WINSTON Churchill once quipped that the US always does the right thing — after trying everything else first. Well, when the right thing comes this time, it will be a long time coming.

The US is a country obsessed with instant gratification, defying patience. It likes to indulge in gluttony of all kinds almost tempting fate. With over two-thirds of the economy dependent on consumer spending, little wonder then that the pace of economic growth has been less than impressive given the noose around the consumer’s neck. Being ‘underwater’ in their homes, implying owing more than the worth of the asset, is commonplace. The unemployment rate is persistently high, and has been ever since the onset of the Great Recession, for reasons more than just situational. Structural factors have, this time, contributed to the perceptibly never-ending saga.

Ever since the rearing of the ugly recessionary head the Congress, along with the administration — this and past administrations — has made efforts to revive the glow of the nation, which have at best been half-baked or, to paraphrase Churchill, everything else first. The ‘right thing’ has been elusive in its full strength, so far. There is only so much a central bank can do to boost a sagging economy, especially considering the severity of the crisis.

The Jackson Hole address of Federal Reserve chairman Ben Bernanke served as a prelude to the market movements the week of Aug 22, 2011. Like a four-year-old in a candy store, the market fluctuated at the slightest inkling of ‘yes, there will be a QE3’ or ‘no, there’s no chance of it’. At the end of the comments by seemingly the only adult in the room, the market fell and then rebounded and closed higher for the day and the week

The crux of the speech had to do with the acknowledgment of the lingering recession in the country and the belief that, provided the policymakers woke up and worked in unison, the long-term outlook was nothing but positive. However, there was no mention of another round of stimulus.

It’s called the Great Recession for a reason. It’s not what the country faced in the earlier part of the decade of 2000, nor is it the slump of the late 1980s and early 1990s.

The label has its roots ingrained in the fact that this is truly a global snafu, with housing — which, in the past, has been a driver of most recoveries — ending up being conspicuous by its absence in picking up. Indubitably, the housing industry does not work in a vacuum. It has other ancillary industries for which it serves as fodder as it produces a virtuous circle of optimum employment, consumer spending and, thus, prosperity.

With an overhang of distressed pieces of property, unfriendly credit policies for both commercial and personal borrowers alike and continuing concerns about further home-value declines, the effect has been exactly the opposite: that of generating a vicious circle of high unemployment, depressed consumer spending and, thus, financial insecurity.

Furthermore, following such a scenario, homeowners have, in droves, opted to walk away from their homes, either by way of a short sale (with banks getting back lower than principal amounts loaned) or a foreclosure. Needless to add, this has added to the financial stress on banks which has manifested itself, as a consequence, in the formulation of even tighter credit policies.

Mr Bernanke commented on the monetary policy, for which he is responsible, and opined that while several tools have been deployed, the Fed stands committed to doing whatever else it takes to make things better. He hit the nail right on the head when he said that the Federal Reserve was not the only party to be relied on for making efforts to improve the economy. The Congress and the administration have a crucial role to play too and the sooner the bickering stops, the better off the country would be. He made a specific mention of the latest debate on the debt ceiling as a quintessential example of the faulty process currently under way in the Capitol.

Not only did it project the US poorly across the globe, it also disrupted the financial markets, making investors wary. To set aside undue politics and to think of the country first and foremost is not expecting the world of the greatest nation’s
politicians, one would think. Unfortunately, such is not the case as one sees paralysis in the making in the name of democracy.

By pushing it off to the fiscal policymakers, Mr Bernanke has clearly indicated that there needs to be some serious growing up.

He advocates, and rightly so, that while fiscal sustainability is of prime significance, it need not and ought not to be dealt with in isolation. It has to be a two-pronged goal of current economic recovery and medium- to long-term stability, thereby implying — much to the chagrin of a part of Congress — not drying up economic investments now while concurrently identifying ways to rein in finances, lest they spiral out of control, and raise revenue. The two can and should go hand in hand.

In September, all eyes are on Congress and the administration to finally deliver their mea culpa, and actually do the right thing. As Churchill would have said, all else has been tried already.

By Mohsin Hafeez,The writer works for a financial services company in the US.
mohsinhafeez@yahoo.com