Weekly Wrap: Recovery roadblocks
TEXT OF INTERVIEW
Vigeland: Man, this seems like a really long week, doesn’t it? GM declared bankruptcy on Monday, and it seems like that was months ago. Maybe that’s because we were all expecting it. Or maybe it’s because there were plenty of other items on the docket this week. The Treasury secretary was in China and Federal Reserve Chairman Ben Bernanke testified before Congress.
Ben Bernanke: Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we as a nation begin planning now for the restoration of fiscal balance.
Joining us for the Weekly Wrap on Wall Street and beyond are Megan McArdle of the Atlantic’s Business Channel and Felix Salmon at Reuters. Hi guys.
Megan McArdle: Hi.
Felix Salmon: Hi Tess.
Vigeland: Youheard the Fed chairman suggesting earlier this week that the worst was behind us and then he turned right around and warned of all these problems ahead, if we keep borrowing and spending — two things we continue to do a lot of — so Megan, we talked about those little green shoots sprouting up this spring, signs of optimism, what happened to those after Bernanke’s remarks?
McArdle: Well, as far as I can tell, the market has completely ignored what Bernanke said and gone on merrily on its way. The green shoots seem to still be impressive enough to at least produce something of a rally in the stock markets.
Vigeland: Felix, do you agree?
Salmon: Well, I think that the green shoots were largely illusory at the best of times. Bernanke was basically saying to anyone who’s looking at the stock market and saying that things are recovering, there’s many, many things which can go spectacularly wrong over the median term.
Vigeland: I guess maybe they’re really looking at these short-term indications, you know, unemployment did not drop as much as previous months and the housing market seems to be picking up, but…
Salmon: Yeah, this is one of my favorite pieces of optimism, where people look at the second derivative of the unemployment numbers. They don’t look at how enormously high it is. They don’t say, “It’s 9.4 percent! That’s horrible!” Instead they look at the difference between the number of people who lost their jobs in May and the number of people who lost their jobs in April. And they say “Oooooh, things are turning around.” This is just never convincing to me.
Vigeland: We’re all looking for it, aren’t we?
McArdle: I certainly hope so. I hope there’s no one out there who’s rooting for the economy to under-perform, but I think that there’s certainly a lot of bear analysts, who are looking at this and just don’t see how it can possibly be sustained.
The United States has gigantic fiscal problems coming down the pike, the Fed has ballooned its balance sheet to a point, where at some point soon it’s got to start disgorging some of this massive build up and where is the secular growth coming from? Where is the new growth going to come from in the world economy? It’s not really clear to me and I think to a lot of other people.
Vigeland: Let’s talk a little bit about Treasury Secretary Tim Geithner’s trip to China this week. Ben Bernanke is here warning us about paying attention to fiscal sustainability. What do you make of Geithner’s trip and these efforts to boost China’s confidence in buying our debt, Felix?
Salmon: It’s a necessary trip because the Chinese hold, depending on who you believe, somewhere in the region of $2 trillion worth of U.S. debt and if they lose confidence in that debt, then that would spell disaster for the bond markets. And as Bill Clinton famously said, we are all enthralled to the bond markets. We basically have to do exactly what they say.
So the good news is however that the Chinese don’t really have much choice. If they want to export their way out of their own current slowdown, then they have to basically continue to do what they’ve been doing all along, which is provide vendor finance and keep on throwing lots of dollars back at the U.S. It’s the kind of game where neither country can really blink, even though neither of them on its own is doing something which makes a lot of sense. The U.S. should be borrowing much less money, as Megan says, although it’s a recession and it doesn’t have a huge amount of choice.
Vigeland: Megan, your thoughts?
PERSON: Well, I think you’ve got a couple of different concerns here. I absolutely agree with Felix that it’s a recession, we shouldn’t be borrowing money. That said, the magnitude is vaster than anything we’ve done before. And there’s a real question to me whether even if it had the will, China would be able to absorb the kinds of deficits that we may be looking at over, I mean, 20 percent of U.S. GDP over a couple of years, right? So that’s one real issue.
And I think the second question, which is how stable is China? Their economy is to some extent a black box and how much longer can they continue to generate the kind of cash they’ve been throwing abroad. And I’m not sure anyone really knows.
Vigeland: And on that note of uncertainty, as always, thank you McArdle, Felix Salmon. Thank you both.
Salmon: Thank you.
McArdle: Thank you.
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