Category Archives: Economy

Update II: Obama: ‘You Have Some People … Who Philosophically Think Government Has No Business Interfering In The Marketplace’

Barack Obama, Economy, Journalism, Media

“President Obama is holding the first evening press conference of his presidency Monday, with the financial crisis as the main topic. Before taking questions, he is giving a brief speech. Here is a running transcript of the speech and news conference:

President Obama says creating 4 million jobs is the most important part of his economic plan.”

[My initial, quick comments are interspersed below, in bold. More comments to follow.]

President Obama: Good evening, everybody. Please be seated.

Before I take your questions tonight, I’d like to speak briefly about the state of our economy and why I believe we need to put this recovery plan in motion as soon as possible.

I took a trip to Elkhart, Indiana, today. Elkhart is a place that has lost jobs faster than anywhere else in America. In one year, the unemployment rate went from 4.7 percent to 15.3 percent. Companies that have sustained this community for years are shedding jobs at an alarming speed, and the people who’ve lost them have no idea what to do or who to turn to.

They can’t pay their bills. They’ve stopped spending money. And because they’ve stopped spending money, more businesses have been forced to lay off more workers. [So what came first, Mr. President? Job loss or a cessation of spending? Do you even know?] In fact, local TV stations have started running public service announcements to tell people where to find food banks, even as the food banks don’t have enough to meet the demand.

As we speak, similar scenes are playing out in cities and towns across America. Last Monday, more than 1,000 men and women stood in line for 35 firefighter jobs in Miami. Last month, our economy lost 598,000 jobs, which is nearly the equivalent of losing every single job in the state of Maine.

And if there’s anyone out there who still doesn’t believe this constitutes a full-blown crisis, I suggest speaking to one of the millions of Americans whose lives have been turned upside-down because they don’t know where their next paycheck is coming from.

And that is why the single most important part of this economic recovery and reinvestment plan is the fact that it will save or create up to 4 million jobs, because that’s what America needs most right now.

It is absolutely true that we can’t depend on government alone to create jobs or economic growth. That is and must be the role of the private sector. But at this particular moment, with the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back into life. [So these are centrally planned, make-work ploys, which the market would not create or sustain sans government.]

It is only government that can break the vicious cycle, where lost jobs lead to people spending less money, which leads to even more layoffs. And breaking that cycle is exactly what the plan that’s moving through Congress is designed to do.

When passed, this plan will ensure that Americans who’ve lost their jobs through no fault of their own can receive greater unemployment benefits and continue their health care coverage. [In other words, welfare. And what has assigning blame have to do with an economic downturn/depression? I see: everyone deserves a job, unless he has done something really bad. And since job loss is undeserved, people must be made whole. Now that’s socialism.]

We’ll also provide a $2,500 tax credit to folks who are struggling to pay the costs of their college tuition and $1,000 worth of badly needed tax relief to working- and middle-class families. [Does He understand what cutting taxes means? It means returning stolen property from whence it was taken in the first place] These steps will put more money in the pockets of those Americans who are most likely to spend it, and that will help break the cycle and get our economy moving. [And after they spend it?]

But as we’ve learned very clearly and conclusively over the last eight years, tax cuts alone can’t solve all of our economic problems, especially tax cuts that are targeted to the wealthiest few Americans. We have tried that strategy time and time again, and it’s only helped lead us to the crisis we face right now. [Bush did not only cut taxes; he increased spending many fold. Obama is providing tax rebates, not cuts, and increasing spending even more than Bush. Which makes him even worse than Bush.]

And that’s why we have come together around a plan that combines hundreds of billions in tax cuts for the middle class with direct investment in areas like health care, energy, education, and infrastructure, investments that will save jobs, create new jobs and new businesses, and help our economy grow again, now and in the future.

More than 90 percent of the jobs created by this plan will be in the private sector. [The government, not the market, conjures a scheme and puts people to work on it. Is that what He calls private sector employment?! Apparently so.] They’re not going to be make-work jobs, but jobs doing the work that America desperately needs done: jobs rebuilding our crumbling roads and bridges, repairing our dangerously deficient dams and levees so that we don’t face another Katrina.

