without being superficial and precision without being boxed-in by the boring but necessary stringencies of academia. Also, academic writing tends to focus on the trees, whereas the intention here is to reveal as much of the forest as possible. This means that the picture painted will require a big canvas and bold brushwork.

The central idea is to reduce the daylight between myth and reality. While common myths could reflect superficial perceptions, inertia in thinking can tend to draw inexact parallels that stop short of dovetailing underpinning causes that are hidden with economic symptoms that are evident. Better defining reality, by making the connection between symptoms and causes, is expected to show that the remedies needed for solving the current economic problem go beyond standard economics, which takes for granted the foundations on which the capitalist market system rests.

The scope is decidedly broad, but not too much at the cost of depth. The tall order is revealed in the suite of questions asked earlier that, when penetrative enough, would make a search for at least some of the answers worthwhile.  It is hoped these answers will deliver a comprehensive perspective that encompasses several disciplinary areas but, emphatically, they do not have pretensions of being complete. The wide view adopted would avoid the compartmentalization of analysis by discipline, which is a typical deficiency in the current literature. Consequently, this book will integrate a range of aspects beyond the boundaries of standard economics. This unmet need is the primary motivation for writing it. 






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