From Enron to Madoff, bear markets to financial crises, bubbles to bailouts, jobless recovery to double-digit unemployment — this has been an economically brutal first decade for the new millennium.
It has bred doubt about the resilience of the American economy. It has stirred calls to dust off New Deal designs.
It has turned our world upside down.
After all, the 1990s were a jobs machine, a deficit destroyer, a stock market utopia. We even deflated the Y2K threat.
It seems now that all those zeros on our new calendars were trying to warn us about the encroaching fleet of financial Hindenburgs.
The boom in technology stocks burst like a bubble, precipitating three years of falling 401(k) accounts.
Terrorist attacks shuttered the stock market for four days, devastated the airline industry and prolonged the decade’s first recession.
We recovered. But then we inflated and popped a housing bubble that reverberated as a credit crisis, threatening to pull down the entire financial system.
In crisis, we embraced unprecedented government intervention, which means Americans still own car companies and financial giants but do it through the U.S. Treasury instead of their retirement accounts.
Kansas City has muddled through, but not without its own pains.
During the decade, Sprint Nextel Corp. shed two-thirds of its Kansas City area employees. Home builders folded. Banks failed. Trucking giant YRC Worldwide Inc. slowed to a crawl.
As we begin the next decade, the worst recession since the Great Depression is finally flashing early signs of recovery. Housing markets have found some stability, industrial production and manufacturing have rebounded, and the stock market has bet heavily on growth.
But even Federal Reserve Chairman Ben Bernanke recently warned that “important headwinds” will keep the recovery weak. Get used to diminished opportunity, blunted wages and prolonged idleness.
“Will that fundamentally alter the confidence of the public in the economic system in general and the financial system in particular? That has yet to be answered,” said Joseph Brusuelas, a director at Moody’s Economy.com.
Americans aren’t sure yet that they trust federal fixes. But this moment of doubt has raised the key economic issue of the coming decade.
What should government do next — step back, or step up to a larger and lasting role in the economy?
“This is pretty much a polarized split, down the middle,” said Art Hall, executive director of the Center for Applied Economics at the University of Kansas. “It’s hard to be a moderate in this debate.”
Too little, too late
According to one view, the colossal failure of the 2000s was government’s decision to let the financial industry essentially run amok.
Deregulation, which began with President Jimmy Carter’s push for trucking and airline competition, was driven to extremes, becoming an anti-government mind-set.
Government weakened its oversight efforts and removed meaningful rules, particularly in the world of finance. It also allowed new players to flourish unfettered.
Bill Black, associate professor of economics and law at the University of Missouri-Kansas City, pointed out that lax enforcement efforts allowed fraud to run rampant in the mortgage market, particularly in making subprime loans to less creditworthy borrowers. Unchecked dishonest players drove honest competitors out of markets.
“It isn’t just that it was done away with through deregulation. You have to remember, this is a crisis where 80 percent of the subprime loans were made by unregulated entities,” Black said.
Failure to regulate corrosive executive compensation practices fueled the fraud.
Earlier rounds of prosecutions — from Ken Lay at Enron Corp. to Bernie Ebbers at WorldCom — and scandals — from tainted Wall Street research to market timing trades in mutual funds — suggested that the environment was ripe for misdeeds.
“There were all kinds of warning signs, and the remarkable thing is that none of this really changed the policymakers,” Black said.
Financial re-regulation has gained a strong foothold in Washington recently. And this camp also sees widespread need for a greater economic role for government.
Despite all the efforts so far, we’re staring at 15.7 million jobless Americans and concerns that they’ll be without work for quite a while. As many as one in 10 borrowers can’t afford their house payments, and many of their lenders can’t afford the losses the foreclosures would trigger.
Columnist Paul Krugman, awarded a Nobel Prize in economics, has called for a second stimulus package on top of the $787 billion one still unfolding.
Barring that, Krugman has suggested subsidies similar to those in Germany that encourage a company with reduced labor needs to cut hours across the board rather than cut jobs.
Economist Irwin Kellner likes tax credits for companies that hire the jobless but also wants government to start hiring them first, much like Franklin D. Roosevelt did during the Great Depression.
The argument is that this decade’s jobs crisis rivals its financial crisis. Just as government halted the financial crisis by serving as lender of last resort, government should become the employer of last resort.
Government already claims much of the credit for early signs that conditions may be improving, citing its cash for clunkers, homebuyer tax credits and job-saving stimulus spending.