They’ll be jobs building the wind turbines and solar panels and fuel-efficient cars that will lower our dependence on foreign oil and modernizing our costly health care system that will save us billions of dollars and countless lives.

They’ll be jobs creating the 21st-century classrooms, libraries, and labs for millions of children across America. And they’ll be the jobs of firefighters and teachers and police officers that would otherwise be eliminated if we do not provide states with some relief.

Now, after many weeks of debate and discussion, the plan that ultimately emerges from Congress must be big enough and bold enough to meet the size of the economic challenges that we face right now.

It’s a plan that is already supported by businesses representing almost every industry in America, by both the Chamber of Commerce and the AFL-CIO. It contains input, ideas and compromises from both Democrats and Republicans.

It also contains an unprecedented level of transparency and accountability so that every American will be able to go online and see where and how we’re spending every dime. What it does not contain, however, is a single pet project, not a single earmark, and it has been stripped of the projects members of both parties found most objectionable.

Now, despite all of this, the plan’s not perfect. No plan is. I can’t tell you for sure that everything in this plan will work exactly as we hoped, but I can tell you with complete confidence that a failure to act will only deepen this crisis, as well as the pain felt by millions of Americans.

Now, my administration inherited a deficit of over $1 trillion, but because we also inherited the most profound economic emergency since the Great Depression, doing little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence. [Government owns the deficit. Does Obama really mean to say here that if the government doesn’t increase its deficit and debt, worse deficits and debts will result? Apparently so.]

Those are deficits that could turn a crisis into a catastrophe, and I refuse to let that happen. As long as I hold this office, I will do whatever it takes to put this economy back on track and put this country back to work. [Obama is nothing if not careful; he must have worked out that whether the situation grows worse or improves, his crazy New New Deal and he will be excempt from blame.]

I want to thank the members of Congress who’ve worked so hard to move this plan forward, but I also want to urge all members of Congress to act without delay in the coming week to resolve their differences and pass this plan.

We find ourselves in a rare moment where the citizens of our country and all countries are watching and waiting for us to lead. It’s a responsibility that this generation did not ask for, but one that we must accept for the future of our children and our grandchildren.

The strongest democracies flourish from frequent and lively debate, but they endure when people of every background and belief find a way to set aside smaller differences in service of a greater purpose. That’s the test facing the United States of America in this winter of our hardship, and it is our duty as leaders and citizens to stay true to that purpose in the weeks and months ahead.

After a day of speaking with and listening to the fundamentally decent men and women [fundamentally? You mean other than their odd, clingy habits–you know, to guns and God.] who call this nation home, I have full faith and confidence that we can do it, but we’re going to have to work together. That’s what I intend to promote in the weeks and days ahead.

And with that, I’ll take some of your questions.

And let me go to Jennifer Loven at A.P. There you go.

Question: Thank you, Mr. President. Earlier today in Indiana, you said something striking. You said that this nation could end up in a crisis without action that we would be unable to reverse.

Can you talk about what you know or what you’re hearing that would lead you to say that our recession might be permanent when others in our history have not? And do you think that you risk losing some credibility or even talking down the economy by using dire language like that?

Obama: No, no, no, no. I think that what I’ve said is what other economists have said across the political spectrum, which is that, if you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. [Not these economists–200 of them]

We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough and, as a consequence, they suffered what was called the lost decade, where essentially, for the entire ’90s, they did not see any significant economic growth. [The Japanese had indeed tried Obama’s plan. As Ann Coulter quipped, if the Japanese, whom Charles Murray has shown to have higher IQs, failed to pull it off, we have no hope in hell of surviving such a socialization of the economy.]

So what I’m trying to underscore is what the people in Elkhart already understand, that this is not your ordinary, run-of-the-mill recession. We are going through the worst economic crisis since the Great Depression.

We’ve lost now 3.6 million jobs, but what’s perhaps even more disturbing is that almost half of that job loss has taken place over the last three months, which means that the problems are accelerating instead of getting better. [The set back: Bush’s bailout bonanza.]

