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Wednesday, November 16, 2011

A New Age of Diminished Expectations

I'm not sure, from this, if Andrew Sullivan "gets it".

A sane and responsible polity will fess up to this and propose and negotiate a fair balance of sacrifice ..

Actually, I'll say no, maybe it's not.  When the ship goes upside down, such as it likely is, the "sane" thing is not a "fair balance", as counter-intuitive to the mediocre, middle-of-the-road mind as that assertion may be. 

The sane thing is "radical" (even odious?) policies that push markets to clear and clear quickly, such as "insane" debt relief (deleveraging). The sane thing may also be a dose of what is not normal, like an increase in income re-distribution, in order to boost demand in specific ways (a "new deal", in the vernacular).

The alternative is long, slow "economic adjustments", much like the one in Japan.

Long, slow, and costly.

Put it this way:  the cost of bailing out sub-prime borrowers and consumers - perhaps even businesses - who have "too much debt" seems exorbitant and outrageous ("odious").  But, doing so is a LOT less costly, in the long run.

One could also argue it is a LOT less risky, to do so.  We have a false sense of security, because we've been bouncing along for over a year, now, without acute deterioration, i.e. the prospect of 'the bottom falling out'.

In our fragile condition, consider what would happen if there were an external shock to the U.S. economy, like a spike in oil prices. That's a truly terrifying prospect, no? Really, budget politics looks kinda small, bathed in that light.