Americans aren’t totally comfortable with federal remedies. But the longer unemployment remains above 10 percent, the greater the odds that public support will grow.
“I think there’s a good chance that we get there,” Black said. “…Unemployment is going to go higher.”
Wrong incentives
One of the sharpest turns during this decade was the one former Federal Reserve Chairman Alan Greenspan seems to have taken in history books.
In August 2005, as Greenspan began to wrap up 18-plus years as head of the Fed, experts hailed “the maestro” as “the greatest central banker who ever lived.” He came to Kansas City that October to receive the first Truman Medal for Economic Policy.
These days, he’s catching much of the blame for the economy’s downfall.
Under Greenspan, critics say, the Fed repeatedly and too often rode to the rescue of financial risk takers by slashing interest rates and soothing their pains.
In the face of a weak recovery early in the decade, the Fed pushed interest rates toward 1 percent and held them there for too long. It fueled the mortgage-fed housing bubble and the growth of unsustainable consumer spending from cash-back mortgage refinancings.
In large measure, critics argue, such efforts to avoid economic downturns became a habit of protecting private gains by socializing the losses.
The risk takers, armed with cheap money, took note of those lessons.
Like side bets in a poker game, soaring oil prices drove gasoline to more than $4 a gallon, then collapsed by half, and an ethanol-brewing spree boiled over in the Midwest.
“In the mind of the banks and many investors, there was a ‘Greenspan put’ out there — that if there was a problem, the Fed would simply cut rates and reflate the economy, and the government would make the banks whole,” said Moody’s Brusuelas.
There were genuine rewards from some of that investment.
Advances in technology brought us the phenomenal reach of smart phones and new innovative leaders such as Google Inc. Olathe certainly benefited from the spread of personal navigation devices and Garmin Ltd.’s expanding footprint.
Kansas City remade its skyline with focused downtown development that raised H&R Block’s new headquarters, the Sprint Center and the Power & Light District.
But when investment bank Lehman Brothers failed in September 2008, credit markets froze in panic. None of the big financial institutions trusted the creditworthiness of the others.
Washington stepped in with massive federal bailouts, widespread guarantees, direct Treasury investments and government purchases of mortgage-backed securities.
Moving ahead
Now that the crisis has passed, some argue that government needs to find the moment when it can step back and let traditional economic forces work.
That likely means the next American decade will be known less for consumption and more for its focus on production, especially for overseas markets that are still emerging.
U.S.-based businesses will continue to infuse technology into their operations, hoping to lower costs still further and to put distance between themselves and foreign rivals.
Spending under the $787 billion stimulus package hits high gear in 2010, particularly in its pursuit of medical records technology, cleaner energy sources and advances in the nation’s electricity grid.
Congress is deciding now how much larger the government’s role in health care will be. And lawmakers face other economic decisions about the soon-to-expire Bush-era tax cuts on incomes, stock dividends, investment gains and estates.
Politically, jobs will dominate the debate as even a rapidly growing job market would take years to whittle down the longest unemployment line in postwar history.
At Kansas City’s Ewing Marion Kauffman Foundation, the call goes out for Washington to support new businesses and to remove barriers to business growth as the surest path to create jobs.
A Kauffman report earlier this month said the nation’s entire growth in employment since 1980 roughly equaled the net increase in jobs at companies less than 5 years old. Hiring and firing by larger and older firms essentially offset each other.
“It’s not that you see every young firm create five to 10 jobs a year,” said Dane Stangler, a co-author of the report. “Those that survive grow quite rapidly, to offset those that fail.”
The White House has begun to talk about targeting small businesses in the recovery.
And Hall, the KU professor, argues that continued intervention delays the recovery. It means buyers and sellers can’t trust current home prices, savers aren’t rewarded for saving and stocks inflate to lofty prices.
“The signals are all wrong,” Hall said. “My opinion is they’re preventing the solution by essentially trying to blow up the same balloon that popped.”
Global efforts at stimulating economies recently led Robert Zoellick, president of the World Bank, to openly worry about another round of bubbles from inflated asset prices.
Like UMKC’s Black, Hall believes time and turmoil are on his side.
Crisis led to a large government response, but Hall said the backlash against bailouts means public sentiment may shift away from more intervention.
“I think they’ve become dismayed to a large extent by what they’re seeing there,” Hall said. “Within two years, if nothing is really better, you could see a complete swing the other way.”
By Mark Davis – www.kansascity.com
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