Posts filed under 'Coming Social Unrest'
“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues
‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.
The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”
Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN
“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…
New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.
That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.” Secret Banking Cabal Emerges From AIG Shadows – Reilly – Bloomberg
Hat Tip to : Jesse
January 31st, 2010
he big banks have gotten plenty of help with their debts. But what about struggling households and non-financial institutions? Roosevelt Institute Braintruster Marshall Auerback investigates.
Once all the TARPs are tidied up and the quarterly profits no longer a revelation, American consumers will still be swaddled in debt. What’s to stop them from just walking away from it–and who’s to say, if the banks keep this kind of behavior up, we don’t want them to?
In The Holy Grail of Macroeconomics, an account of post-bubble Japan, Richard C. Koo illustrates that highly-indebted corporations with depressed asset holdings and a positive cash flow will embark on sustained debt repayment until their balance sheets are healthy once again. He argues that this happened in Japan over the last two decades and also happened in the U.S. over the four years of the Great Depression. This ongoing debt repayment created decades of economic stagnation, particularly because the fiscal response was so fitful and inconsistently applied.
But does it follow that sustained debt repayment will be the response of a household sector in the U.S. with destroyed asset holdings and high debt? To our way of thinking, it is unclear. This is especially the case with respect to mortgage indebtedness; U. S. households have non-recourse mortgage loans and can walk away from their debts rather than pay them down.
Public opinion polls reveal that Americans are angry about the current economic, healthcare, housing and environmental crises. Polls also document that a significant majority of Americans want the federal government to do something to fix these problems. But you’ve also got the makings of a huge neo-populist anger brewing, largely because (in the words of Frank Rich), “What disturbs Americans of all ideological persuasions is the fear that almost everything, not just government, is fixed or manipulated by some powerful hidden hand, from commercial transactions as trivial as the sales of prime concert tickets to cultural forces as pervasive as the news media.” In other words, even the feds might not be able to help.
The approach to financial reform that the Obama Administration has hitherto adopted is a classic illustration of this problem. Financial institutions are now back to business as usual and have provided limited help to the non-financial sector. In fact, some of them are clearly committed to worsen households’ financial position and have oriented their activity toward this end in order to maximize their profitability. Yet, they have received commitments from the taxpayer totaling $23.7 trillion.
Marshall Auerback argues that a debtor’s revolt would be a good thing.
H/T to Naked Capitalism
January 18th, 2010
Let’s hope he doesn’t end up the same way:
“Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It’s surreal; it’s just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.
We have broken from reality–a psychotic Nation. Ignorance with a pretense of knowledge replacing wisdom. Money does not grow on trees, nor does prosperity come from a government printing press or escalating deficits.
We’re now in the midst of unlimited spending of the people’s money, exorbitant taxation, deficits of trillions of dollars–spent on a failed welfare/warfare state; an epidemic of cronyism; unlimited supplies of paper money equated with wealth.
A central bank that deliberately destroys the value of the currency in secrecy, without restraint, without nary a whimper. Yet, cheered on by the pseudo-capitalists of Wall Street, the military industrial complex, and Detroit.
We police our world empire with troops on 700 bases and in 130 countries around the world. A dangerous war now spreads throughout the Middle East and Central Asia. Thousands of innocent people being killed, as we become known as the torturers of the 21st century.
We assume that by keeping the already-known torture pictures from the public’s eye, we will be remembered only as a generous and good people. If our enemies want to attack us only because we are free and rich, proof of torture would be irrelevant.
The sad part of all this is that we have forgotten what made America great, good, and prosperous. We need to quickly refresh our memories and once again reinvigorate our love, understanding, and confidence in liberty. The status quo cannot be maintained, considering the current conditions. Violence and lost liberty will result without some revolutionary thinking.
We must escape from the madness of crowds now gathering. The good news is the reversal is achievable through peaceful and intellectual means and, fortunately, the number of those who care are growing exponentially.
Of course, it could all be a bad dream, a nightmare, and that I’m seriously mistaken, overreacting, and that my worries are unfounded. I hope so. But just in case, we ought to prepare ourselves for revolutionary changes in the not-too-distant future.”
January 18th, 2010
….the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.
True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.
Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.
Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.
FDR’s first inaugural address
January 16th, 2010
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| Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington |
If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.
In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”
January 16th, 2010
Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.
Then he got elected.
What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.
How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?
Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.
How did we get here? It started just moments after the election — and almost nobody noticed.
