Tuesday, October 30, 2012

"Sandy, and Other Storms"

Sydney M. Williams
Thought of the Day
“Sandy, and Other Storms”
October 30, 2012

A storm with the breadth, power and intensity of Sandy is awesome to behold. Its very strength contrasts with the relative insignificance of man. Lear, coming upon a naked and dirty Edward in the midst of a violent storm, asks, “Is man no more than this?”

Science today allows us to track storms, with reasonable accuracy, and to measure their intensity. Warnings allow us to prepare. For local officials, that means urging evacuation if necessary, closing public buildings, schools and meetings. It means suspending or cancelling transportation; it meant closing the NYSE yesterday and today. For individuals, it means lawn furniture be stored; windows and doors secured, and water, food and flashlights purchased. Boats are brought ashore. It means ensuring the generator works and that there is enough fuel to keep it going for a few days. Each of us battens down our respective hatches. Yet there is nothing we can do to alter the direction or the intensity of the storm. From time to time, the boy-who-cried-wolf syndrome is experienced. False warnings bring complacency. After last year’s bout with Irene, officials in New York, New Jersey and Connecticut took Sandy more seriously.

Man’s capacity to do harm is legion. His search for bigger and deadlier weapons seems non-ending. But all the lethal weapons scientists have been able to develop pale in comparison to what nature can deliver with such apparent ease. Man’s capacity to do malice, while presuming to do good, can also be destructive. There are storms of a political nature that we can see coming, yet are often ignored by those in positions of responsibility. The fiscal cliff, coming in January is one; the printing of dollars with no explanation as to how to painlessly stop the process is another; and the exorbitant level of government debt is a third. Unlike Sandy, which we can only observe in awe, these other storms are preventable. But, to do so takes a will, which Congress and the President have not demonstrated, and a plan, which, if they have one, has never been disclosed.

The New York Times and the President sounded relieved (and even elated) that the economy in the third quarter grew at 2%, versus a more dismal 1.3% in the second quarter. However, such a poor showing three years into recovery is almost unprecedented. But the number exceeded expectations; so the President was able to say that recovery is underway. “We have come too far to turn back.” No one, least of all Mr. Romney, wants to turn back. He, like most of us, wants to move forward, but at a more rapid pace. Most of us would rather jog than amble. And making things worse, a fiscal cliff looms. Left alone, tax rates for everyone will rise, and sequestration will cut federal spending for many government programs especially Defense, but significantly, as the winds of Sandy roar around my house, it will cut $900 million from the Federal Emergency Management Agency (FEMA.) The combination of tax increases and cuts in government spending will almost assuredly send the economy back into recession. At any rate, 2% GDP growth is too minimal to reduce unemployment, not to mention it is too little to absorb the natural increase in the labor force.

A second pending storm was created by the Federal Reserve – their ballooning balance sheet. There was no question that the Federal Reserve helped stave off what could have been a total credit collapse in the autumn of 2008. The quick response of Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke and then New York Fed Chairman Tim Geithner did help avoid what could have been a disastrous event. Contrary to what Mr. Obama would have one believe, the system was saved before he took office. The TED Spread – a measurement of one bank’s willingness to extend credit to another – had fallen from 480 basis points in September-October, 2008 to 131 basis points on December 31, 2008. But since those dark days, Mr. Bernanke has increased the size of the Fed’s balance sheet more than three fold to just under $3 trillion. A recently announced third level of quantitative easing will add another $40 billion a month to the Fed’s balance sheet – almost half a trillion dollars more over the next twelve months. While aggressive Fed action was clearly warranted in late 2008, recent easing has increased asset prices, but has not restored confidence in the economy. Forgetting about the unfairness of interest rate-price fixing on America’s seniors, unwinding that monster without tipping the economy back into recession will be a more difficult task than that facing Con Edison in the aftermath of Sandy.

Federal debt levels are worrisome and are likely to create a storm that will make Sandy appear a walk in the park. The most obvious (and likely) path for government to take is to pay future obligations with depreciated dollars – a regressive tax that will fall hardest on middle income Americans. In the past, when governments had to borrow heavily, as did the United States during World War II, they relied on issuing as much long term debt as possible. In contrast, today, not only has our federal debt reached levels not seen since the 1940s, we are borrowing in the short term markets. Thus, when rates do rise, as they most assuredly will, the effect will be felt almost immediately; federal deficits will climb. Low interest rates are an aphrodisiac, and the Obama Administration has been imbibing; it will be left to the taxpayers to pay for rehabilitation.

The easy availability of debt is critical to economic growth, but too much debt causes economies to falter. In the Bush years, we saw that phenomenon with a too-rapid expansion of consumer debt. Today, we are seeing it, even more dramatically, in the rise in federal debt. (And none of what I have discussed in this essay includes the massive entitlement promises Congress has been so happy to grant constituents, while responsibility for repaying will be left to future generations.) If Congress and the Administration are serious about getting the economy growing, they will have to work on improving confidence among small and mid-size businesses. Cash on corporate balance sheets approximates $2 trillion. Getting that money back into circulation through investment should be the focus of government. Doing so will take tax reform and more sensible regulation, and confidence that policies will have some permanence.

In the meantime, Sandy persists on her path. I am writing this in mid-afternoon on Monday. The tide remains high, but is slowly retreating. The next one is not due until midnight – October’s full moon! The eye of the storm is still off Atlantic City; so we have not yet felt her full brunt. Even so, wind gusts have already knocked down a couple of branches and, if reports are to be believed, we have another thirty-six hours to go. The NYSE has already decided to close on Tuesday, the first time the Exchange has closed for two consecutive days due to weather related problems since the Blizzard of ’88 – 1888 that is! There is little we can do regarding Sandy, except watch, hope and pray. Our house is about 900 feet from the river; about half that distance is marsh. We sit about 30 feet above sea level, so I don’t worry about being flooded. Yet it is unnerving to watch the tide creep ever closer. Tonight and tomorrow it will likely rise even higher.

With the storm having moved west and north, this morning’s tide is back to normal. But, like millions of others in the region, we lost power. The generator, however, is doing its job; so I am able to finish this on my I-Pad.

When it comes to man’s relationship with nature, Shakespeare had it right. Amidst nature’s storms, man does seem insignificant, and he becomes a victim of circumstances. But when it comes to self-created storms, such as those described above, the responsibility for success or failure is man’s alone.

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