1. Europe has dominated my thinking for several months. I am deeply troubled by the top-down, imposed austerity that is being put in place by the Eurocrats. It is the apparently invariant neo-liberal orthodoxy practiced by the IMF for many years in the developing world, and adopted 100% by the Germans, and, with less power, by the French. The answer to any sovereign budget problem is "fiscal consolidation", which means austerity, budget cuts, and tearing huge holes in the social safety net and the powers of unions. Austerity will not work in Europe (as it also will not work in the UK or in the US). The problem is not public deficits, or public debt buildup. It's an imbalance in trade competitiveness, leading to large surpluses in Germany, almost identically offset by current account deficits in the periphery. Why would Germany want to punish its customers? It is nonsensical. What the periphery needs, and what they had before the 2008 crisis, is good vendor financing and PDI (Private Direct Investment). Europe, at some level, and in some form, will blow up in 2012: sooner, if the ECB continues to refuse the role of lender of last resort; later, if the ECB takes up the mantle of unlimited purchases of sovereign bonds. There will be, early or late in 2012, I believe, a major credit event (one or more countries leaving the Euro, one or more major bank collapses, etc.) The US will get hit, and possibly, hammered. One or more banks may go down. My hope: this will give us a second chance to break up the banks into smaller, more manageable entities, and wipe out a ton of private mortgage debt that will never be repaid.
2. No one in power seems to understand macroeconomics. There is an infatuation with austerity and the public debt crisis. We hear repeated statements that the US is broke. Not true. Not even remotely true. What are the central bad assumptions:
a. Deficits are bad.
b. Balanced budgets are good, surpluses even better.
c. Public debt strangles the economy, and must be paid down or eliminated.
d. Failure to reduce public debt unfairly burdens our children and grandchildren.
e. There is a limit to how high the public debt/GDP can go (Rogoff and Reinhart - 60%)
f. Out of control deficits and debt ratios will lead to the US some day being shut out of the credit markets, like Greece, Ireland, Portugal, etc.
g. Deficits will push up interest rates.
h. Government spending does not create jobs or add to GDP.
i. If we don't control spending and debt levels, bond markets/vigilantes will attack us and drive rates up to unmanageable levels.
j. The Fed controls the money supply (M1, M2).
k. Banks lend out of reserves provided by the Fed (bank money multiplier).
l. The Government needs taxes to fund spending.
m. Treasury needs to sell public debt to fund spending.
n. Issuing public debt reduces the inflation risk caused by deficits.
o. If we don't get spending under control, we face the risks of inflation, currency debasement, and hyperinflation.
p. Our current low interest rates on public debt are an aberration.
q. China has us over a barrel because they own so much of our debt.
All of these statements are either wrong in toto, or wrong in part. Yet they are almost all taught in college macroeconomics. And they form the essential way most economists, almost all pundits, and both political parties view the economic world. Quite simply, everyone is wrong. We are deciding policy based on a host of bad assumptions. I will spend a lot of blog time presenting the case for macroeconomics that work, based on MMT (Modern Monetary Theory). Sometimes dense stuff; but it's worth working through, if it helps us to see how much of our public discourse is based on faulty economics.
3. Republicans have overreached. Much of their program is outside the mainstream. Specifically: converting Medicare to a defined benefit (versus a defined contribution) program; privatizing Social Security; eliminating collective bargaining for public unions; resisting tax increases/promoting tax decreases for the wealthy/the top 1%; repealing Obamacare (country is split down the middle here); support for unlimited money in politics with limited disclosure requirements; resistance to a path to citizenship for illegals (again, the country is split); escalating war on reproductive rights with effort to define personhood at conception; resistance to Wall Street/bank regulation post crash. The country does not support this agenda. My hope: the 2012 campaign becomes a referendum on this agenda, not just a choice between Obama and the Republican nominee. If this happens, the Republicans could be defeated badly enough, that moderate Republicans will emerge to question this agenda, and move the Party back towards the center. Things to watch before November: Will Scott Walker be recalled as Governor of Wisconsin (if so, this will be only the third time in history)? Will the Supreme Court uphold the individual mandate and thus validate the legality of Obamacare? Does Occupy Wall Street stay alive, and become stronger in the Spring, tending to validate the President's message given in his Ossawatomie speech? I hope all three things happen, which could give powerful momentum to discrediting the conservative agenda.