Now, what I said in Elkhart today is what I repeat this evening, which is, I’m absolutely confident that we can solve this problem, but it’s going to require us to take some significant, important steps.

Step number one: We have to pass an economic recovery and reinvestment plan. And we’ve made progress. There was a vote this evening that moved the process forward in the Senate. We already have a House bill that’s passed. I’m hoping, over the next several days, that the House and the Senate can reconcile their differences and get that bill on my desk.

There have been criticisms from a bunch of different directions about this bill, so let me just address a few of them.

Some of the criticisms really are with the basic idea that government should intervene at all in this moment of crisis. Now, you have some people, very sincere, who philosophically just think the government has no business interfering in the marketplace. And, in fact, there are several who’ve suggested that FDR was wrong to interfere back in the New Deal. They’re fighting battles that I thought were resolved a pretty long time ago.

Most economists almost unanimously recognize that, even if philosophically you’re — you’re wary of government intervening in the economy, when you have the kind of problem we have right now — what started on Wall Street, goes to Main Street, suddenly businesses can’t get credit, they start paring back their investment, they start laying off workers, workers start pulling back in terms of spending — that, when you have that situation, that government is an important element of introducing some additional demand into the economy.

We stand to lose about $1 trillion worth of demand this year and another trillion next year. And what that means is you’ve got this gaping hole in the economy. [Assignment: read “FALLING PRICES ARE NOT DEFLATION BUT THE ANTIDOTE TO DEFLATION” By George Reisman, to understand the “demand” thing.]

That’s why the figure that we initially came up with of approximately $800 billion was put forward. That wasn’t just some random number that I plucked out of — out of a hat. That was Republican and Democratic, conservative and liberal economists that I spoke to who indicated that, given the magnitude of the crisis and the fact that it’s happening worldwide, it’s important for us to have a bill of sufficient size and scope that we can save or create 4 million jobs.

That still means that you’re going to have some net job loss, but at least we can start slowing the trend and moving it in the right direction.

Now, the recovery and reinvestment package is not the only thing we have to do. It’s one leg of the stool. We are still going to have to make sure that we are attracting private capital, get the credit markets flowing again, because that’s the lifeblood of the economy.

And so tomorrow my treasury secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again.

And that means having some transparency and oversight in the system. It means that we correct some of the mistakes with TARP that were made earlier, the lack of consistency, the lack of clarity, in terms of how the program was going to move forward.

It means that we condition taxpayer dollars that are being provided to banks on them showing some restraint when it comes to executive compensation, not using the money to charter corporate jets when they’re not necessary.

It means that we focus on housing and how are we going to help homeowners that are suffering foreclosure or homeowners who are still making their mortgage payments, but are seeing their property values decline. [So now an owner has a property title in the perceived value of the property. News flash to Big Ears: A property is worth what the market will pay for it at the time of the sale; no more, no less.]

So there are going to be a whole range of approaches that we have to take for dealing with the economy.

…

Chuck Todd. Where’s Chuck?

Question: Thank you, Mr. President. In your opening remarks, you talked about that, if your plan works the way you want it to work, it’s going to increase consumer spending. But isn’t consumer spending, or overspending, how we got into this mess? And if people get money back into their pockets, do you not want them saving it or paying down debt first before they start spending money into the economy?

Obama: Well, first of all, I don’t think it’s accurate to say that consumer spending got us into this mess. What got us into this mess initially were banks taking exorbitant, wild risks with other people’s monies based on shaky assets and because of the enormous leverage, where they had one dollar’s worth of assets and they were betting thirty dollars on that one dollar, what we had was a crisis in the financial system.

That led to a contraction of credit, which, in turn, meant businesses couldn’t make payroll or make inventories, which meant that everybody became uncertain about the future of the economy, so people started making decisions accordingly, reducing investment, initiating layoffs, which, in turn, made things worse.

Now, you are making a legitimate point, Chuck, about the fact that our savings rate has declined and this economy has been driven by consumer spending for a very long time. And that’s not going to be sustainable.

You know, if — if all we’re doing is spending and we’re not making things, then over time other countries are going to get tired of lending us money and eventually the party’s going to be over. Well, in fact, the party now is over.

