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January 31, 2010
David Warsh, Proprietor


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No January Thaw

In New England, there is ordinarily a break in the weather known as the January thaw. Most years, usually around January 25, temperatures climb about six degrees from their chilly norm and remain there for a few days, before the next cold spell arrives. It is then that, if you look up, you see buds have begun to form on the trees.

No thaw this year! Boston’s Charles River is frozen solid. As if to mock a century or two of folklore, a single uncharacteristically warm day last week brought a considerable rain, enough to wash away the snow, followed by a week of bitter cold.

EP is more discomfited by the intransigence in Washington than by the weather.

Threats pile up. In On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, his just-published memoir, former Treasury Secretary Henry Paulson reports that high-ranking Russian officials approached their Chinese counterparts in August 2008 to propose dumping Fannie Mae and Freddie Mac bonds in order to precipitate a crisis in financial markets and force a US government bailout.

The Russians were about to go to war in Georgia, and a demonstration of fragility in New York would have been a welcome diversion. The Chinese government declined, and told Paulson about the proffer while he was in Beijing for the Olympics. The crisis arrived in New York in September anyway, with the bankruptcy of Lehman Brothers.

Also last week, John Markoff, David Sanger and Thom Shanker of The New York Times, reported on a series of probes, cyberattacks and surveillance efforts in the last few years thought to be associated Chinese nationals, and discussed the evolving US strategy in response – essentially a policy of retaliation. With nuclear deterrence, the problems of diagnosis were relatively straightforward, wrote Markoff.

But in cyberattacks, the damage can range from the minor to the catastrophic, from slowing computer searches to bringing down a nation’s cellphone networks, neutralizing its spy satellites or crashing its electrical grid or its air traffic control systems. It is difficult to know if small attacks could escalate to bigger ones.

To counter such threats, the Obama administration proposes to create a new Cyber Command, the Times reported, to be run by Lt. Gen. Keith Alexander, head of the National Security Agency, if the measure is approved by Congress. Wider discussions are taking place among military leaders about how best to deter economic gambits such as the one the Russians apparently contemplated on the eve of their Georgian war.

But Congress is deadlocked on just about everything else – not just national health care policy, but banking regulation, deficit reduction, climate management, campaign finance, confirmation protocol, to name only the most obvious..

The thirty votes cast against Ben Bernanke’s appointment to a second four-year term as chairman of the Federal Reserve Board, came from an oddball, bipartisan coalition of Senators, most (but not all) from rural states with strong populist and anti-Eastern elite traditions. They included Roger Wicker (R-Miss.), Richard Shelby (R-Ala.), Bernie Sanders (I-Vt.), Al Franken (D-Minn), Russ Feingold (D-Wis.), both senators from Iowa, Chuck Grassley and Tom Harkin (a Republican and a Democrat!), and even Ted Kauffman (D-Del.), the long-time aide who replaced Vice President Joe Biden. This is one further presage of interesting mid-term election campaigns in the fall – no single strong tide but instead a crazy-quilt of local interests.

Meanwhile, the Republican Party leadership’s reaction to the president’s State of the Union speech indicates a willingness to bet everything on the presidential election of 2012.

Obama is temperamentally well-suited to such a campaign. He may have to sacrifice Treasury Secretary Timothy Geithner, a particularly successful field commander who was nevertheless very roughly handled in Congressional hearings last week. A suitable replacement, if he could be persuaded to return to Washington, would be former Treasury Secretary Paul O’Neill. As Obama’s appearance before the Republican House issues conference last week signified, he is prepared for a prolonged period of trench warfare.

Meanwhile, what are the chances that growth, which apparently resumed in the third quarter of 2009 and accelerated dramatically in the fourth quarter, will present a prolonged “jobless recovery,” as in the aftermath of the recessions of 1990-91 and 2001? There are two good reasons to be optimistic, says Robert Gordon, of Northwestern University, a member of the National Bureau of Economic Research, who traces the ups and downs of business fluctuations.

First, he says, the panic during late 2008 and early 2009 was overdone, making a bounce-back more likely. Second, there was no equivalent this time to the late 1990s boom in information and communications technology whose contribution to productivity was so great that it kept job growth down in 2001-04. Even a V-shaped recovery in hours worked doesn’t guarantee a rapid decline in unemployment, says Gordon; first those who were forced into part-time status will be recalled to full-time status. More hours, then more jobs, and eventually the unemployment rate will begin to drop.

The November election is still nine months away. By the presidential election of 2012, the expansion should be well underway. By then today’s Republican strategy of resisting all change will be wearing thin

January thaw or not, when you look up, the buds are there.

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