Britannia Radio

From The Sunday Times

May 16, 2010

This is a time to weep and a time to laugh

Irwin Stelzer

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Two conflicting currents are sweeping through both Main Street and Wall Street. The first is nervous-making, the second soothing. They are, respectively: a sense that things are beyond the ability of individuals or governments to control; and a sense that the economy is turning round, that the financial sector will not melt down, that the jobs market is recovering, and that even the housing market is returning to something like normal.

The feeling that things are spinning out of control is an amalgam of seemingly unrelated events. The stock market drops almost 1,000 points in a matter of minutes and nobody can figure out why — not congressional investigators, not the regulatory authorities, not the Wall Street houses and traders who are supposed to understand even the slightest upticks and downticks in share prices. A recently naturalised Pakistani plants a car bomb in Times Square and only his incompetence prevents it from taking hundreds of lives. Never mind that he had travelled regularly to Pakistan, and perfectly fit the profile of a terrorist — young, male, Muslim, a frequent visitor to a country that houses terrorist training camps. He was not under surveillance. Little wonder many New Yorkers believe another attack is coming.

Then there is Europe. If a small, inconsequential country such as Greece can precipitate a broad sell-off in the bond markets, and bring interbank lending to a halt, imagine what some financial problem in a large country might do. Just as a problem in the US sub-prime market triggered a recession here and in Europe, so the failure of a tiny bank in, say, Germany, might cause chaos, just as the flapping of a butterfly’s wing in one part of the world can create a tornado in some faraway place. If Lehman Brothers’ failure could bring down the banking system, who knows what small bank, insurer or brokerage might collapse and bring the financial system down with it.

Finally, America’s Greek-style fiscal situation seems insoluble. Voters won’t give up entitlements, and there is no coalition that will force them to do so. Indeed, in the teeth of mounting deficits, the administration and Congress lavish new entitlements on the voters whose favour they pursue. Meanwhile, corporate taxes are already among the highest in the developed world, and not much can be wrung from President Barack Obama’s target group, families earning more than $250,000. So, deficits as far ahead as the eye can see, and beyond even that. Out of control.

Ralph Waldo Emerson had it right: things are in the saddle and ride mankind. Or so all too many people, many of them not easily rattled, tell me.

But some of those very same people acknowledge that the economy is indeed improving, in no small part because things are not out of control: the Federal Reserve Board has done a brilliant and innovative job to help the economy recover; Obama’s stimulus package seems to be having a positive if costly effect, with just the delayed timing that White House economist Larry Summers predicted to me it would; consumers are exerting control over their finances and reducing credit card debt; and more workers are honing their skills at educational institutions.

All of this is adding up to what appears to be a sustained recovery. Last week’s report that 290,000 jobs had been created in April was, of course, the most-watched indicator, and analysts now are talking of 500,000 jobs being added this month. Profits of the companies in Standard & Poor’s Index of 500 companies are up over 50% in the first quarter compared with a year ago.

Little wonder that CEOs are permitting themselves a smile. A survey of chief executives by the Business Council (representing large companies) and the Conference Board (a not-for-profit) found the index of business confidence at 66.6, up from 50 a year ago. A bit more than 70% of all CEOs expect the economy to expand at an annual rate of between 2.1% and 3% this year, up from 51% who held that view last year. And Goldman Sachs is forecasting the economy will grow in the 2.5%-3% range in 2011.

The steel, transport, construction, banking and auto industries are among those reporting big improvements in activity. Surprisingly, John Paulson (no relation to former Treasury secretary Hank Paulson), the hedge fund manager who earned billions betting on the housing collapse, expects house prices in California to jump some 20% this year (admittedly, from a low base), leading a revival in the sector. Individual estate agents tell me that their phones are ringing off the hook. Of course, they would say that, wouldn’t they? Still, at minimum the collapse in house prices seems to have come to an end.

So who has got it right? The cheerful CEOs, the consumers who are opening their purses a bit, the estate agents who claim to be busier than in years, or those with a vague feeling that the next unstoppable disaster lurks round the corner? The answer is that both groups exaggerate. People who think there is nothing to do but sit and wait for the next blow to fall forget that Europe has for the moment forestalled a liquidity crisis, proving that even its slow-moving governing mechanism can take action, even if a bit too slowly. The anti-terror agencies are doing a better job of arresting would-be terrorists before they can strike, and it is likely that “circuit breakers” will be installed on exchanges to head off precipitous 1,000-point drops in the price of any share. Not much can be done about butterfly wings.

The economic optimists also have gone a bit overboard. We have yet to see how the economy will perform once the Fed implements its exit strategy, which seems already to be under way; the effect of the stimulus wears off; the dicey commercial property loans still on the banks’ books are written down or off; and the politicians are forced by the bond markets to get the deficit under control.

As always, things are too complicated to warrant either taking to the bomb shelters or uncorking the champagne.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

stelzer@aol.com