Batten Down the Hatches: Crisis of Globalization

Monday, March 9, 2009

Partial Transcript from CNN's Fareed Zacharia, GPS, aired Sunday, March 8, 2009:

ZAKARIA: OK, on to the economic crisis, which never ends, so our discussion of it never ends. And we're also going to talk about where economics meets politics, both at home and abroad.

David Frum was a speechwriter for President George W. Bush, and wrote that memorable phrase, "the Axis of Evil" -- actually, the "axis of hatred" as you wrote it. He is now on a crusade to get the Republican Party to move to the center.

Barbara Ehrenreich has worked as an associate at Wal-Mart, a waitress, a hotel maid and a nursing home assistant -- not the usual resume of one of my guests, but she did it all for a book.

Ian Bremmer is one of the great doom-and-gloomers of the economy these days. He says, brace yourself, 2009 is going to be worse than many people anticipate.

And Niall Ferguson thinks historians will look back on the early 21st century and say that the country at the heart of the global economy during that time was Chimerica. Never heard of it? Well, that's because Niall made it up. It's his concept of a symbiotic relationship between China and the United States.

Thank you all.

Niall, when you look at things, you have been also a doom-and- gloomer. You've been predicting that this is going to get worse and worse. So, have we reached bottom yet?


It seems to me, we won't go down as far as we did in the early 1930s, but we're going to go down a good deal further still, whether you look at the stock market, or, indeed, more importantly, global trade, because it seems to me that what's happened since we last talked about this, is that a financial crisis has turned into a crisis of globalization.

And the thing that really scares me is the collapse of exports from some of the world's leading export economies, particularly in East Asia -- starting with Japan. But look also at Taiwan. Look at South Korea.

So, we're now in a crisis of globalization. And in some ways, that crisis is affecting other countries much more than it's affecting the United States.

ZAKARIA: What does it mean to say that it's a crisis of globalization -- which means, you know, as you said, the exports are down 30, 40 percent in these countries. What's the danger?

FERGUSON: Well, those economies that are heavily reliant on exports have a commensurate decline in output and a surge in unemployment that's going to be very destabilizing for them.

The other thing that's shifting is that the great capital flows that accompanied the boom in trade are also shrinking. So countries that got hooked on foreign capital are getting killed, particularly in Eastern Europe, where there's a massive financial crisis in its early stages -- a crisis that could drag down the entire West European banking system with it.

So, if you think this crisis is anywhere near the halfway stage, you're in for some very nasty surprises.

ZAKARIA: And you think that this means social turmoil, political upheaval?

IAN BREMMER, AUTHOR, THE FAT TAIL: You have a situation where the social instability that comes from this significant economic downturn that we are, as Niall mentioned, just moving through. We're not near the end at this point. That usually takes 12, 18 months to start to play into a lot of these emerging markets, these developing countries.

So, we haven't really started to see the beginning of that social instability. The global markets aren't yet paying attention to this. They're not yet pricing it in.

ZAKARIA: Barbara, do you think there's social instability that you can see in the United States as a result of this downturn yet?

BARBARA EHRENREICH, AUTHOR, "NICKEL AND DIMED: One advantage the United States may have compared to some of the Eastern European countries is that we have this huge infrastructure of neighborhood groups, community organizations. You know, we have a civil society -- trade unions, workers' rights centers. And I think those are going to be the nuclei for people to figure out, what do we do.

It's the job loss now. It's the huge waves of unemployment, and with almost no safety net.

ZAKARIA: David, what happens here if this continues for months and months and months?

DAVID FRUM, AUTHOR, "COMEBACK: CONSERVATISM THAT CAN WIN AGAIN": President Obama actually has a great safety net behind him, which is that the country -- the timing of this lined up so that he can blame everything on his predecessor, certainly through one congressional election cycle, and maybe for a little bit longer than that. And he has struck a tone that is very powerful. And he's got the advantage also of political opponents who seem to be volunteering for the lemming role of throwing themselves off the cliff in order to help, that as...

ZAKARIA: Explain that. Why do you think the Republican -- you have a big essay in Newsweek. What do you mean by this?