4. I hope 2012 is the year when we begin to talk seriously about housing policy from two perspectives: holding Wall Street, banks, and bank servicers accountable for the fraud they have perpetrated on homeowners, investors, the US land records system, and the taxpayer; and eliminating unpayable home mortgage debt. On the first point, Treasury has been absolutely asleep at the switch in terms of conducting real loan file and investment deal analysis, but it looks like some aggressive states attorneys are beginning to fill the gaps ( Schneiderman in New York; Biden in Delaware; Coakley in Massachusetts; Masto in Nevada; and Harris in California.) By the end of 2012, there will be some very serious legal inroads made against the banks in these states. Additionally, the SEC and the FHFA are moving against the banks at the federal level. On the accountability level, I am becoming somewhat more hopeful. As to mortgage debt forgiveness, the Administration has been extremely timid; moral hazard/how can we have a solution that just helps those who got in trouble, offering no reward for those who stayed current. But the real reason, I suspect, is that Treasury doesn't want to pound the banks' balance sheets. But it's time to move forward. Fully 25% of mortgages are underwater, and another 10% are close to being underwater. That's almost 18 million mortgages. To make up some numbers to look at scale: a $50,000 mortgage forgiveness on 18 million mortgages would total $900 billion. This would potentially bankrupt the big banks, which I think is necessary to avoid a lost decade like Japan, which refused to recapitalize its banks in the early 1990s'. Such a move would go a long way to repairing private household balance sheets, surely increasing families' willingness and ability to spend. Additionally, such a move would big time jump start the housing market, always a key in economic recovery.
5. I truly hope Occupy Wall Street is just getting started. We need a powerful restatement of the ethical underpinnings of the American dream: We are not only a nation of individuals seeking to maximize our personal success; we are a nation of community, contribution, and shared sacrifice. Any individual or group of individuals that takes hold of the economic reins of power, and uses this position to advance only their own, and not the community's interests, needs to be exposed and called to account. We must serve more than our personal advancement; we must be in the Nation's service. We must work tirelessly to see that everyone gets a"fair deal, a fair shake and a fair shot". I can think of no better way to ensure this conversation is robustly engaged in this country, than to have Occupy continue to grow, in fact to flourish. Occupying the public space is an important part of the message, because it insists that all "public space" needs to be fully accessible, if not controlled by the 99%. There is an essential experiential element to Occupy that few, especially conservative pundits understand: you learn revolution by revolting; more softly, you learn true democracy by being and doing democracy - by being in the collective, democratic space of the General Assembly; by listening deeply to others in the Circles of Concern; by supporting broad, local listening through the amazing "Mic Check" means of spreading the word; and occasionally you need to face into the organized and assaulting opposition, in solidarity with your Band of Brothers and Sisters. Something new is a-birthing in America. It bears the aroma of Spirit. Watch this, and watch it as much as you can with clear and quiet eyes.
6. 2012 may well be a year with considerable focus on the international scene. Not much will happen in a divided Congress. Energy, Climate Change, Immigration, and further moves in Healthcare must await the 2012 elections. Until then, only the international arena offers the possibility of substantial action. Egypt, with progress towards a representative government, while we adjust to dealing with a majority Islamist government. Will the military share power? It's not clear. But there can be progress. Syria, with a rejection of Assad probable. What will emerge? Most likely a Sunni majority government that breaks much of its ties to Iran, and to Hezbollah in Lebanon. Will it be civil war? Possibly and possibly not. What are the chances that the Sunni majority will break through the political morass and assert its will? Not extremely high; but not negligible. And what about Israel, potentially bordered on three sides by significantly Islamist states? I think Israel may possibly decide, perhaps in 2012, that they must finally go ahead and sign a two-state peace agreement with the Palestinians. And Iran - could this be the year they decide to come in from the cold? Syria under Sunni (Saudi) leadership would help. Israel making peace could help a lot. The odds aren't great; but, again, they are non-zero. And China? Is this the year where a possible hard economic landing shakes the world's fear and trembling in the face of the Asian Giant? And might this be the year when protests, fed by the new social media, begin to show up on some regular basis? Here the odds are reasonable, not just possible. Times they are a'changin. The air is full of calls for freedom, for individual dignity and valuation. No more can the dictator count on controlling the flow of information. And information brings power, and a desire for freedom. 2012 will be a year of transition and change, pushed further by what may start soon in Europe, carry into China and then burst on the scene as a worldwide recession, even depression. And it's hard to keep the people down and out when the economy is stumbling. Mark my words: by the time we get to November, many things will look different. How will it affect our elections? Hard to say, but the impacts will be real.