Who's Rooting for the Economy to Tank Again? These Guys.

Most Americans have a lot riding on the success of the government's efforts to pull the U.S. economy out of its ditch: individual investors, bankers, Federal Reserve Chairman Ben Bernanke, Democratic politicians, and taxpayers. A somewhat smaller group has a lot riding on the failure of these efforts. I'm not simply talking about investors who are betting against the markets and who believe the recent stock-market rally is overdone. I'm talking about the Failure Caucus, a group spanning the political spectrum that has invested reputations, egos, and, in some instances, their political futures on the notion that we're in for several more years of economic trauma.

Vindicated bears. A small group of analysts, economists, and journalists accurately predicted the financial apocalypse of 2008. As a result, their reputations have justly been enhanced. The vindicated bears are generally suspicious of the recent turnaround efforts, because they believe that the excesses that caused the problems have yet to be worked off. (I sympathize with many of these folks and consider myself something of an intellectual fellow-traveler.) Peter Schiff, a libertarian money manager who warned of a debt apocalypse, sees much more pain in the future. After all, he says, the rescue—cheap money and government spending—is simply trying to reinflate the original bubble. Nouriel Roubini, who has been dubbed Dr. Doom, believes that we could be in for a double-dip, W-style recession for similar reasons. But at a certain point, negativity can become shtick. And forecasting is extremely difficult. Just because somebody was right in late 2007 doesn't mean he'll be right in 2009.

Economic forecasters. As I've noted in the past, professional economic forecasters are often wrong at inflection points. When the economy is about to pitch into recession, they forecast growth. When it's about to bottom, they forecast continued contraction. When it's about to shift into higher gear, they see continued idling. Why? Forecasters frequently fall victim to primacy bias: They tend to extrapolate recent trends into the future. That, combined with a suspicion among modern-day economists about Keynesian-style stimulus, has translated into a general sense of pessimism. As recently as May, the professional forecasters surveyed by the Philadelphia Fed predicted the economy would grow at a 0.4 percent annual rate in the third quarter. According to Macroeconomic Advisers, that's likely to be low by a factor of eight! In their most recent projection, the same forecasters upgraded their forecast. They said the economy would grow at a 2.3 percent annual rate in the second half of 2009. Better, but still probably behind the curve.

Political economists. A surprising number of analysts—the Wall street Journal op-ed page, my Newsweek colleague George Will, Tories, supply-siders; you know the type—insist on viewing economic and market performance through the lens of politics. Democrats, they know, are bad for markets and the economy, while Republicans are good for both—evidence be damned. They don't need any stinking data to tell them the rescue efforts are going to end in disaster. These are folks who believe that the stock market fell in February and March because it hated Barack Obama (and has rallied since then because he's become less popular)*; who believe that the New Deal prolonged the Depression; and who act as if the last 16 years of fiscal, monetary, and economic history didn't take place. In their view, fiscal stimulus can't work because it's done by the government and the Fed's expansionary efforts must, at all times, always be inflationary. Ergo, we're doomed. (This was the substance of the Paul Krugman-Niall Ferguson feud.) What's both impressive and annoying about these folks is their inability to process information that runs counter to their bedrock beliefs. When data comes in that suggests otherwise, they ignore it or declare victory. Niall Ferguson recently told the Times of London that he "won the argument" he and Krugman had about "the future path of long-term interest rates." (As this chart of the 10-year treasury note over the past two years shows, he's done no such thing.)

This crowd is downright hostile to the optimists. I spent some time on the phone this morning with Michael Darda, an economist at MKM Partners. Darda is no squish. He used to write a lot for the National Review. But when he tells conservative audiences he's expecting the economy to grow at a 4 percent annual rate through the end of 2010, the reaction is frequently disbelief. Darda bases his conclusions largely on his reading of leading indicators, credit markets, and past performance in the wake of recessions—not on who controls the White House. Yes, taxes are likely to rise in 2011, and the Fed will have to tighten monetary policy. But that's no reason to be bearish now, he argues. "The real risk is in being too negative."

That risk is highest for the political division of the Failure Caucus. The conventional wisdom on the right holds that President Obama and his Democratic allies in Congress are setting themselves up for a big fall through their overreaching. But I'd argue that it's the Republican Party, which was always on the side of greater growth, higher stock prices, and more wealth, that has painted itself into a corner. Many Republicans opposed the initial bailouts because they were conducted by an unpopular Republican president in conjunction with a Democratic Congress. (In Todd Purdum's Vanity Fair article, former Treasury Secretary Henry Paulson conspicuously praises congressional Democrats and conspicuously says little about congressional Republicans.) Then they doubled down with virtually uniform opposition to the Obama stimulus bill, which had been watered down to attract Republican votes. In order for Republicans to be vindicated politically, the bailouts and the stimulus—and the economy at large—must fail. Thus considered, every positive data point, every sign of stabilization in the housing market, every rise in the S&P 500, every TARP repayment, is something of a rebuke. As the clouds part, the historic party of economic sunshine is in the strange position of praying for rain.

