Tuesday, November 08, 2011
[IWS] THE WAY FORWARD: MOVING from the POST-BUBBLE, POST-BUST ECONOMY to RENEWED GROWTH and COMPETITIVENESS [10 October 2011]
IWS Documented News Service
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
New America Foundation
The Way Forward: Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness [10 October 2011]
By Daniel Alpert, Westwood Capital; Robert Hockett, Professor of Law, Cornell University; and Nouriel Roubini, Professor of Economics, New York University
October 10, 2011
[full-text, 35 pages]
Notwithstanding the magnitude of the challenge, however, this paper argues that there is a way forward. We can get past the present impasse, provided that we start with a better diagnosis of the crisis itself, then craft cures that are informed by that diagnosis.5 That is what we aim here to do. The paper proceeds in five parts:
Part I provides a brief explanatory history of the credit bubble and bust of the past decade, and explains why this bubble and bust have proved more dangerous than previous ones of the past 70 years.
Part II offers a more detailed diagnosis of our present predicament in the wake of the bubble and bust, and defines the core challenge as of the product of necessary de-levering in a time of excess capacity.
Part III explains why the conventional policy tools thus far employed have proved inadequate – in essence, precisely because they are predicated on an incomplete diagnosis. It also briefly addresses other recently proposed solutions and explains why they too are likely to be ineffective and in some cases outright counterproductive.
Part IV outlines the criteria that any post-bubble, post-bust recovery program must satisfy in order to meet today’s debt-deflationary challenge under conditions of oversupply.
Part V then lays out a three-pillared recovery plan that we have designed with those criteria in mind. It is accordingly the most detailed part of the paper. The principal features of the recovery plan are as follows:
First, as Pillar 1, a substantial five-to-seven year public investment program that repairs the nation’s crumbling public infrastructure and, in so doing, (a) puts people back to work and (b) lays the foundation for a more efficient and cost-effective national economy. We also emphasize the substantial element of “self-financing” that such a program would enjoy, by virtue of (a) massive currently idle and hence low-priced capacity, (b) significant multiplier effects and (c) historically low government-borrowing costs.
Second, as Pillar 2, a debt restructuring program that is truly national in scope, addressing the (intimately related) banking and real estate sectors in particular – by far the most hard-hit by the recent bubble and bust and hence by far the heaviest drags on recovery now. We note that the worst debt-overhangs and attendant debt-deflations in history6 always have followed on combined real estate and financial asset price bubbles like that we have just experienced. Accordingly, we put forward comprehensive debt-restructuring proposals that we believe will unclog the real estate and financial arteries and restore healthy circulation – with neither overly high nor overly low blood pressure – to our financial and real estate markets as well as to the economy at large.
Third, as Pillar 3, global reforms that can begin the process of restoring balance to the world economy and can facilitate the process of debt de-levering in Europe and the United States. Key over the next five to seven years will be growth of domestic demand in China and other emerging market economies to (a) offset diminished demand in the developed world as it retrenches and trims back its debt overhang, and (b) correct the current imbalance in global supply relative to global demand. Also key will be the establishment of an emergency global demand-stabilization fund to recycle foreign exchange reserves, now held by surplus nations, in a manner that boosts employment in deficit nations. Over the longer term, we note, reforms to the IMF, World Bank Group, and other institutions are apt to prove necessary in order to lend a degree of automaticity to currency adjustments, surplus-recycling, and global liquidity-provision.7
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