And so the — the sequence of how we’re approaching this is as follows. Our immediate job is to stop the downward spiral, and that means putting money into consumer’s pockets. It means loosening up credit. [But loose credit contributed to the crisis.]

It means putting forward investments that not only employ people immediately, but also lay the groundwork for long-term economic growth.

And — and that, by the way, is important, even if you’re a fiscal conservative, because the biggest problem we’re going to have with our federal budget is if we continue a situation in which there are no tax revenues because economic growth is plummeting at the same time as we’ve got more demands for unemployment insurance, we’ve got more demands for people who have lost their health care, more demand for food stamps. That will put enormous strains on the federal budget, as well as the state budget.

So the most important thing we can do for our budget crisis right now is to make sure that the economy doesn’t continue to tank. And that’s why passing the economic recovery plan is the right thing to do, even though I recognize that it’s expensive.

Look, I — I would love not to have to spend money right now. I’d love — you know, this notion that somehow I came in here just ginned up to spend $800 billion, you know, I mean, that wasn’t — that wasn’t — that wasn’t how I envisioned my presidency beginning. But we have to adapt to existing circumstances.

Now, what we are going to also have to do is to make sure that, as soon as the economy stabilizes, investment begins again, we’re no longer contracting but we’re growing, that our mid-term and long-term budget is dealt with, and I think the same is true for individual consumers. [The market, however crippled, doesn’t allow individuals to sell others into financial slavery; that’s a feature of the state.]

Right now, they’re — they’re just trying to figure out, how do I make sure that, if I lose my job, you know, I’m still going to be able to make my mortgage payments? Or they’re worried about, how am I going to pay next month’s bills? So they’re not engaging in a lot of long-term financial planning. [Like their government?]

Once the economy stabilizes and people are less fearful, then I do think that we’re going to have to start thinking about, how do we operate more prudently? Because there’s no such thing as a free lunch.

So if — if you want to get — if you want to buy a house, then putting zero down and buying a house that is probably not affordable for you in case something goes wrong, that’s something that has to be reconsidered. So we’re going to have to change our — our bad habits. [Mañana. First we must spend ourselves out of debt. If it sounds insane it’s b/c it is.]

But right now, the key is making sure that we pull ourselves out of the economic slump that we’re in.

All right, Julianna Goldman, Bloomberg?

Question: Thank you, Mr. President. Many experts, from Nouriel Roubini to Sen. [Chuck] Schumer [D-New York], [In what is he an expert? Parasitism?] have said that it will cost the government more than $1 trillion to really fix the financial system. During the campaign, you promised the American people that you won’t just tell them what they want to hear, but what they need to hear.

Won’t the government need far more than the $350 billion that’s remaining in the financial rescue funds to really solve the credit crisis?

Obama: Well, the credit crisis is real, and it’s not over. We averted catastrophe by passing the TARP legislation. [Did you not say that matters have gotten worse over the last 3 months?] But, as I said before, because of a lack of clarity and consistency in how it was applied, a lack of oversight in — in how the money went out, we didn’t get as big of a bang for the buck as we should have. [So a better bureaucracy would have improved the abysmal the outcome.]

My immediate task is making sure that the second half of that money, $350 billion, is spent properly. That’s my first job. Before I even think about what else I’ve got to do, my first task is to make sure that my secretary of the treasury, Tim Geithner, working with Larry Summers, my national economic adviser, and others are coming up with the best possible plan to use this money wisely in a way that’s transparent, in a way that provides clear oversight, that we are conditioning any money that we give to banks on them reducing executive compensation to reasonable levels and to make sure that they’re not wasting that money.

We are going to have to work with the banks in an effective way to clean up their balance sheets so that some trust is restored within the marketplace, because right now part of the problem is that nobody really knows what’s on the bank’s books. Any given bank, they’re not sure what kinds of losses are there. We’ve got to open things up and restore some trust.
advertisement

We also have to deal with the housing issue in a clear and consistent way.

I don’t want to pre-empt my secretary of the treasury. He’s going to be laying out these principles in great detail tomorrow.

