Business As Usual Is Not An Option

Ben Bernanke, our unruffled Federal Reserve chairman, was asked today whether spending trillions of dollars is the right answer given that it was overspending that got us into trouble in the first place. And his answer was clear - but also goes to the heart of the widespread unease that many feel right now: We cannot afford not to spend. Without aggressive measures, the downturn will become much worse. We need to get through this crisis, then only can we start talking about being fiscally responsible. For sure, there has to be a plan to address the ballooning budget deficit; but now is not the time to be prudent - and he cited St. Augustine's famous "God let me be moral - only not just right now."


The rub with this though is that St. Augustine knew what he had to achieve, and more importantly, what he had to do to fulfill God's demands. It was more or less in his own hands. But it's far from obvious that any of the world's governments have any coherent notion of how to get to the blessed state of sustainable deficits, both external and internal. We need to rethink the premise of a global economy that is driven chiefly by consumer spending in the largest economy, the U.S. Rebalancing the global economy will require the U.S. to curb consumption and invest more in education, transportation, clean technology and many other areas that have been neglected in the past decades. Japan, China and Germany (numbers 2-4 of the global economy) must wean themselves off the exporting fix - these economies must find a way to stimulate private consumption. None of this will be achieved overnight; the scale of the challenge we are facing is daunting.

Conventional wisdom says that the housing market in the U.S. lies at the root of the current crisis - that is partly true. But a different statement would also be correct: it was the massive global imbalances that created the havoc we are now struggling to contain. The G7's conciliatory tone toward China - rather than the usual yuan bashing - was a first step; but the forum that will prove decisive in outlining the post-crisis economic order should ideally be the G20 - where emerging and developed nations come together - which next gathers in London in early April. It has been mostly a talking shop, a handy place for national grandstanding. But under the new U.S. leadership, it has to be hoped that this will change, because we cannot emerge on the other side of the crisis with the same or similar imbalances in the world economy. We cannot afford business as usual.

Hummers & Pigs

Two topics to look at Tuesday: the fate of the U.S. auto industry - still very much in the balance - and the worries about the strength of the European banking system, given its exposure to the rapidly deteriorating economies of Central and Eastern Europe.

There is not much to say about the U.S. car makers - though GM finally seems to have come to its senses and appears to be contemplating at least a plan to ditch the unspeakable Hummer. That retiree healthcare costs have become a major sticking point in the auto industry's efforts to prove to the government that it is making progress in getting itself back on the right track should serve as a reminder to politicians that reform is needed urgently in this area. Decent healthcare for all is the hallmark of a developed economy - and the reason why we pay taxes. This is one of the state's most important duties (besides defense and education) - it's time for politicians to face up to reality.

More ink can be spilled on the Western European banking system - though it is highly doubtful that Eastern Europe will prove to be the downfall of Europe's big banks: it remains a sad fact that European banks' exposure to U.S. mortgage-related assets is far larger than their exposure to the Eastern European consumer. That doesn't mean these countries won't struggle and there won't be a lengthy period of adjustment as consumers there too learn the perils of borrowing more than they can afford - and in a foreign currency to boot. But European bank balance sheets - with the possible exception of some of the more exposed Austrian banks - will not be sunk by overextended households in the east.

And then there's the market's new favorite term: PIGS - which stands for the four euro problem children Portugal, Ireland, Greece and Spain. They are being punished by bondholders and the ratings firms alike for their profligate ways. The cost of protection against a porcine default has risen, seemingly implying a greater likelihood of a national default. Yet the opposite is true - and the reason for that is the much-maligned euro. The common currency has many weaknesses; chiefly, it lacks the backing of the taxation power that makes it nigh impossible to seriously threaten the dollar as the world's reserve currency. But that is an external aspect; internally, among the euro zone members, the common currency has become a shelter in the storm, with the European Central Bank proving a flexible master of liquidity measures to keep euro zone money markets functioning and steering its creation through the first big storm of its decade-long existence. Small countries outside the common currency are peering in and wondering whether it's wise to remain in the cold as their currencies are pummeled by the increasing market volatility; small countries in the euro zone, such as Greece and Ireland, need only to look at Iceland should they doubt the wisdom of their decision. The joke that the difference between Ireland and Iceland is one letter and six months lacks the third leg and crucial distinction: there is strength in numbers.