Before all the members of the Failure Caucus start flaming me as a naive idiot, let me stipulate that there's plenty to be pessimistic about, even with the strong turn in the markets. The recession may be over, but we must still grapple with significant structural problems—a poor labor market, more credit losses tied to commercial real estate, huge chunks of the bailout spending that won't be recouped. But the flow of news isn't uniformly bad, as it was a year ago. And it has to enter our minds—and the debate—that the combination of extraordinary fiscal and monetary efforts, combined with the private sector's natural healing process, may produce growth. There's a chance that it might all fall apart again. But there's a chance—an increasingly likely one, I believe—that it'll all work.

(Correction, Sept. 2, 2009: This article originally misspelled Barack Obama's first name.)

"Many Republicans opposed the initial bailouts because they were conducted by an unpopular Republican president in conjunction with a Democratic Congress."

Yeah, like who? They opposed the bailouts because they where such a bold faced ripoff of the taxpayer. It's still infuriating to think that my tax dollars went to bail out rich a$$holes on Wall Street (and foreign banks!) from their own messes. Then more bailouts for unionized clock watchers in Detroit.

The Republicans still had the White House when these bailouts started, and I really doubt that they wanted their own party to fail, except maybe the RINOs that wanted this crap. No blame to them, huh?

Real conservatives never want to see more unemployment or severe economic turmoil because to them that sort of thing transcends politics, but opposing bad policy is always good politics. Let's not forget that popular opposition to TARP was running 99 to 1! Does that mean that the American people also wanted the economy to fail?

It's clear to me that the author of this piece is nothing more than a grinning Obama cheerleader. No law against that, of course.

It’s clear to me that the author of this piece is nothing more than a grinning Obama cheerleader. No law against that, of course.

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I would not be so quick to assign a political motive to the author. Most people in the financial markets want money to move since they profit from the short term movements. Most investors are looking for long term growth.

I am pessimistic about the long term economic outlook due to debt. The government will not borrow their way out of the promises they have made for entitlements and likely will destroy the value of our currency trying.

We may get a bump in the short term but only an idiot would ignore the coming disaster of debt.

"I would not be so quick to assign a political motive to the author."

The part of the article that I quoted is heavily political. Read it again and you'll see. Besides, this is FR. Even stories about the weather are political.

"We may get a bump in the short term but only an idiot would ignore the coming disaster of debt."

The debt situation is a disaster now. I hate to think what's coming. At least people seem to have learned and are deleveraging as fast as they can. I know I am. Why, credit scores are more important now than having the newest car or flat screen TV.

He publishes an opinion piece in Slate. Could it be anything other than cheer leading for the left?

Right now a lot of eyes are focused on mid-month September as being a “multiple witching hour” to the point of being a black sabbath the size of Burning Man.

The proximate cause will likely be dozens of banks that just can’t hold out anymore and *must* fail, all at once. There are at least that many “zombie” banks, that are just waiting in line for the FDIC to close. But the FDIC cannot close banks until they have enough money in their account to do so. They are forbidden from just promising money.

And while the FDIC will *eventually* be able to get that money, it just won’t be able to do it fast enough. And this means “bank holiday”, until the money comes through.

But when a bank holiday happens, it means a bank panic all over the US. This will fold dozens of more banks (with some 1800 banks at risk). This will crash many existing but failing business mortgages, which will take down several of the major national pension funds as well.

There is not enough currency for the public to withdraw its savings in paper cash, so they will have to just electronically transfer their money to some other non-bank business. The government cannot print paper money any faster, so paper money and coin will be at a premium. Many businesses will likely demand cash for purchases, and refuse all electronic transfers.

I understand there are politics involved in everything and did not express myself well. I look at all the talking heads on the economy, writers for wall street, etc. etc. as being heavily focused on the immediate because that is where most of the money is made on Wall Street today.

It is the immediate movement of money that is the focus instead of the long term creation of wealth. Instead of low inflation - steady growth that benefits everyone our investment system seems geared towards bubbles. It can be a short term bubble or a long term bubble like tech stocks or real estate. They are all still bubbles and a small number of people can make big money at the expense of those not in the game.

Even our government runs like this now. It’s all about the four year cycle of elections is’nt it? It does not fit well with what I learned in school decades ago.... the principle of interest and long term growth. If you are connected and in the game you can make big money. If you are just the average Joe like me with a 401k you have to pray the bubble is inflated when you retire. You can’t make much on interest at the bank anymore when interest rates are so low because of inflation.

Those on the inside get rich (like Congress, bankers (including the Fed), and the other money changers and brokers on Wall Street. Those of us who play by the rules and think long term are left to luck. Just ask someone who had to retire recently compared to someone who retired at the top of the bubbles.

I hope that makes more sense.

A good question could be raised of what will go first, the banks that loaned money to commercial real estate, or the commercial real estate going, and taking the banks down with them.

Add to that the heavy investment by pension funds through these banks into commercial real estate, dragging them down as well.

This even sets aside the alt-a and ARM residential real estate bubbles going off in there somewhere. Together they are about 1.5 times the size of sub-prime.

And T-bills are increasingly wobbly. That little trick of having the Treasury sell to its prime purchasers, who don’t want those T-bills, but then turn around and sell them to the FED is a huge disaster.

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