Here are the top reasons for the economic meltdown and how they will be solved:
1- Greed + extreme experimentalism. That is nothing new. It happened before. Extreme experimentalism is a feature of American capitalism.
2- Feds and treasury were unable to identify enough capital at the right time to fix the problem thus allowing Lehman to fall and creating a crisis of confidence. The last time this occurred was in 1989 and Greenspan and NY Fed were able to assemble equity pumping and lending into the freezing credit market. This time, they were unable to do so. This time all the liabilities from credit default swaps were 6B. This is nothing really and should have been dealt with early on. The fed inaction and letting Lehman collapse created panic in the market that was unwarranted. The losses due to the sub-prime mortgage in Lehman were probably bigger than in 1989 and couldn’t be just covered by ensuring liquidity is available. I need to check on that but I doubt it. Now, let us turn to why the Fed was unable to deal with it before it became public:
a. Lehman losses went with no attention for a long time. Just incompetence from the Fed.
b. Ideology has gripped the Bush administration. Many in the administration like Hoover believed that the best way is to let market forces deal with the situation.
c. The Koreans at the end didn’t want to pump cash into Lehman because the rumors were everywhere and they got a cold feet. In the 1989 crisis, the Saudis interfered but given the relationship between King Abdullah and the US, it is unlikely they will interfere now. Therefore, it had to be dealt with and dealt with publicly.
The origin of the issue is the subprime mortgage and that was left unattended for a long period first under Alan Greenspan then when the collapse started Bernake was unable to comprehend or deal with the problem. A lot of people took mortgages that they were unable to pay and with declining productivity in the economy and freezes on hiring, they were unable to pay those mortgages. The ideological Bush administration was crippled and unable to deal with the issue at a policy level. Iraq obviously has sucked the oxygen out of everything else. The right solution to it was to create jobs for those people who couldn’t work under mainstream capitalism like in roads and bridges so they stay in their jobs. Instead the Bush administration gave people tax rebates in their hands to spend on items imported from China. This didn’t help the economy in any way. It was simply a bribe.
How to Fix It?
1- Greed + extreme experimentalism. That is nothing new. It happened before. Extreme experimentalism is a feature of American capitalism.
2- Feds and treasury were unable to identify enough capital at the right time to fix the problem thus allowing Lehman to fall and creating a crisis of confidence. The last time this occurred was in 1989 and Greenspan and NY Fed were able to assemble equity pumping and lending into the freezing credit market. This time, they were unable to do so. This time all the liabilities from credit default swaps were 6B. This is nothing really and should have been dealt with early on. The fed inaction and letting Lehman collapse created panic in the market that was unwarranted. The losses due to the sub-prime mortgage in Lehman were probably bigger than in 1989 and couldn’t be just covered by ensuring liquidity is available. I need to check on that but I doubt it. Now, let us turn to why the Fed was unable to deal with it before it became public:
a. Lehman losses went with no attention for a long time. Just incompetence from the Fed.
b. Ideology has gripped the Bush administration. Many in the administration like Hoover believed that the best way is to let market forces deal with the situation.
c. The Koreans at the end didn’t want to pump cash into Lehman because the rumors were everywhere and they got a cold feet. In the 1989 crisis, the Saudis interfered but given the relationship between King Abdullah and the US, it is unlikely they will interfere now. Therefore, it had to be dealt with and dealt with publicly.
The origin of the issue is the subprime mortgage and that was left unattended for a long period first under Alan Greenspan then when the collapse started Bernake was unable to comprehend or deal with the problem. A lot of people took mortgages that they were unable to pay and with declining productivity in the economy and freezes on hiring, they were unable to pay those mortgages. The ideological Bush administration was crippled and unable to deal with the issue at a policy level. Iraq obviously has sucked the oxygen out of everything else. The right solution to it was to create jobs for those people who couldn’t work under mainstream capitalism like in roads and bridges so they stay in their jobs. Instead the Bush administration gave people tax rebates in their hands to spend on items imported from China. This didn’t help the economy in any way. It was simply a bribe.
How to Fix It?
1- You have to create quick jobs in the economy by pumping $ into public works.
