The Thinker

What’s causing that great sucking sound

There is plenty of bleak economic news among the recent headlines. Today I read online that housing prices are 18% less than they were a year ago. The last unemployment report showed 7.2% unemployment, but yesterday came a raff of announcements from major employers that they too were cutting jobs. These include Caterpillar (20,000 jobs), Pfizer (8,000 jobs), Sprint-Nextel (8,000 jobs), Home Depot (7,000 jobs) and General Motors (another 2,000 jobs). Even Microsoft is planning to lay off people. It will shed 5,000 jobs over the next eighteen months. In fact, in 2008 the economy shed 2.6 million jobs, the most since 1945 and 2009 is just getting started. We can expect even higher unemployment numbers to be reported in early February. One has to look hard to find any company that is beating the odds. IBM still made a profit and beat Wall Street expectations, but it is unlikely that their winning streak will extend through the current quarter. As for the value of stocks in general, the S&P 500 index is at about 62% of what it was a year ago.

The only thing we can say with confidence is that we have not hit the bottom yet. Many economists think that things will turn around when the government stimulus finally kicks in late this year. I am no economist but my hunch tells me that a real recovery is likely in 2010 or later, rather than this year. In short, this economic downturn may well be the 21st century’s Great Depression. It is dramatically altering our financial landscape and fundamentally changing our assumptions about how society is supposed to work.

Banks are supposed to be in the business of lending, but few want to lend to anyone but their most creditworthy buyers, even after getting huge capital injections courtesy of the U.S. taxpayers. Why? There is too much uncertainty in the market. Why lend out money when you might not get it back? Moreover, sustained deflation is a real possibility. If it happens, it means that banks that hold on to their assets may yield more relative wealth than by loaning it out, even with interest. Of course, if no one lends money the economy halts, which is clearly well underway.

How did all this come about? It all comes down to one word: trust. The global economy runs on it. We have to have trust in our institutions to play by a set of fair rules. Until and unless it does, the economy is unlikely to markedly improve. Equally as important to our recovery as the massive stimulus bill being debated in Congress is the establishment of a new set of financial rules to govern the country and the world.

You may have noticed that the new Obama Administration is working hard to be the most transparent administration in history. It is doing this by putting far more public records online and in a more timely fashion than ever before. By being open about the way it is governing, it is desperately hoping to foster trust.

Yesterday within an hour of belatedly being confirmed, President Obama swore in as Timothy Geithner as the new Treasury Secretary. The evening was well underway when Geithner was sworn in, but Geithner went swiftly from the ceremony to work at the Treasury Department. He did so because the sooner he could affect a new set of financial rules affecting the country, the faster trust could be restored. Geithner and President Obama realize that the new rules must be judged fair, transparent and must be impartially applied. This is how trust is restored.

When Ross Perot first ran for president in 1992, he talked about the “great sucking sound” that would result from the then unratified North America Free Trade Agreement (NAFTA). He predicted that NAFTA would cause more jobs to move from the United States to Mexico than would be created. Whether he was right or wrong was debatable, but in 2009, we are hearing a global great sucking sound as millions of jobs vanish and wealth disappears by the trillions of dollars. That is the sound of trust being lost.

The world is reacting like a wife who discovers her husband is a philanderer. Just as marital trust is hard or impossible to renew after an affair, when shady Wall Street deals abuse our trust (evidenced in diminished stock portfolios and plunging home prices), financial trust becomes hard to reestablish too. In most cases, the abused wife will divorce her philandering spouse. She may marry again, but only if she is confident that her new husband would have the qualities her old husband lacked. When a massive trust crisis happens to a populace, a depression can result.

President Obama, his administration and the Congress thus must work very hard to establish the trust and confidence of the American people and the world. Like it or not, our wealth and future prosperity now rests in their unproven competence. This is why President Obama is working so hard to find common ground with Republicans. Trust is enhanced if both sides of the aisle can embrace a new set of governing rules, and is diminished when it does not exist. This approach may be unpalatable to many on both sides of the political spectrum, particularly given the Republican’s recent and toxic record, but it may be crucial to our recovery.

The good news is that we now have a true grownup leading our country. He understands in this critical time what is required for the rest of us to regain trust. So there is genuine reason for hope. Let us hope that we can work through our jitters and through transparency, decency and fair play come out of this and into a better future.


4 Responses to “What’s causing that great sucking sound”

  1. 9:45 pm on January 27 2009, Stacey Derbinshire said:

    Great Blog post. I am going to bookmark and read more often. I love the Blog template

  2. 11:27 pm on January 27 2009, Ray R. said:

    The housing prices sentence is missing some information. It reads “18% of what they were ago” Something missing there. If it should be one year ago, that wouldn’t make any sense either, since housing prices couldn’t have dropped that much. Other than that, I thought it was a very good article. A disappointing report, to be sure, but we at least have a thinking individual in the White House that cares about the nation. We hope for the best and our hearts go out to those who suffer as a result of the “downturn” brought about by the idiots of this world.

  3. 9:39 pm on January 28 2009, Mark said:

    Good point. That should read 18% less than they were a year ago. I will correct. Clearly, editing is not my greatest skill!

  4. 5:40 pm on January 31 2009, Scott Plantier said:

    See the Washington Post column of Thursday, February 14, by Eliot Spitzer:

    This is one of the better examples of how we got here and serves as explanation of why Mr. Spitzer was targeted by our former King George.

    I’m still waiting for our media to rightfully assign blame here rather than point to all of us as having been the source of the housing bubble. Yes, many bought homes who should not have, but as this article points out the primary cause was the removal of all regulatory restraint which opened the door to financial destruction.

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