FRUM: There's a new poll out that shows that Rush Limbaugh is less popular than Reverend Jeremiah Wright, which is an achievement. Eleven percent of Americans under 40 have a positive impression of Rush Limbaugh. And this is a man who is not only claiming, but is being accepted, as the figurehead of the Republican Party.

ZAKARIA: On this program last week, Martin Wolf, a great British columnist for the "Financial Times," said that he thought President Obama's stimulus was all wrong, but mainly because it was much, much too small.

I mean, here he's being attacked in Congress, certainly, for it being too large. Niall, do you think history suggests that we actually need a much larger stimulus?

FERGUSON: Well, I don't think that. Martin Wolf, along with Paul Krugman, is a born-again Keynesian -- one of the many economists thrown into such panic by their subject's collapse, that they've gone back to the general theory that Keynes wrote in 1936, in the hope of salvation. And the mantra is bigger deficits, bigger deficits.

Well, I think a $1.75 trillion deficit, which is what they're looking at -- 12.3 percent of GDP, 44 percent of all the expenditure in this year's budget -- is way big enough.

And I think there's an international dimension to this, which is relevant to our discussion. The more the United States embarks on a huge Keynesian stimulus, the more it sucks capital away from the rest of the world.

It's easy for the United States...

ZAKARIA: Wait. Explain that. Because we are financing this spending binge by borrowing money from the rest of the world. We're selling American Treasury bills to the rest of the world.

FERGUSON: Which is what we've done all along. We financed our housing bubble this way, and now we're going to finance our recovery, our stimulus package this way.

And it's kind of -- it works for the United States. The United States is a safe haven for the political reasons we've just been discussing. It's not a place that's about to produce blood in the streets and a red revolution, which is certainly a scenario you can imagine in some of the emerging markets.

So, for many, many reasons, investors say, OK, if I'm going to hold something, it'll be a U.S. government bond. It may not pay much...

ZAKARIA: So, this is sounding good, then. So, we've...

FERGUSON: For the United States, great. But think of the destabilizing effects this has on the rest of the world.

If the U.S. deficit, if the U.S. stimulus sucks all the available savings in from the rest of the world, how is the rest of the world going to cope? And I think that's the key to understanding this crisis of globalization. It's asymmetric.

ZAKARIA: I can't imagine one congressman being worried about what you...

FERGUSON: Right. Well, this is, of course, the precise mentality that we had in the 1930s, when Americans said, let's focus on our domestic problems, and never mind about the rest of the world. We'll worry about that later.

But if you let the rest of the world plunge into the kind of political disorder that Ian's talking about, there will ultimately be a price to pay. Political risk goes up in the world at a time when the U.S. is fundamentally looking to draw down its overseas commitments.

But you know what's going to happen. I've read this script. I've seen this movie. Five years down the line, the United States finds itself with a very much more dangerous world than when it last looked.

BREMMER: And if you are Beijing making decisions about where you're going to make investments, those decisions are politicized. They're decisions about national security, national interest, political stability -- not just decisions about maximizing profitability.

When governments make decisions about where to allocate capital, as opposed to multinational corporations, they don't make decisions in terms of global markets. They make decisions in terms of national interests.

ZAKARIA: So, what you're saying is that, when Beijing -- when the Chinese government is deciding what to do with its money, they could either use the money to buy American debt, finance our expansion, or they could spend the money in China.

BREMMER: That's right.

ZAKARIA: And that politically, they're much more likely to spend it in China.

BREMMER: As this crisis spirals out, the United States suddenly is going to be on the losing end of all this. You combine that with the political instability, because the United States is not paying attention to the world, they're paying attention to the U.S.; the Chinese are not paying attention to the world, they're paying attention to the Chinese.

Who then takes care of the mounting global crises that exist on things like collective security, climate change, nuclear proliferation? They don't get resolved until there's a sufficiently large shock that we get pushed out of our complacency.

ZAKARIA: Barbara, are you happy with President Obama so far?

EHRENREICH: I think he has spoken with gravity of the situation in a way that resonates for people.

