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Bill Clinton on the Economy

Former President William Jefferson Clinton visited Moncton New Brunswick this week.

Bill Clinton in Moncton

Given the current state of the financial markets, Clinton chose the economy as the focus of his talk.  He emphasized that all nations are interdependent, Canada and the United States even more than most.

Referring to the recession, he joked (paraphrasing), "as an American, I want to say to all Canadians, and the world, sorry about that".

Clinton has firm opinions on the immediate causes of this recession and what our best options are for recovery. He mentions that, as much as a year ago, Hillary Clinton warned that the problems in subprime mortgages would soon be a much wider spread issue.  I'll try and give a point by point overview of how it was explained:

• Post 9/11 housing boom (2001-2007) became a prime investment strategy by brokerages.
• Housing investments became very profitable and the economy improved.
• Subprime mortgages became widely available (2004-2006) increasing profitability.
• Housing became the sole, or at least largest by far, pillar of growth and investment.
• Mortgages were bound, sold (Mortgage-backed_Securities), and hedged against, increasing risk.
• fyi - Mortgage brokers are not subject to Federal regulation
• The bubble burst, house prices began to decline, mortgage delinquencies increased, and mortgage backed securities lost value.
• Many financial institutions had over extended credit out in mortgages and had no way to recover their capital with housing prices refusing to rise.
• The elimination of the Uptick Rule allowed stock values to plummet without pause, egged on by short sellers.
• Even with government bailouts, institutions are holding on to their cash in an attempt to ride out the storm.

Clinton gave a personal example of how credit is still being pushed on people regardless of their personal circumstance.  On a day off from campaigning with Hillary, he received two robo-calls at home from companies offering credit cards.

What Hope for the Future?

Clinton proposes that people remain optimistic.  He warns not to be "like the cat that sat on a hot stove, got burned, and now won't sit on a cold one". That is, do not sit on cash like many companies, but invest in the economy. He tempers this with the old saw, "if it sounds too good to be true, it is".  So, don't look to any magic investment to make everything better; be sensible.  He predicts the economy will recover in no less than 1 year and no more than 3.  He comments that President-elect Barack Obama has put together an excellent economic council and a solid plan to attack the financial crisis.

Clinton goes on to point out the wide spread effects of the economic crisis.  One example he relates is a bank closure in Iceland that resulted in the loss of pensions for UK constables. In another example Clinton relates recently he was invited to Dubai by the president of the nation's largest bank. This country has billions in cash reserves and a strong oil industry and yet, due to the spreading financial hysteria, its stock market is plummeting. Clinton says this is a psychological reaction that we are likely to see more of.

Clinton suggests government economic stimulus take the form of infrastructure expansion:

• Upgrade the aging electrical grid to more efficiently service all areas and allow optimal alternate energy regions to contribute power back through the grid.
• Improve rural internet backbones to stimulate small business growth.
• Upgrade the rail system.
• Build the better electric or hybrid vehicle now.  Don't wait for Europe or Asia.  Reclaim the market share that is being lost by trucks and SUVs due to high gas prices.

Clinton points to the real estate crash in Japan in 1990 as an example of improper economic stimulus.  A fortune was invested in public works projects that provided a temporary economic boost but no long lasting benefit.

Clinton raised another point about the auto industry. He said that without some promise of aid GM would not likely survive to see President-elect Barack Obama inaugurated.  Chrysler and Ford would also be sorely affected by a loss of suppliers if GM crumples. If the auto industry crashes in the US, it is certain to have an effect on Canadian suppliers. Across all industries, Clinton warns Canadians not to expect US trade relation expansion for some time. At least, not until it rebuilds manufacturing jobs of its own.  Once the US economy begins it recovery, Canada can look forward to the renewed benefits of our interdependence.