Lard (And Love) Is In The Air

Barack Obama, Democrats, Economy, Political Economy, Republicans

The following is an excerpt from “Lard (And Love) Is In The Air,” my new WorldNetDaily.com column:

“Try as they do to stick to substance (and I mean that in the narrowest sense), any typical exchange between the Obama press pimp and the presstitutes in attendance quickly degenerates as follows:

‘Has he had a cigarette since the coronation? Where did He watch the Super Bowl? Who was invited to His White House Super Bowl bash? How late does He work? What’s He reading? Has the First Dog been named yet? Does He cry? Is there a twinkle in His eye?’

The idolatry continues on cable well after the news conferences have ended:

Huffed Arianna Huffington: ‘Omigod, the Godly One just admitted to screwing up. How different is He from Bush, who stayed the course and took the country over the cliff with him.’ Yada, yada…

Yes, lard is in the air everywhere. But so is love. As all the fawning seems to suggest, when Obama screws you over, it just feels right. After all, he has that certain je ne sais quoi.”

More on the “the president’s $900 billion oink omnibus bill,” and the misconceptions Democrats and Republicans have about it, in “Lard (And Love) Is In The Air.”

Fareed Zakaria/Niall Ferguson Interview

Debt, Economy, Federal Reserve Bank, History, Inflation, Media

Niall Ferguson is right, “Most debt throughout history in fact is public debt.” What he doesn’t mention is that mini-monarchs, principalities, and ruling families did not posses a printing press. Moreover, absent the system of Fractional Reserve Banking, pyramiding debt was not as easy as it is nowadays.

As for Zakaria: is there anyone more inane and wishy-washy than he?

Here’s the exchange between the two:

ZAKARIA: As Barack Obama prepares to take office, he has no bigger challenge than fixing the economy.

On this program, I’ve talked to many esteemed economists, but few with keener insights than the Harvard historian, Niall Ferguson.

I spoke with Niall recently about the crisis, and also his fascinating new book with its grand title, “The Ascent of Money: A Financial History of the World.”

(BEGIN VIDEO)

ZAKARIA: Welcome, Niall Ferguson.

Niall, when you look at the history of financial times, troubles, how bad is the one we’re currently in?

NIALL FERGUSON, HARVARD UNIVERSITY AND AUTHOR, “THE ASCENT OF MONEY”: We are now in a financial crisis that bears comparison with the Great Depression. Nobody should have any doubt about that.

The difference is that we’re adopting very different monetary and fiscal policies to try to repress that crisis. That’s why I would call it a Great Repression.

But it is potentially as bad. We’re not out of the woods yet. And it seems to me that we’re looking not only at the biggest post-war recession, but potentially also at an extremely slow, long, lost decade. It’s something that nobody …

ZAKARIA: Sort of like Japan in the ’90s.

FERGUSON: That could be a good scenario. If you think of the Great Depression as the worst case scenario, we would be getting off lightly if we can get by with a decade of one percent per annum growth.

So at the moment, I’m really quite apprehensive that the process of deleveraging has far from run its course. There’s no floor in sight in the real estate market. And these things have a self-perpetuating quality. One of the lessons of history is that depressions tend to feed on themselves. There is, after all, a psychological dimension to this. Once people get really spooked, it’s very hard for the market to find its bottom.

And remember, stocks sold off between ’29 and ’33 by nearly 87 percent. So you have to have a sense of orders of magnitude here.

Financial crises happen infrequently on this kind of scale. And that’s why we need to have historical knowledge to have an understanding of their dynamics.

ZAKARIA: If you want to look at the nightmare scenario, the Japanese people forget — initially pretended they had no problem in the 1990s.

But two or three years into their crisis, they injected capital into the banks, they cut interest rates and they had massive fiscal stimulus — all the things that we’re doing. And it didn’t work.

FERGUSON: The most you can say is that they avoided a Great Depression. I mean, they ended up with very low, almost zero growth for a decade.

But, you know, that’s a better scenario than what happened in the 1930s. Let’s not forget that in the 1930s, the United States — and, for that matter, Germany — saw unemployment of 25 percent of the civilian work force. And output contracted by roughly a third, by roughly 30 percent.