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December 13th, 2009
In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.
“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank’s “Bear Case” scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).
The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.
Inflating debt away might be seen by some governments as a lesser of evils.
If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.
The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.
SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”. Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.
Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
SocGen’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.
Mr Fermon said his report had electrified clients on both sides of the Atlantic. “Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried,” he said.
November 22nd, 2009
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times
November 21st, 2009
The Job Report: Another month, another drop in payrolls. Will it ever occur to our leaders in Washington that what they’re doing isn’t working – and may actually be damaging our economy?
News that the unemployment rate jumped to 10.2% in October, its highest level since 1983, as the economy shed 190,000 nonfarm jobs, underscores the spectacular failure of the so-called fiscal stimulus to stimulate anything other than economic misery.
Since the $787 billion stimulus was passed in February, the economy has lost 2.9 million jobs – for a total of 4.3 million since the end of 2008. The silver lining, some say, is the number of jobs lost each month is shrinking. But they lose sight of this: There’s no guarantee the economy’s 3.5% growth in the third quarter will continue.
Indeed, some worry the economy is on a slow-growth path that will lead to permanently high joblessness, weaker income growth and fewer opportunities. The Blue Chip consensus of more than 50 economists nationwide expects unemployment to remain above 8% at least into 2012.
Why should this be? Well, start with the fact that virtually all job growth comes from companies with fewer than 500 employees, and that startups and very small businesses are responsible for more than half of all new jobs.
Today, these entrepreneurial job creators are running scared. That the White House vows to jack up taxes on those with “high incomes” (that is, entrepreneurs) is one reason why. Next year’s scheduled expiration of the Bush tax cuts that pulled the economy out of the 2001 recession is another.
Higher income taxes, a flood of stiff new regulations and the possibility of at least $2 trillion in new taxes related to cap-and-trade and a health care overhaul over the next decade have created a climate of uncertainty – for small and large businesses alike.
Businesses are hunkered down. They have $1 trillion in cash stashed away, but they won’t invest out of fear it’ll be taxed away or some government czar will tell them how to run their business.
At the same time, banks have a record $800 billion in reserves but can’t seem to find any worthy borrowers.
The White House claims its stimulus “saved or created” 640,000 to 1 million jobs. But no evidence shows that’s true. Stimulus has failed. If anything, borrowing hundreds of billions of dollars to fund such feckless initiatives is destroying private-sector jobs. Time has come for a dramatic change of course.
The Stimulus Plan Has Failed – Editorial, Investor’s Business Daily
November 8th, 2009
In light of the recent multitude of chances for the population at large to be gently introduced to the shenanigans of our Federal Reserve System, I have hope that the lights may come on for enough people before it is too late. Who knows, maybe that light will shine the way back to liberty, property, and peace — and towards real change for the better in America.
[VIEW THIS ARTICLE ONLINE]
October 31st, 2009
Bottom Line. The Fed is moving toward the exit as they look toward the conclusion of their securities purchases programs. But it is not clear that such a move is justified by their own forecasts or the inflation/wage/employment data. There may be an internal fear they have gone too far, a fear that the hawks can exploit. To be sure, I see no reason to expect the Fed will raise rates for a long time. And the Fed maintains it policy flexibility, claiming to be ready to revive asset purchases should economic or financial conditions justify. But I now suspect the bar for renewed expansion of Fed accommodation may be much higher than I had anticipated. And that the dominant push for expansion would have to come from financial market conditions, while they would be willing to tolerate persistently high unemployment rates so long as U. Michigan inflation expectations say elevated, regardless of the actual inflation data.
At Tim Duy’s Fed Watch
October 3rd, 2009
Unemployment will almost certainly in double-digits next year — and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics’ household survey, you can bet there’s another either too discouraged to look for work or working part time who’d rather have a full-time job or else taking home less pay than before (I’m in the last category, now that the University of California has instituted pay cuts). And there’s yet another person who’s more fearful that he or she will be next to lose a job.
In other words, ten percent unemployment really means twenty percent underemployment or anxious employment. All of which translates directly into late payments on mortgages, credit cards, auto and student loans, and loss of health insurance. It also means sleeplessness for tens of millions of Americans. And, of course, fewer purchases (more on this in a moment).
Unemployment of this magnitude and duration also translates into ugly politics, because fear and anxiety are fertile grounds for demagogues weilding the politics of resentment against immigrants, blacks, the poor, government leaders, business leaders, Jews, and other easy targets. It’s already started. Next year is a mid-term election. Be prepared for worse.