But I think one of the things he's missing, though, in the way he, you know, has been talking about the crisis, is the degree of class anger that there is in America now. You know, it astonishes me, and I'm certainly somebody who has fanned the flames of class warfare from below as much as I can.

But, you know, for so many people it's so clear. Now, the rich, the CEO class, the people who are on top, they betrayed us. It wasn't that they were just greedy. They're supposed to be greedy, right. It's capitalism.

But they were dumb. They were stupid. They didn't know what they were doing. It was a house of cards.

And that is just such a palpable rage that I think Obama is not addressing. And I don't know if he's ever going to really hear it, if he's surrounded by people like Larry Summers.

ZAKARIA: And we will be back in a moment.


ZAKARIA: And we are back with our panel discussing the economy and politics.

Niall, how do you think President Obama has done so far? The stimulus package is tied to a long-term investment plan. Should these have been split up? How would you have approached it?

FERGUSON: Well, he inherited an enormous financial problem. And I suppose in some measure, he couldn't help but add something to it. He had to deliver on at least some of his pledges.

And the thing that puzzled me most about the stimulus package was that he outsourced it to Congress, and let Congress write the detail. And I thought that was a step in the direction of parliamentary government that he probably came to regret.

After all, asking Congress to design a $700 or $800 billion spending package is like asking a bunch of alcoholics to run a bar.

But the thing that most disappointed me when I looked at the small print of the budget, was the extraordinary optimism of the growth forecasts. I mean, this is a budget that envisages a doubling of the federal debt over a period of 10 years, that will take it up to around 100 percent of gross domestic product.

But that's on the assumption that the economy is going to bounce back and start growing at 3, 4, 4.5 percent in the next few years and for the foreseeable future. And that's just not credible.

It's much more likely that the U.S. economy will grow at something more like 1 percent, because the juice is gone. We can't leverage any more. And mortgage equity withdrawal was an absolutely key part of the growth during the Bush years.

So, I think there's an underlying over-optimism there in many of the calculations that have been made. And I think this will create all kinds of problems for the ambitious schemes he has for, say, health care reform.

I'm almost sure that's going to be derailed as the economic bad news mounts, as it becomes clear that we're in for a much more protracted period of slow growth.

ZAKARIA: David, why did he outsource the writing of the stimulus to Congress? I mean, one theory is, it's the only way you could have gotten it through fast.

FRUM: I think there's a lot of truth to that.

Also, there's huge pent-up demand among Democrats. And they've been out of power for a long time. They have projects. They have constituencies.

They won power again in the elections of 2006, but they had a president who, at that point, finally discovered the veto pen. And anyway, they didn't want to give the president any credit for anything positive, even spending, which people sometimes like.

Now, the moment is up. I think the analogy that Henry George used was throwing a banana into a cage of monkeys.


And I think that's a description of what happened there.

EHRENREICH: I mean, let's remember that one of the reasons for the financial crisis is that this is such an unequal society, that compared to any other industrialized society, we had such a large population of people called the "working poor."

You know, that was the market for the subprime mortgages. You don't have an equivalent population like that in Ireland or, you know, so many other places.

FERGUSON: But we call them the "non-working poor" there.


They're all (ph) unemployed.

EHRENREICH: But, OK. That's, yes, much better I think.

And with, you know, something -- we have to in some ways, if we're looking for long-term sustainability, address that inequality which had become so noxious. I mean, we were like this huge, top- heavy structure that finally just fell, in a way.

FRUM: The problem when it falls is that federal revenues fall with it. And at the end of the boom, the -- what was it -- I think it was the top 1 percent were getting, what, 22 percent of the income, and paying 40-plus percent of the taxes.

If their share of the income slips a little bit, what is going to happen to federal revenues? Where are those tax collections going to come from?

And they are, the federal government -- I'm with Niall, I think he's right (ph) -- is probably over-exaggerating, exaggerating its revenue projections. And all of these deficit and debt problems are going to be really scary.

FERGUSON: And this is where the international dimension comes in, because I'm going back to a point that Ian said.

If international investors take fright (ph), and when they see that the deficit is actually even bigger than 12 percent, when it turns out actually to be 14 percent, something straight out of World War II, then I think there's going to be a new source of pressure that's currently absent.

