Capital Commerce

And speaking of new New Deals, as I did a couple of posts ago, Chicago Democratic Rep. Rahm Emanuel outlines in the Wall Street Journal a "new social contract" between government and workers in this age of globalization. It has four main parts:

1) Education. Force students to complete high school and at least one year of higher education or skills training. Expand the Hope Scholarship and Lifetime Learning tax credits. [Me: What is the penalty for dropouts? The same as the unspecified one for people who don't want healthcare insurance?]

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Is a $400 billion (with a bullet, it seems) taxpayer bailout of homeowners on its way? One school of thought, promoted by columnist Holman Jenkins in today's Wall Street Journal, posits that since the Federal Reserve has now made it clear that it will "step up and prevent price-crashing fire sales by illiquid institutions," the credit markets may begin to slowly defrost. And since the main reason many on Wall Street have been pushing for a bailout is to bring a sense of certainty to the markets, an expanded federal effort on the housing front—such as creating new government-backed mortgages for struggling homeowners and paying off lenders to prevent a tsunami of foreclosures—may no longer be needed. Holman concludes thusly:

The test of the Fed's latest action will be if oversold mortgage debt begins to look like a mouth-watering opportunity to Wall Street sharpies. Then we're out of the woods. If not, the chorus for a federal housing bailout will quickly become irresistible, since leaving Mr. Bernanke to fight the problem single-handedly would be to invite an inflationary crisis on top of a mortgage crisis.

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Over at the VoxEU econ site, Jeffrey Frankel, an economics professor at Harvard and former member of the Council of Economic Advisers under Bill Clinton, makes his case that the euro will usurp the dollar's place as the de facto global currency. He concludes by comparing the decline of the greenback to the decline of the British pound (boldface mine):

The decline in the status of the pound during the course of the first half of the 20th century was part of a larger pattern whereby the United Kingdom lost its economic pre-eminence, colonies, military power, and other trappings of international hegemony. As some wonder whether the United States might now have embarked on a path of "imperial over-reach," following the British Empire down a road of widening budget deficits and overly ambitious military adventures in the Muslim world, the fate of the pound is perhaps a useful caution. The Suez crisis of 1956 is frequently recalled as the occasion on which Britain was forced under US pressure to abandon its remaining imperial designs. But the importance of a simultaneous run on the pound and President Eisenhower's decision not to help the beleaguered currency through IMF support unless the British withdrew its troops from Egypt should also be remembered.

My take: There are a few key differences that Frankel omits. The United States is the global military superpower, and there is no sign that the conflict-averse European Union wishes to contest that position. Second, the long-term demographics and fiscal solvency of the United States are much superior to those of Old Europe. Third, the United States has the more competitive economy and is far more innovative. And while I have no doubt that many nations will diversify their currency holdings, that's quite a stretch from the euro's becoming pre-eminent.

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Michael Mandel speaks kindly of the housing bubble over at his Economics Unbound blog:

In 2004 I wrote a book called Rational Exuberance. The main premise of the book was that the boom-bust pattern of the U.S. economy was actually an advantage. Back then I wrote: "During boom times, the U.S. is able to fund innovative and growing new businesses with financial instruments...that barely exist anywhere else. And then when the inevitable bust comes, the U.S. financial system is highly liquid and far more diversified than elsewhere, able to cope with sharp plunges without freezing up. For the U.S., the ability to direct resources to innovative new businesses sucks in new ideas and smart people from all over the world. That accelerates innovation, produces new jobs, and creates a competitive advantage that other countries cannot match, no matter how low their wages are." Well, it looks like the U.S. is about to test my 2004 assertion. Bets, anyone?

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