So why is unemployment and underemployment so high, and why is it likely to remain high for some time? Because, as noted, people who are worried about their jobs or have no jobs, and who are also trying to get out from under a pile of debt, are not going do a lot of shopping. And businesses that don’t have customers aren’t going do a lot of new investing. And foreign nations also suffering high unemployment aren’t going to buy a lot of our goods and services.
And without customers, companies won’t hire. They’ll cut payrolls instead.
Which brings us to the obvious question: Who’s going to buy the stuff we make or the services we provide, and therefore bring jobs back? There’s only one buyer left: The government.
Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.
Yes, I know. Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.
When I was a small boy my father told me that I and my kids and my grand-kids would be paying down the debt created by Franklin D. Roosevelt during the Depression and World War II. I didn’t even know what a debt was, but it kept me up at night.
My father was right about a lot of things, but he was wrong about this. America paid down FDR’s debt in the 1950s, when Americans went back to work, when the economy was growing again, and when our incomes grew, too. We paid taxes, and in a few years that FDR debt had shrunk to almost nothing.
You see? The most important thing right now is getting the jobs back, and getting the economy growing again.
People who now obsess about government debt have it backwards. The problem isn’t the debt. The problem is just the opposite. It’s that at a time like this, when consumers and businesses and exports can’t do it, government has to spend more to get Americans back to work and recharge the economy. Then – after people are working and the economy is growing – we can pay down that debt.
But if government doesn’t spend more right now and get Americans back to work, we could be out of work for years. And the debt will be with us even longer. And politics could get much uglier.
The Truth About Jobs That No One Wants To Tell You by Robert Reich
October 3rd, 2009
Conclusion: the labor market is till weak, weaker than it should be at this point in a cyclical recovery. Unless this changes in the fall and winter, a double dip recession is going to be more likely. While the preceding points stress the negative, I should point out that my baseline view is for job losses to continue to diminish, albeit at a slow pace. I would anticipate job gains to appear by the end of the year or early in 2010.
That gets me back to Hunt and Hoisington and partial recovery. Even if we see job gains by Q1 2010, this will be a full 6 months after the manufacturing sector turned up. This must limit consumption because spending can only increase through higher employment and income or increased debt and leverage. As most of the cost-cutting and productivity gains inherent in those cuts is now behind us, the heavy lifting begins. Earnings growth is likely to be weak in this environment.
How a fully priced equity and corporate bond market continues to rally in the face of these factors is beyond me. I see government bonds as a better bet than either corporates or equities for the medium-term.
Update: I failed to mention the rather large (over 800,000 jobs) benchmark revision of prior unemployment data. It’s this sort of thing which makes people not trust the numbers. But, revisions are always necessary if you are going to do month-to-month measurements in an economy as large as the United States.
At Credit Writedowns
October 3rd, 2009
Pittsburgh protesters demand G20 do more for jobs
Forbes
“We’re not going to accept a jobless recovery,” said Larry Adams, a postal worker who came from Jersey City, New Jersey, for the protest. …
September 21st, 2009
Announced changes in the regulatory landscape, including for hedge funds, private equity, and derivatives and securitization markets, will contribute to an increase in overall credit costs. The secular trend towards lower nominal interest rates, which has sustained financial intermediation and credit markets in the past 25 years, has come to a halt.
August 13th, 2009
In Spain: Bleak forecast puts unemployment at 22% in 2010, Edward Harrison relates that the recovery in Spain will be later than elsewhere in Europe because of the extent of deleveraging, and unemployment will continue to rise.
August 5th, 2009
Moscow’s Troubles in the Caucasus
The ongoing ethnic and political tensions between the Caspian Sea and the Black Sea are becoming a threat to the leadership in Moscow. Although the Kremlin garnered respect as a result of its war with Georgia one year ago, the situation remains explosive in other parts of the Caucasus.
August 5th, 2009
Income inequality can rise and fall for all sorts of reasons. Twenty-somethings just starting out and retired seventy-somethings both earn a lot less on average than peak-earning fifty-somethings. As the age profile of the population shifts, income inequality figures shift, too. So what? Consider another example. A generous immigration policy can widen the income gap in this country while at the same time reducing world poverty. That’s good, if you ask me.