2- Restoring confidence by showing there is a steady hand at the wheel.
3- Create major incentives for renewable energy development and research. This will have to be a huge incentive package for renewable energy so you create jobs in those areas. Same for buying hybrid cars. Next car that any American buys should be a hybrid car.
4- Reduce spending on almost everything else, including winding down the Iraq war. Iraq according to the Obama plan will become an ethincally and sectly segregated country unless Iraqis themselves think otherwise, which all indication from the Iraqi leadership say they are very sectarian. Therefore, the American military will create isolated zones. There will be no talk of splitting oil revenues since the US has limited bargaining power with the Shiite now. The Saudis will get even unhappier unless the focus completely shifts to solving the Palestinian problem. The appointment of Gates as secretary of defense signals that this is the plan for Iraq and Gates is very supportive of resolving Arab/Israeli conflict as well.
5- This finally leads to be able to stay in the Middle East at low cost by solving the Arab/Israeli conflict. Here lies the problem. Israel will very likely shift right wing in the next elections. Not only because of mood but because many of the neo-conservatives leftovers are going there to promote Benjamin Netanyahu. This makes Obama’s job much more complicated since Mr. Netanyahu will likely stall, talk tough on Iran (but do nothing) to embarrass the US president. Obama will do himself a good service by dispatching people to Israel to swing the elections otherwise. However, given the current crisis in Washington this is unlikely. Therefore, the likely outcome in the Middle East is to engage and try hard to appease the Saudi and if things move, ok, if not, that is fine. This is why the selection of Hillary Clinton is brilliant because she is the most tenacious (remember the primaries), she doesn’t despair, the Israeli lobby and neoconservatives cannot uncover any baggage for her anymore than what they already did, and it will be hard to say No to a woman like her; women actually get these things a lot better than anybody else. She is also well-liked in the Middle East, along with her husband. It is also the best chance to start the negotiations from where they left off under Bill Clinton. She is the real hope now to get the Arab/Israeli conflict resolved. The coming game will be Hillary vs. Netanyahu. For Obama, if it doesn’t work, then Hillary is burnt anyways and the most intractable conflict in history will most likely consume her and her husband’s energy well beyond Washington. This way she leaves Washington for him, which is the best position for the new president.
6- The crisis will be an opportunity to do several things:
a. Reduce consumer and company debt in the US.
b. Lower raw materials prices, which were causing severe long term harm to the US economy. This also put in check nations like Russia. China, India, and Brazil are actually likely to continue growth and that is good for the US in geopolitical terms. For China, see point d below.
c. Re-structure the financial system. There will be a lot of clean up to be done in the next 3-4 years.
d. Re-structure the manufacturing sector in the US especially car manufacturing to focus on technology. There will be some pain primarily lost jobs but that is a price that makes Wall Street happy and finally puts auto-manufacturing on the go. The other opportunity is to reduce the forces of globalization especially moving manufacturing jobs to China. This will take some guts but this is the right time to do it. This is where Obama can spoil it because if you slow it too much you reduce productivity and if you let it go at this pace you make globalization too painful.
What does that mean for Egypt and the Arabs?
1- Iraq will cease to be a political force in the Middle East for a very long time to come and might even be permanently.
2- Hillary will be the game in town. Obama is unlikely to invest presidential capital in the 1st term on Middle East politics especially if Netanyahu is elected unless the deal is almost done.
3- Hillary is driven and will be looking for those who can deliver the deal for her. A deal in the Middle East raises her stature so much, her job to be next president will become easier. The problem is that Arabs cannot do that for her. Surprisingly, the Arabs who can deliver for her are the Israeli Arabs if an Israeli leader is willing to make a coalition with them. That wont happen unless there are US assurances that it is the final game. This may actually happen but it has a low probability. Therefore, Hillary may come in and force a deal that appeases Arabs but does not really consult with them.
4- The Mediterranean union may wane and collapse under its own weight. However, Europeans will need diversified energy. Solar thermal leadership in North Africa can actually pay dividends. Europeans have always been narrow minded about working with North Africa. In all likelihood, they will continue to be so and be hostage to the Russians hiding behind NATO and American leadership.
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