So, if you compare a depression with a stagnation, you’re going to take the stagnation every time. That’s why I say, paradoxically, the Japanese scenario of a lost decade might be a good outcome compared with the Great Depression 2.0 scenario.

ZAKARIA: But the difference this time around is, there are other countries out there that are growing. What does that mean, that China and India will probably have some reasonable growth rates despite all this?

FERGUSON: Well, that’s the hope. But I’m not 100 percent convinced that this is going to work out.

Notice also that the stock markets of countries like China — not to mention India, Russia and Brazil, the BRICs — well, they’re dropping like bricks right now, with sell-offs far in excess of what we’ve seen in the United States.

So, I think there’s a question mark over whether China and these other rapidly industrializing countries can keep the world going. They’re still much smaller economies than the United States.

If the U.S. consumer goes on strike, then I don’t really see how the BRICs are going to substitute. They’re nowhere near big enough, and their consumers are nowhere near rich enough.

ZAKARIA: But wouldn’t you say that, in this scenario which you’re describing, which is very scary, the mistake would be to err on the side of caution? And, therefore, wouldn’t it make sense to have a very, very large stimulus program of some kind?

FERGUSON: What worries me, Fareed, is that each country is going about this in its own way, in an almost uncoordinated way, despite the G-20 summit in Washington.

It’s as if everybody is dusting down their copy of Keynes’ “General Theory” and embarking on a national stimulus package, just in the same way that each central bank is heading towards a zero percent interest rate, but at its own pace.

The thing that worries me is that we seem to be forgetting how globally integrated the world economy now is. Each national action has an international reaction, an international consequence. And…

ZAKARIA: Such as? Play that out.

Suppose we had a $1.5 trillion deficit. You are suggesting there’s a problem, because somebody has to buy this debt.

FERGUSON: Right.

Well, we’ve been confidently assuming that the rest of the world will continue to make its savings available to finance our current account deficit, which isn’t about to disappear overnight.

Even if it’s only a large federal deficit, a large government deficit, the money has to come from somewhere. And $1.5 trillion is serious money in anybody’s book. I mean, this is somewhere close to 10 percent of U.S. GDP.

Now, the savings are out there in the surplus countries right now. But if the Chinese decide they’d rather deploy their resources into growing their own consumption, I don’t see how they can simultaneously buy a trillion dollars of freshly printed 10-year Treasuries.

ZAKARIA: So what happens? Suppose we start running these deficits, the Chinese don’t want to buy U.S. debt. Our interest rates have to start going up dramatically.

FERGUSON: Oh, we could see a sell-off, exactly, in the bond market. The price of U.S. bonds could go down. We could then, therefore, see the yields go up. And suddenly, you’re looking not at a 3.5 percent rate on the 10-year, but something much higher.

The other problem is, of course, in the currency markets. We’re assuming that the dollar will be the international reserve currency for the rest of time. But that’s no way a historical lesson.

It seems to be clear from the experience of the British currency that reserve currencies are not forever. They’re not like diamonds. And at some point, questions are going to be asked about how far the American currency really is the most reliable currency.

ZAKARIA: What is the back story of what is going on now?

When people look back 50 years, 100 years from now, and they watch the United States in this extraordinarily vulnerable position because of all this debt — somewhat true of Western Europe as well, perhaps in some ways more true — and they watch China, with $2 trillion of surplus savings, with a budget surplus, growing still, for the most part, robustly, what will they say about the trajectory of these countries?

FERGUSON: I think they’ll look back and say, you know what? There was actually one country at the heart of the global economy in the early 21st century, and it was called Chimerica — China plus America. And these two economies were symbiotically linked. They were intertwined with one another.

China did the saving, America did the spending. China made its funds available through currency intervention, the United States took the money and piled on the debt.

And this worked pretty well for nearly a decade. It took us from the Asian crisis of ’97, ’98, right down to the American crisis that began in 2007.

The question that historians will grapple with — and this is the thing that fascinates me now — is whether or not Chimerica was able to survive this crisis. If China and America continue to interact economically, then it seems to me we’re in with quite a good chance of avoiding another Great Depression.