Income inequality can also rise as a side-effect of injustice in our socio-economic system. But injustice should be rooted out because it is wrong, not because it widens the income gap as a side effect. If, just to take a wildly hypothetical example, the government has unjustly dumped loads of taxpayer money on Goldman Sachs, such a narrow allocation of public funds for private use should concern us for its own sake – not because Goldman’s bountiful bonuses are likely to exacerbate income inequality.
A good hard jog and an oncoming heart attack may produce the same racing heartbeat. But the distinction matters. A mathematical abstraction like national income inequality is a similarly ambiguous symptom. We can slash the level of income inequality in an instant by slapping even higher taxes on big earners. Or we can slash the level of income inequality by falling into recession. But neither remedy addresses the real problem, which is persisting poverty, not income inequality.
The corruption of a political system in which crises are used to pay off the governing party’s allies is also a real problem. The current silence about inequality – from news editors, pundits and politicians alike – would be golden if only it were based on a grasp of the limited utility of income statistics in guiding us toward more effective and humane public policy. But that is not the case. Instead, it appears that the commentators who fretted over income inequality so publicly for so long have simply stopped worrying about it. Inequality, it seems, only matters when a Republican is in the White House.
Does Income Inequality Really Still Matter? – Will Wilkinson, The Week
July 31st, 2009
Fear itself: “Swine flu is not the only thing we are neurotic wrecks about. Over at the Home Office, ministers warn about the likelihood of an al Qaeda terrorist attack,” says a Daily Mail op-ed on “today’s culture of fear.” As to which, Prison Planet maintains its drum beat of reporting on pandemic-flu-related mass graves being dug and martial law plans being laid here and abroad — while The Pakistan Daily assures readers it’s not the H1N1 virus we should fear but the pending vaccine. Two thirds of New Zealand travelers now view the world as more dangerous than when they first went abroad — with terrorism, crime and disease topping their worries, NZCity has an insurance company survey showing.
July 30th, 2009
Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »
July 25th, 2009
Back in 1983, economist Thomas Sowell wrote The Economics and Politics of Race, an in-depth look at how different ethnic and immigrant groups fared in different countries throughout human history. He noted that some groups, like the overseas Chinese, Japanese, and Jews, tended to thrive economically no matter where they went, bringing new skills to the countries that they arrived in and often achieving social acceptance even after facing considerable hatred and violence. Other groups, like the Irish and the Africans, tended to lag economically and found it difficult to become prosperous…
July 25th, 2009
The reason that the savings gauge has leapt is not that Americans are saving more, but only that they are paying off their past, huge borrowings because of financial distress. Americans actually cut savings in the form of financial assets held by 0.5 per cent of their incomes in the first quarter, while cutting borrowing even more aggressively, by 5 per cent of income. This telling data leads to two important conclusions.
First, it suggests that immediate US recovery prospects may be even more frail than supposed, and than Mr Bernanke is liable to admit. With Americans now battling to pay down debt against a backdrop of still-plunging house prices and soaring unemployment, while shoring up spending power with cuts in their savings, the resurgence of consumer demand on which recovery hopes are pinned may well prove elusive. The position could grow worse still once the boost to US personal incomes from the Obama Administration’s fiscal giveaway also fades, as it soon will.
Second, and critically, it is clear that America has yet to begin to address the real roots of this crisis and embark on the long road to a more sustainable economic future. Until it does so, the future will remain a hostage to fortune.
The U.S. Is Not Yet Free of Economic Peril – Gary Duncan, Times of London
July 21st, 2009
To promote car sales and home buying, Congress could have provided temporary but generous tax breaks. It didn’t. The housing tax credit applied to a fraction of first-time buyers; the car tax break permitted federal tax deductions for state sales and excise taxes on vehicle purchases. The effects are trivial. The recently signed “cash for clunkers” tax credit is similarly stunted; Macroeconomic Advisers estimates it might advance a mere 130,000 vehicle sales. States fared better. They received $135 billion in largely unfettered funds. But even with this money, economists at Goldman Sachs estimate that states face up to a $100 billion budget gap in the next year. Already, 28 states have increased taxes and 40 have reduced spending, reports the Office of Management and Budget.
There are growing demands for another Obama “stimulus” on the grounds that the first was too small. Wrong. The problem with the first stimulus was more its composition than its size. With budget deficits for 2009 and 2010 estimated by the CBO at $1.8 trillion and $1.4 trillion (respectively, 13 and 9.9 percent of gross domestic product), it’s hard to argue they’re too tiny. Obama and congressional Democrats sacrificed real economic stimulus to promote parochial political interests. Any new “stimulus” should be financed by culling some of the old.