If there's a flight from the dollar, if there's a flight from 10- year Treasuries -- which is already detectable, just in its beginning -- then the Obama administration is going to be suddenly hit by an external shock it wasn't expecting.

ZAKARIA: And this is the worst-case scenario, which is that people abroad lose faith in the U.S. dollar, and particularly in buying our debt, which means we have to raise interest rates in order to get people to buy our debt.

FERGUSON: Well, the rates automatically go up, as the bond prices fall, at which point Ben Bernanke at the Fed has no option but to start printing money. He has to start buying Treasuries directly from the Treasury.


ZAKARIA: So, then you get inflation, high interest rates and slow growth, which is the kind of nightmare combination.

EHRENREICH: The one thing that, you know, should be put into this equation is, we cannot afford the role in the world that the United States has played any more.

I don't know -- you know, I worry very much about this expansion. Obama said -- doesn't want -- desire to expand the war in Afghanistan and expand -- where do we -- where is this coming from? BREMMER: Well, we can't...

EHRENREICH: We can't...

BREMMER: ... afford the role that U.S. has played, but we also can't afford the role the U.S. is about to play, which is very little of a role at all.

I mean, at the end of the day -- you remember, when Obama was elected, but before he was inaugurated, there were issues around Gaza. And he was asked, you know, sort of what do you think. And his response was, well, you know, there aren't two presidents at the same time, only one president. Well, he didn't say that when he was asked about the GM bailout, and the bailout for the automotive companies.

You know, Trotsky, right, said that you don't want war, but war wants you. Well, Obama does not want foreign policy, but foreign policy wants him.

And you cannot have Davos go on, and have 41 heads of state -- 41-and-a-half, if you count Putin -- and have Obama send absolutely no one, because they don't want to focus. And..

EHRENREICH: Oh, no. No, I'm not saying retreat into isolationism. I'm saying you can't have that kind of aggressive, enormously expensive military involvement in the world.

FERGUSON: Well, wait a second. Wait a second. We just walk away from Afghanistan...

EHRENREICH: If we're talking about the federal government...

FERGUSON: ... and give it back to the Taliban?

I mean, that's extraordinary. This is a typical example of how our focus shifts. We've kind of forgotten 9/11 ever happened. We've forgotten what terrorist organizations did.

If we walk away from Afghanistan, we're essentially saying to the Taliban, carry on where you left off. And indeed, have Pakistan, too, while you're at it.


EHRENREICH: I would volunteer to fight the Taliban, personally, as a woman. But I think that maybe we have to be thinking smarter. You know, we can't just have a discussion about deficits, and can we really afford social spending like SCHIP, without somehow putting on the table the fact that the United States spends more than any other nation on earth.

BREMMER: Barbara, I won't volunteer to send you to fight the Taliban.

FRUM: I completely disagree with what Barbara was saying before. His job is, if there are social tensions, to soothe them, to be reassuring. That's his great strength, is that he is such a mellifluous, soothing presence.

And that's what he's going to have to do, persuade people that he has a plan, but not to tell them, not to make any promises about how it's going to be, because those promises may be falsified. And if they are, once they are, you never recover, as George Bush found when he was optimistic about Iraq. He was optimistic about Iraq. And he was eventually right, but he wasn't right in time, and he never recovered.

ZAKARIA: Niall, last word. What is the thing -- what's the next shoe that's going to drop? What do you think?

You know, we're in a situation where every prediction has been -- every dark prediction has been borne out. Things have turned out to be worse than expected.

So, what happens going forward? Three months from now, where will we be?

FERGUSON: Well, we're going to have a very interesting G-20 summit in London early next month. And I think the topic of conversation at the top of the agenda will be the collapse of Eastern Europe.

And I want to know how the Obama administration will react when Ukraine begins to disintegrate, egged on by Mr. Putin, who sees wonderful opportunities opening up for him in what he calls the "near abroad." That's code for the former Soviet Union.

He wants it back. Watch this space.

ZAKARIA: Watch this space indeed, and we will be back. Thank you. Thank you all.


Civilization's Last Call