So the Chinese …

ZAKARIA: In a sense you mean, the Chinese have to save America in this crisis.

FERGUSON: Well, somebody has to finance all of this borrowing. And somebody has to make sure that there are still markets for Asian exports.

There is a reasonable argument for saying that the Chinese will continue to buy 10-year Treasuries and other dollar-denominated securities in order to maintain the global trade that goes on between China and the rest of the world.

But there is an alternative that they can choose. They can say market socialism in one country. We’re going to focus on our resources, our own consumption. We’re going to say good-bye to the world market and revert to being a rather introverted Middle Kingdom.

It’s happened before in history. It wouldn’t be the first time.

Now, if that happens, it’s the end of globalization. If Chimerica turns out, if you’ll forgive the pun, to be a chimera, then we really do risk being taken back to something like the 1930s. Because remember, the key to the Depression wasn’t just the banking crisis or the stock market crash in the United States. It was the breakdown of globalization as a result of protectionism and a collapse of international trade.

That’s what made the Depression so protracted and so deep.

And my worry is that we could inadvertently allow the same kind of thing to happen if there isn’t adequate coordination between Washington and between Beijing. That’s the key relationship that future historians will talk about.

ZAKARIA: All right. We’ll be back with some good news, maybe, with Niall Ferguson.

(COMMERCIAL BREAK)

ZAKARIA: And we are back with Niall Ferguson of Harvard University, and the author of “The Ascent of Money.”

Niall, take us through the past and shed some light on the present. So, right now we have this kind of financial collapse of confidence. Credit has dried up.

When has that happened before? And does it always have a serious impact on the economy?

FERGUSON: Well, I think it’s worth cheering ourselves up with the reflection that, in the very, very long run, financial history is a good news story. It’s a success story.

That’s why I called the book “The Ascent of Money.” It hasn’t just ascended to be the dominant subject of conversation in this country. It’s also ascended from extraordinary, simple beginnings to produce a system that integrates the world economy and facilitates all kinds of transactions.

It’s been a bumpy ride, though, because as you say, this isn’t the first major crisis that we’ve experienced.

You know, you can go right back to the early history of banking, go right back to the Italian city states of the Medieval and Renaissance period, and it’s striking how often financial crises came along and blew banks up back then. The immediate predecessors of the hugely successful Medici Bank went bust when, among others, the English king defaulted on his debts.

So, financial history has a kind of familiar, repetitive quality to it.

ZAKARIA: Now, in those days, am I right in thinking — I mean, really back over most of it — the big crises were often because governments, kings, bankrupted themselves by overspending because of wars?

FERGUSON: Right.

ZAKARIA: We are now overspending because of, in effect, citizens and consumers who over-consume. Is that…

FERGUSON: Most debt throughout history in fact is public debt until relatively recently. It was governments that could borrow on a really large scale, and ordinary citizens simply didn’t have the collateral to do that. I mean, consumer credit is really a 20th century phenomenon.

The only people who could put on substantial amounts of leverage before that were the aristocrats who had large estates and were effectively mini-monarchs.

ZAKARIA: And did they? Were there aristocrats and financiers that did the kind of thing that hedge funds do today?

FERGUSON: Oh, absolutely. I mean, the Duke of Buckingham is a particularly fine example of a 19th century tale of disaster in the leveraged real estate market.

The second Duke of Buckingham was a pretty high-living kind of character, who lived life to the full. And there was nothing that he wasn’t prepared to throw money at, from mistresses and other men’s wives, to the most extravagant furnishings that have ever been seen.

And I paid a visit to Stowe House, which was once the grandest private residence in all of England. It’s now a rather forlorn accommodation for a minor public school. But back then, this was a symbol of aristocratic living.

The trouble is, it was all financed by debt. Buckingham put on, in many ways, the mother of all mortgages. And there came a point in the 1840s with declining revenues from his agricultural estates, when the creditors called time.

And there was an absolutely humiliating scene when the entire contents of Stowe House were auctioned to the public. The Economist, the magazine which observed these sorts of things very closely, commented that this was a sign of a fundamental shift in the social order, to have a duke’s private possessions auctioned off because he’d gone bust.

