Is the economy beyond saving?
— Srini Mahadan, Virginia
We don’t blame you for asking. Times don’t just feel tough, they feel unprecedented—even for Jack, who managed a company through three recessions (1973-75, 1980-82 and 1990-91). During each of those downturns, on any given day in February, even with the economy in decline, you could still predict your April sales figures within a couple of percentage points. Today it’s as though a blanket of fog has dropped over commerce: Visibility is near zero. No wonder managers are in a frenzy of institutional preservation, doing everything they can to unload costs.
But is the economy beyond saving? Of course not. Too many smart, dedicated people are on the case. The real unknown is how soon a recovery can start, and how fast it will take hold once it does. And that, we believe, depends on policymakers’ coming to terms with three contentious, but inexorable, facts.
Fact No. 1: Focusing on the details of the stimulus package before fixing the banking system is backward.
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Healthy banks are to the economy as healthy hearts are to people: They keep them alive with the “lifeblood” of credit. Right now, however, while the patient is having a heart attack, policymakers are busy talking about how much to spend on a suit he’s going to wear next year.
The Troubled Asset Relief Program and other early initiatives appear to have stabilized the markets, but more needs to be done, as unpalatable as that may sound to bailout-weary Main Street. Falling housing prices remain a serious problem, and the government still needs to install an aggressive programme to get foreclosures under control. It also needs to get toxic assets off the balance sheets they continue to contaminate.
In 1989, the Resolution Trust Corporation’s “good bank/bad bank” approach worked effectively, but the recent Citigroup rescue suggests that government asset guarantees are also a potential option.
Our purpose, though, is not to dwell on the details. It’s to make the point that policymakers will be wasting their political capital fighting over the stimulus package if they don’t first invest their energies in saving the financial system.
Fact No. 2: The stimulus package is turning into a big, opaque mess with questionable potential for job creation.
The package flew through the House, but that doesn’t mean most people trust it or think that it includes the best set of ideas our government can offer. We’re in the crowd hoping that the Senate debate will move the Bill in the direction of transparency and good sense.
But we believe that will only happen if policymakers start talking about the stimulus package as they should, in terms of three distinct “buckets” of proposals. The first should contain all the plans intended to spur employment, with each expenditure linked to detailed projections about how many jobs, and what kind, will result. The second bucket should contain all the proposals for expenditures designed to help those hurt by the economic collapse. And the third should contain all the measures that are in the stimulus package because...well, because they’re pork and partisan payback.
That third bucket is unfortunate, of course, but that’s politics. It would be naive to deny its existence. But it would be worse still for policymakers to keep discussing the stimulus package as though it’s just one big mass of initiatives. The package will restore much needed confidence and ultimately be more effective if the debate about it concerns what really matters: creating jobs and providing support to those who’ve lost them.
Fact No. 3: Revenge may be tempting, but it’s a losing strategy.
The list of people that could have prevented or mitigated this economic disaster is long, and recent reports about the billions paid in bonuses to Merrill Lynch bankers have only exacerbated feelings that someone has to pay for this capitalism-run-amok.
But policymakers need to accept that we are all now investors (“we” meaning the taxpayers) in the companies that the government is helping. Within limits, we must let these companies do what it takes to thrive in a globally competitive world, even including, yes, paying for performance and courting customers with sales events. If we don’t, we will all soon be investors in carcasses.
We don’t mean to minimize the challenge ahead; your question correctly suggests its magnitude. But if we’re guided by a shared understanding of the banking system’s priority status, the real contents of the stimulus package, and the self-destructive cost of revenge, we’ll find a way out together.
©2008/BY NYT SYNDICATE
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