Market Overview

The Obama Administration And Krugman Have It Wrong


Paul Krugman was interviewed by the New York Times after the Federal Reserve announced Tuesday that it was doing what traders call "quantitative easing light" as it announced it would roll over maturing mortgage backed securities into U.S. Treasuries. He said in the interview, "The Federal Open Market Committee has spoken. What's my reaction? The Fed's current policy is grossly inadequate, logically bizarre, and slightly – but only slightly – encouraging."

Unfortunately, Paul we can't spend our way out of this recession this time. This isn't a supply side recession, this is a demand side. There isn't demand from consumers that there used to be. Banks are right when they say that the demand for loans just isn't there.

While I do believe that banks are making it harder for consumers that want loans, I also believe that this is rightfully so, so as not to fall back into the same tricks as before. Consumers are not spending on luxuries anymore. The mind set of today's consumer has changed. Sure the super wealthy are still spending and the financial markets have come well off their lows, giving the appearance that things are all well and good. Well they aren't.

You are seeing consumers pick and choose which retailers survive in this market, as companies that were thriving before are either hurting severely, cutting back to the bare minimum or worse, going out of business. An addiction to debt fueled this recession and you can't put out fire with more gasoline. It simply doesn't work. You need to throw cold water on the problem -- spending and spending and spending isn't going to help if people don't want to take the free money.

Treasury Secretary Tim Geithner wrote an op-ed piece in the New York Times last week entitled 'Welcome to the Recovery.' Well Tim, if this is what the recovery is going to look like, then I hate to see what the next recession looks like as this still feels like a recession to me.

I want to discuss two particular points that are egregious in their claims.

The first piece in the op-ed I want to discuss is Geithner says, "Exports are booming because American companies are very competitive and lead the world in many high-tech industries." Tim, did you not see the trade balance for the month of June? It was horrible, coming in $8 billion worse than expected. This number alone could cause GDP for the second quarter to be cut in half, from 2.7% down to 1.3%. I don't know what part of the country you're in where you see exports booming. I only know what Washington tells me and that isn't a positive number.

The next piece is Geithner goes on to say "The auto industry is coming back, and the Big Three — Chrysler, Ford and General Motors — are now leaner, generating profits despite lower annual sales." While this is true, you can't take credit for Ford. Ford did it without the help of Chapter 11 bankruptcy, potentially putting it at a disadvantage. Instead, the American consumer responded by helping Ford by buying more of their products because it did not take government money.

So while Washington thinks that things are looking up, try asking 90% of the country (the middle and lower class) if things are any better out there. I'll bet you won't like what you hear.

Posted-In: Paul KrugmanMovers & Shakers Politics Economics


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