Currency Wars_ The Making of the Next Global Crisis - James Rickards [68]
Geithner’s notion of convening power states that, in a crisis, an ad hoc assembly of the right players could come together on short notice to address the problem. They set an agenda, assign tasks, utilize staff and reassemble after a suitable interval, which could be a day or month, depending on the urgency of the situation. Progress is reported and new goals are set, all without the normal accoutrements of established bureaucracies or rigid governance.
This process was something Geithner learned in the depths of the Asian financial crisis in 1997. He saw it again when it was deployed successfully in the bailout of Long-Term Capital Management in 1998. In that crisis, the heads of the “fourteen families,” the major banks at the time, came together with no template, except possibly the Panic of 1907, and in seventy-two hours put together a $3.6 billion all-cash bailout to save capital markets from collapse. In 2008, Geithner, then president of the New York Fed, revived the use of convening power as the U.S. government employed ad hoc remedies to resolve the failures of Bear Stearns, Fannie Mae and Freddie Mac from March to July of that year. When the Panic of 2008 hit with full force in September, the principal players were well practiced in the use of convening power. The first G20 leaders’ meeting, in November 2008, can be understood as Geithner’s convening power on steroids.
It was in the G20 that the United States chose to advance its vision for a kind of global grand bargain, which Geithner has promoted under the name “rebalancing.” To understand rebalancing and why this has been critical to growth in the U.S. economy, one need only recall the components of gross domestic product. For the United States, GDP grew to roughly $14.9 trillion in early 2011. The components broke down as follows: consumption, 71 percent; investment, 12 percent; government spending, 20 percent; and net exports, minus 3 percent. This was barely above the level the U.S. economy had reached before the recession of 2007. The economy was not growing nearly fast enough to reduce unemployment significantly from the very high levels reached in early 2009.
The traditional cure for a weak economy in the United States has always been the consumer. Government spending and business investment might play a role, but the American consumer, at 70 percent or more of GDP, has always been the key to recovery. Some combination of low interest rates, easier mortgage terms, wealth effects from a rising stock market and credit card debt has always been enough to get the consumer out of her funk and get the economy moving again.
Now the standard economic playbook was not working. The consumer was overleveraged and overextended. Home equity had evaporated; indeed many Americans owed more on their mortgages than their houses were worth. The consumer was stretched, with unemployment high, retirement looming and kids’ college bills coming due. And it seemed the consumer would stay stretched for years.
In theory, business investment could expand on its own, but it made no sense to invest in plant and equipment beyond a certain point if the consumer was not there to buy the resulting goods and services. Besides, high U.S. corporate tax rates led many corporations to keep their earnings offshore so that much of their new investment took place outside the United States and did not contribute to U.S. GDP. Investment remained in the doldrums and would stay there as long as the consumer was in hibernation.
With the consumer out of action and investment weak, the Keynesians in the Bush and Obama administrations next turned to government spending to stimulate the economy. However, after four stimulus plans from 2008 to 2010 failed to create net