Paulson Fails Fast. Or Is He Just Flailing?

Last Updated Nov 14, 2008 2:45 PM EST

What everyone wants is a quick fix for the world economy. That isn't going to happen -- the Fed and the Treasury are about out of options, and bodies like the IMF don't have any better answers. This impasse has people like David Roche, the author of "New Monetarism," almost gloating.

Roche, in an essay called "The Coming Crunch" predicts that emerging markets in Europe, Latin America and central Asia will be "parched" of their surplus liquidity, which is in fact already happening. More provocatively, he argues that China will not be able to stimulate domestic demand on anything like the scale it will need to avoid a major setback (the Chinese economy needs to grow on average about 8 percent just to produce enough jobs to keep employment steady). Only 36 percent of China's economy is driven by domestic spending, vs. 70 percent of ours, he writes. If he's right, it won't be for lack of trying on China's part -- it recently announced a $586 billion domestic spending program, a kind of Chinese New Deal.

China, unlike the U.S., has the money to pay for such a stimulus program â€" one reason why the Washington Times is fretting about China now having less capital available to fund our ongoing debt needs, which just got bigger, as our bailout spending will help drive the annual deficit towards a trillion dollars.

But we can take some hope -- the government is indeed being innovative. Treasury secretary Henry Paulson threw out the bailout plan the other day, saying it wasn't working. This is failing fast, which is part of the recipe used by all great innovators.

The thing to watch now is whether Congress is willing to let Paulson fail a few more times between now and January 20. Fail too fast and too often, and it starts to look like flailing. Flailing inspires no confidence. No confidence means no spending and no lending.

The question for your business is what to do in this kind of climate. The trouble is, there's no way to tell what's a smart move. Look what Paul Krugman, is saying: "prudence is folly."

He means don't ask the government to stop spending just yet, no matter how foolish it may seem to add to our deficit. In fact, he wants the next stimulus plan to dump about $600 billion into economy. Sounds like folly, doesn't it?

But in a broader way, he's absolutely right: what we think we know no longer matters. Our economic models are based on what's gone before. We all know that what we're in now isn't like the last five recessions. It won't be like the Great Depression because the government has already reacted far more aggressively. We can't turn to the new behavioral economics for accurate insights, because laboratory-driven experiments simply aren't going to replicate what people will do in a real downturn.

People and businesses are acting like we're headed for a Reckoning Downturn, where the U.S. economy pays the price of a gigantic debt overhang and the rest of the world tries to avoid suffering along with us. But the statistics suggest the reckoning may not be a dire one.

While very few businesses are in position to be strategic, we can all be tactical.

  • Try to do business with governments, universities and utilities. They're unlikely to go out of business or welsh on debts.
  • Find something useful you can do in China. Partnering with a local firm, perhaps.
  • One sure thing: if your instinct is to hang on for dear life, get past it. If you're going to fail, fail faster. Otherwise, you'll wind up flailing.
What's your tactic? Post it in comments and let's get a debate going.
  • Michael Fitzgerald

    Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.