Too Late for Krugman to Yell "FIRE"?

All across America people are beginning to wake up and realize their country is in serious trouble and heading for even worse. You can hear it every time a notable yells "FIRE."

FIRE is an acronym for "finance/insurance/real estate" which have grown to become a cancer on the economy of the United States. The latest to let out a howl of protest is NYT columnist and Nobel Prize winning economist, Paul Krugman. From The New York Times:

What’s the matter with finance? Start with the fact that the modern financial industry generates huge profits and paychecks, yet delivers few tangible benefits.
Remember the 1987 movie “Wall Street,” in which Gordon Gekko declared: Greed is good? By today’s standards, Gekko was a piker. In the years leading up to the 2008 crisis, the financial industry accounted for a third of total domestic profits — about twice its share two decades earlier.

These profits were justified, we were told, because the industry was doing great things for the economy. It was channeling capital to productive uses; it was spreading risk; it was enhancing financial stability. None of those were true. Capital was channeled not to job-creating innovators, but into an unsustainable housing bubble; risk was concentrated, not spread; and when the housing bubble burst, the supposedly stable financial system imploded, with the worst global slump since the Great Depression as collateral damage.

Krugman argues that the financial sector has grown far too large as a segment of America's economy - and it must be shrunk:

...the fact is that we’ve been devoting far too large a share of our wealth, far too much of the nation’s talent, to the business of devising and peddling complex financial schemes — schemes that have a tendency to blow up the economy. Ending this state of affairs will hurt the financial industry. So?

What Krugman doesn't address is how his country is to fill the vacuum left over by shrinking America's FIRE economy. What do you put in its place and where do you get it? And that, kids, is Wall Street's ace in the hole. The enormous damage they've done is much, much harder to repair than it was for them to cause and they know it.

An article I came across a month or two back in The New Yorker addressed attempts to redevelop America's pre-globalization manufacturing sector. Powerful people were beginning to realize the deep and open wound left in America by the transfer of its manufacturing base to cheap labour countries abroad. Now they wanted to sew that back up, heal their country's economy, restore its manufacturing sector. But it wasn't working. They couldn't make it happen. That little genie was out of the bottle and, arm in arm with Elvis, had long since left the building.

One problem those hoping to re-industrialize America kept running into was the choking grip of the financial sector. Nobody wanted to invest large amounts of capital in factories that promised just a reasonable, albeit modest, return when the financial sector was offering huge returns. And, as Krugman correctly points out, once in the hands of Wall Street, all that capital was then funneled instead into inherently self-destructive economic bubbles.

America also can't restore its industrial economy because it can't compete - on wages, on environmental regulation, on almost anything. The globalized, free market economy means Americans cannot manufacture. The United States cannot manufacture. It cannot compete in its own markets - on the shelves of WalMart - with "cheap" imports. That's what happens when you enter a vast free-trade regime. We're told it's about the free movement of capital but that's a smokescreen. What it's really about, the sine qua non, is the surrender of national sovereignty over access to your markets. That's like giving your teenager the keys to the family car and a twelve-pack.

Republican insider and author Keven Phillips addressed this conundrum in his 2005 book, "American Theocracy." Phillips examined the path of American supremacy and the evolution of its economy from agrarian to industrial to financial and he did that in the context of the rise and fall of the previous Spanish, Dutch and British empires. Each of them grew more powerful, more dominant, more supreme until it decided that it didn't need to make things anymore, it was so rich it could just devote itself to finance and have the stuff manufactured in cheap factories abroad. And that was the end of them.

Phillips, in a very well developed analysis, reveals that what each of these superpowers, by turns, did - and what America itself has done - was to use its national wealth to grow another nation's economy. Where do you find really cheap labour? In agrarian societies, that's where. You take an agrarian society and cheaply transform it into an industrial society only to discover, well after it's too late to change anything, that you've been ousted by the very rival your wealth went into creating. Brilliant.

It's easy to agree with Krugman when he claims America's FIRE economy needs to be suppressed, regulated, cut down to size but it's a lot harder to answer, "okay, then what?" How do you reverse the damage of the three decades that have passed since Reagan ushered in America's "Age of Ruin"?

Is it too late to yell "FIRE"?

Wringing In The New Year

In a debt-ridden, import-addicted, consumer-driven economy, any cut in consumer spending can be the economic equivalent of an aneurism. This is the very scenario that appears to be developing in the United States just as the president and congress try to come to grips with the aftershocks of the credit crunch resulting from the subprime mortgage meltdown.

About the only debate in the business news is whether America is already in a recession or on the eve of one. From the New York Times:

"Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy.

The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.

And consumer confidence, an important barometer of economic health, has plunged. Andrew Kohut, president of the Pew Research Center, says consumer satisfaction with the economy has reached a 15-year low, according to the firm’s polling.

Even wealthier consumers, who were seen as invulnerable to rising gasoline prices and falling home values, are feeling the squeeze.

Even in tough economic times Americans rarely reduce their consumption, preferring instead to slow the growth in their spending. Since 1980, they have cut spending in only five quarters — a total of 15 months — most of them in the depths of a recession. The 2001 recession passed without a cutback in consumer spending.

Fresh evidence of a pullback is pouring in from many quarters as Americans confront the triple threats of higher energy costs, falling home prices and a volatile stock market.

Perhaps the strongest barometer over the last 30 days is the performance of the country’s big chain stores. December turned out to be a blood bath for retailers at every rung on the economic ladder, with sales for the month growing at the slowest rate in seven years.

But it is the trouble at the highest reaches of retailing that has economists most worried about a recession. Over the last year, even as low-wage and middle-income consumers have cut back, the wealthy have spent freely, keeping high-end chains insulated from the economic turbulence.

That started to change in December, as shoppers held off on buying $300 designer shoes and $500 dresses. For example, store sales fell 4 percent at Nordstrom, the high-end department store.

A "made in America" recession would be felt globally throughout the developed world, probably in Canada as much as anywhere. This time, however, the effects may be softened by sustained, strong growth in the 7% range in the developing world which may offset some loss of trade to the United States.