You see, real estate can get you into trouble even if you have a hereditary title.

ZAKARIA: Now, are we going to look back on these times in that way? In other words, have the last 20 years been a kind of high point of finance and finance capitalism, and perhaps over the next 30 or 40 years we won’t see anything like this again, with hedge fund managers making $1 billion a year and birthday parties that cost $3 and $4 million?

FERGUSON: Well, think of it in terms of a planet — Planet Finance that grew to be even larger than Planet Earth — when we had the notional amounts outstanding of derivatives by the end of 2006 somewhere in the region of $500 trillion, you know, more than 10 times the annual output of the entire world economy. Or think of it as an era — the Age of Leverage, a period in which it was easy for households and banks to borrow ever more money, until finally we maxed out.

And I think one of the lessons of history is that it doesn’t matter what form your debt takes, whether it’s public debt or private debt, whether your government has run up an enormous amount of external borrowing, or whether your households have taken on mortgages that they simply can’t service.

Sooner or later financial history tells us these debts have to go one way or the other. They can go through default. They can simply be canceled.

That happened, incidentally, in ancient times. It was called a jubilee. The debts got canceled, and it was pretty hard luck on the creditors when it happened.

The other way that they can be reduced is through inflation. And this has been a recurrent feature, as I try and show in “The Ascent of Money,” of financial history — times when suddenly the value of money itself collapses and, therefore, so too does the value of debts denominated in that money.

That happened to Germany twice in the 20th century. And we shouldn’t rule out the possibility that, at some point in this sequence of events, we get ourselves out of this intractable debt problem by letting the printing presses roll and letting the money supply finally generate an inflation in double digits or even treble digits.

ZAKARIA: All right. Give us a last thought that’s good news.

You say, in the end, at the end of the day, this is a good news story, and that’s why you call it “The Ascent of Money.”

So what’s the good news here?

FERGUSON: The core, the heartbeat of economic growth, if you like, is innovation — technological innovation, managerial innovation and financial innovation.

And one of the fascinating things that struck me as I worked on the 1930s and the 1970s, and looked even further back to the first great depression that struck in the late 19th century, when prices fell for more than two decades, is the fact that innovation can keep going even in the toughest times.

Even in the 1930s, American corporations were still making major advances in technology. This was a time when IBM was laying the foundations for the computer, a time when RCA was transforming broadcasting. This was a time of great innovation. General Electric was in its heyday.

In the same way, in the 1970s stagflation, new companies were formed. Microsoft was one of them, Apple was another.

Necessity, Fareed, is the mother of invention. And even in the toughest crisis, I have confidence that in the United States there will be innovators who set, as it were, the path for the next era of economic expansion.

And in that sense, we’ll see the ascent of money resume. And we’ll look back and say, well, we fell off a cliff then. But we picked ourselves up, and we climbed up the next mountain.

U.S. To The World: ‘Don’t Worry Be Happy’

Addiction, Barack Obama, Bush, Economy, Europe, Federal Reserve Bank, Inflation

“World worries how US will pay for stimulus,” blared a headline in The International Herald Tribune.

But, like the lyrics to that 1988 drone, the US’s message to the world is: “Don’t Worry Be Happy.”

Obama’s cool with spending more than even “W” the wastrel managed to spend. What does it say about galloping central planning in the US, when even statist France, where 2.5 million protesters took to the streets, is refusing to go beyond its Keynesian comfort zone:

“Prime Minister François Fillon on Monday rejected demands that the French government seek to stimulate consumer spending … to lift France out of its economic slump”:

‘It would be irresponsible to chose [sic] another policy, which would increase our country’s indebtedness …,’ Fillon said in a speech in Lyon.”

To cure the addict, the world must stop enabling the American government: dethrone the dollar as the world’s reserve currency—a status that comes with a license to print money promiscuously. Successive American governments have abused this status and debased their country’s coin.

The American people refused to stop the madmen in change (they could have, by electing Ron Paul, the only sane representative running). Maybe the world must stop enabling the madmen and the addicted American electorate.