THE PLANK AUGUST 31, 2009
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The notion of a two-track economy seems to be taking hold. We kicked the concept around pretty well last week--your 130 comments (as of this morning) helped clarify a great deal of what we know, don’t know, and need to worry about. The two-track concept overlaps with, and builds on, long-standing issues of inequality in the U.S., but it’s also different. Within existing income classes, some people find themselves in relatively good shape and others are completely hammered.
New dimensions of differentiation are also taking hold within occupations and within industries--the WSJ this morning has nice illustrations. The contours of this differentiation begin to shape our recovery or, if you prefer, who recovers and who does not--it’s hard to say how this will play out in conventional aggregate statistics, but these are likely to become increasingly misleading.
For now, I would highlight three points about the two-track future for banks--partly because this matters politically, and partly of the way it impacts the rest of the process.
- The remaining big banks have become bigger and more powerful economically--the Washington Post emphasized deposits yesterday; good point, but only part of the picture. The Financial Roundtable is tickled pink about the government’s “reform” proposals (except the consumer protection part), with good reason.
- Many smaller banks are getting squeezed--as reflected in the latest news on the FDIC’s “danger/sick list.” The smaller banks really do not seem to understand how they have been done in by the big banks--if they did get it, they’d be up on Capitol Hill and all over the media arguing strenuously for much tougher controls on bad big bank behavior. The lack of leadership among non-large banks is remarkable.
- The WSJ today has the data: borrowing costs for large banks are now lower than for small banks. This is, of course, a direct reflection of the government’s firefighting/firesetting strategy: unlimited cheap resources for large big banks; for small banks, not so much.
So now it’s all about whether you are a preferred client of Goldman Sachs or another big finance house.
If you’re on the inside track, this is a great time to buy U.S. assets that are being dumped by people without access to cheap credit, or assets overseas (e.g., Asia, where the “carry” or interest rate differential relative to the Federal Reserve is already positive and the exchange rate risk is all upside).
If you’re on the outside track, you are experiencing a version of Naomi Klein’s “Shock Doctrine.” Some (former) members of the elite are in this category--this is another standard feature of emerging market crises and “recoveries.” But mostly, of course, it’s nonelite on the outside track and a more concentrated, reconfigured version of the elite on the inside.
This can lead to short-term growth--the speed of recovery in many emerging markets surprises many, from about 12 months after the crisis breaks. But it also leads to repeated crisis, to derailed growth, and to a loss of income, status, and prospects for most of society.
2 comments
This dovetails with another post of yours about the relative productivity of the US and China, and the US's increasing orientation toward consumption and services (and terrible education system) vs. China's toward tradable goods. Of course these are just two sides of the same entirely unsustainable coin. But what it means in terms of the 'Two Track Economy' is that our wealth, by which I mean the consumption we as a country have grown accustomed to, is entirely unsustainable (see for example 11% fiscal deficits at the national level, state government budget tightening, etc., now that both consumers and businesses are net savers). In the process of shrinking that in the aggregate, our burgeoning institutional corruption to levels last seen in the late Western Roman Empire ensures that the pain is shared unequally, falling most on those with the least clout. The outsiders in Dr. Johnson's parlance. This will add to civil unrest that over time will threaten the establishment, as well as the baby that bathwater sits around, i.e. the liberal democracy if we can keep it. Engineering an escape from this monumental problem is a huge task, one that the best leaders and most educated, mature and responsible citizenry of our past would struggle to successfully complete. So I'll be happy to go short whatever odds anyone would be willing to fashion on the likelihood that the current bunch getting it done. This set if circumstances oddly unites both the heroes and the villains of this tragedy- the informed and the willfully ignorant- in a few years of brass polishing on a sadly fated ship of state.
- I Majorajam
August 31, 2009 at 12:16pm
How humilating it must be for the Bear Stearns/Lehman Brothers ilk on Wall Street to have Naomi Klein's Shock Doctrine pin them...THEM!...to the mat. Down for the count by their own fellow travelers. It's like Roy Waller in The Matchstick Men. A grifter conned by another grifter. A sting as elaborate no doubt as the one that kicked Margaret Ford upside the head in House of Games. But Roy and Margaret both learned valuable lessons [each in their own way] and were able to ride off into the sunset of a Hollywood happy ending. Or, perhaps, in Margaret's case a David Mamet happy ending. And who knows, maybe Congress will investigate Goldman Sachs and expose exactly how they pulled it off. And maybe Eric Holder will empower another special prosecutor to invetigate how Congress and the White House played their own parts in the scams. Or maybe not? Wait, I've got an idea! Let's pressure Holder to name Eliot Spitzer as the special prosecutor. A redemption story. And Spitzer already knows a thing or two about soliciting prostitutes, right? Yeah, I know what you're thinking: who are the prostitutes, who are the pimps and who are the Johns in this sordid tale? Make up your own cast. That's what I'll do. george
- iambiguous
August 31, 2009 at 12:55pm