Stock markets around the world this morning are tanking. "Many market watchers had been forecasting that a rally that has sent most major stock indexes up significantly over the past two weeks was likely to peter out or even reverse," the New York Times reports this morning. Maybe we'll hold steady, probably not. It's not as though we're somehow in a special category from the rest of the world.
What's just as bad is the growing worry among even the most stalwart supporters of the new administration is that it is operating in a miasma of bad advice from its economic team. It doesn't take much of a look backward to find that Lawrence Summers (for example) was as closely associated with the meltdown of the financial system as he is now with trying to set it to rights. Sometimes it makes sense to hire a convicted safecracker to design the security system for the new bank. Sometimes it's a really dumb move.
It’s painful now to read a lecture that Mr. Summers gave in early 2000, as the economic crisis of the 1990s was winding down. Discussing the causes of that crisis, Mr. Summers pointed to things that the crisis countries lacked — and that, by implication, the United States had. These things included “well-capitalized and supervised banks” and reliable, transparent corporate accounting. Oh well.
One of the analysts Mr. Summers cited in that lecture, by the way, was the economist Simon Johnson. In an article in the current issue of The Atlantic, Mr. Johnson, who served as the chief economist at the I.M.F. and is now a professor at M.I.T., declares that America’s current difficulties are “shockingly reminiscent” of crises in places like Russia and Argentina — including the key role played by crony capitalists.
Simon Johnson is one of the wisest analysts of the current situation. He's been quoted a lot in these pages. Citing Russia and Argentina -- and South Korea and Malaysia about ten years ago -- Johnson writes: "In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay."
In other words, our nervousness about China's next moves is not misplaced. Quite apart from any problems in the economy, ours and the world's, we face two big ones in the financial system, Johnson writes.
That political balance of power is what is fueling the quote unquote populist anger. Until now, we -- and our government -- have been willing to play down the depth of the problem in the banking sector. Now we're not so sure. Those toxic assets! That naive confidence in the taxpayer's ability -- read "the economy's ability" -- to absorb the giant losses till to come! No wonder Paul Krugman writes:
Well, "all along" is too long. But if Krugman were to indict our financial sector rather than the whole economy, I'd more than agree.