Thursday, November 11, 2010

A Very Serious Warning from Robert Rubin

You can't get to be much more of an insider that Robert Rubin. He is the former head of Goldman Sachs, former Treasury Secretary and current co-Chairman of the Council on Foreign Relations. He is out with a a very serious Op-Ed in today's FT.

In my view, it is perhaps the most alarming warning about the financial health of the United States that has been penned to date. To understand the seriousness of his warning, you must understand that Rubin chooses his words carefully, that he is a liberal who sees an important role for government, that he is a Keynesian and that he understands, very well, the complex structure of the United States financial system.  In other words, he is not likely to sound an alarm about the financial situation unless he sees very serious problems.

Also, keep in mind that in his memoir, Locked in the Cabinet, former Labor Secretary in the Clinton Administration, Robert Reich wrote:
"I profoundly disagree,"  says Rubin. He is the only person in the Administration who can profoundly disagree without raising his voice.

Rubin is now close to raising his voice.

Here are the key points that must be understood and taken away from Rubin's piece:
There are realistic chances of a healthy recovery in the shorter term. However, we face enormous headwinds: high unemployment and low job growth; both a decline in fiscal demand and unsustainably high federal deficits; excess capacity; business uncertainty; weak consumer financial conditions; and much else.
Being a Keynesian, he does see benefits to "stimulus" spending, but because he is a Keynesian his warnings about the dangers of  "stimulus" untied to deficit reduction is instructive:

...a major new stimulus could well be constructive, if it is tied to real, trusted and enacted long-term structural deficit reduction. Otherwise, a major new stimulus is likely on balance to be counterproductive, initially or over time. It could seriously increase business uncertainty about future economic conditions and policy, or change market psychology unexpectedly and dramatically, causing serious market disruptions. Or, even if a major new stimulus worked initially, it could fail to generate lasting momentum due to the headwinds, leaving us worse off than we would have been, with more debt but no greater gross domestic product.
His warnings about Fed chairman Bernnake's QE2 should be taken equally seriously:
Another macroeconomic tool, quantitative easing, has been used aggressively. The much-discussed extension could work. Alternatively the economic effect could be quite limited, since interest rates are already very low, the stock market impact and consequent effect on consumption are uncertain, deflationary expectations are not currently significant economically, and weakening the dollar could generate harmful reactions elsewhere. And a large, new round of quantitative easing has real risks: undermining confidence in the Fed’s ultimate refusal to monetise our debt; undesirably heightened inflationary expectations more broadly, now or later, or actual inflation; and competitive devaluations and trade restrictions.
Given Rubin's cautious understated style, that he ends by telling us "there is much to do" is a very serious warning:

The historic resilience of our political system, our economy, our culture and our society is a hopeful augur. We have risen to difficult challenges many times in the past and we can do so again. But there is much to do.
Translation: We are on the edge of a financial cliff. Once the system starts to implode, it will take a miracle for the Empire to come out anywhere close to its former self.

1 comment:

  1. Hello Kettle, this is the pot. You're black.