Here, as elsewhere, there’s a gap between Obama’s high-minded rhetoric and his performance. In February, Obama denounced “politics as usual” in constructing the stimulus. But that’s what we got, and Obama likes the result. Interviewed recently by ABC’s Jake Tapper, he was asked whether he would change anything. Obama seemed to invoke a doctrine of presidential infallibility. “There’s nothing that we would have done differently,” he said.
Obama’s Squandered Stimulus Plan – Robert Samuelson, Washington Post
July 21st, 2009
We are now looking at unemployment numbers that undermine any confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. A better image is to look at the true total of jobless people as a prudent navigator looks at an iceberg.
What we see on the surface is disconcerting enough. The estimate from the Bureau of Labor Statistics of job losses for June is 467,000. That increases by 7.2 million the number of unemployed since the start of the recession. The cumulative job losses over the past six months have been greater than for any other half-year period since World War II, including demobilization. What’s more, the job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all employment growth from the previous business cycle.
That’s bad enough. But here are nine reasons we are in even more trouble than the 9.5 percent unemployment rate indicates.
One. June’s total included 185,000 people who were assumed to be at work, many of whom probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation: finance, for example. When the official numbers are adjusted over the next several months, look to some of the 185,000 boosting the unemployment totals.
Two. More companies are asking employees to take unpaid leave. These people don’t count on the unemployment roll.
Three. No fewer than 1.4 million people wanted or were available for work in the past 12 months. They were not counted. Why? Because they hadn’t searched for work in the four weeks preceding the survey. The assumption is that they had found work or don’t want it, but there are other explanations: school attendance, family responsibilities, sheer exhaustion.
Four. The number of workers taking part-time jobs because of the slack economy, a kind of stealth underemployment, has doubled in this recession to about 9 million, or 5.8 percent of the workforce. Add those whose hours have been cut to those who cannot find a full-time job, and the total of unemployed and underemployed rises to 16.5 percent, putting the number of involuntarily idle workers in the range of an overwhelming 25 million.
Five. The inside numbers are just as bad. The average workweek for production and nonsupervisory private-sector employees, around 80 percent of the workforce, dropped to 33 hours. That’s 48 minutes a week less than before the recession began, the lowest level of activity since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water and factories operate at only 65 percent of capacity. If American workers were still putting in those extra 48 minutes a week now, 3.3 million fewer employees could perform the same aggregate amount of work. With a longer workweek, the unemployment rate would reach 11.7 percent, not the official 9.5 percent (which in turn dramatically exceeds the 8 percent rate projected by the Obama administration).
Six. The average length of official unemployment increased to 24.5 weeks. This is the longest term since the government started to track these data in 1948. The number of long-term unemployed (those out of a job for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
Seven. The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.
Eight. The jobs report is even uglier when you consider that the sector producing goods is losing the most jobs–223,000 in the last report alone.
Nine. The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers to full-time status.
Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because more layoffs in this recession have been permanent and not temporary. Instead of shrinking operations, companies have closed whole business units or made sweeping structural changes in the way they conduct their business. For example, General Motors and Chrysler shut down hundreds of dealerships and reduced brands; Citigroup and Bank of America cut tens of thousands of jobs and exited many parts of the world of finance. In other words, we could face a very low upswing in terms of the creation of new jobs, and we may be facing a much higher level of joblessness on an ongoing basis. Job losses may last well into 2010 to hit an unemployment peak close to 11 percent. And then joblessness may be sustained for an extended period.
Can we find comfort in knowing that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power because employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled from 4.8 to 9.5 percent in just 16 months, a record rate so fast it may influence future economic behaviors and outlooks. Bear in mind that the lackluster increase in inventories suggests that there’s little prospect in the pipeline of real growth in consumption, investment, and exports. So the terrible state of the labor market is likely to be a strong head wind against consumer spending for a long time as wages and overall income growth are decelerating and households, within a fairly short period, will have received their full portion of the stimulus package.
How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments–Medicaid, jobless benefits, and the like–that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10 percent of the stimulus package today.
Second, the stimulus package may have been well intentioned, but it was too small and too badly constructed to get money into the economy fast enough to replace lost consumer and business spending and to slow unemployment. Workers’ pessimism is justified: About 40 percent believe the recession will continue for another full year. As paychecks shrink and disappear, consumers are more hesitant to spend and won’t lead the economy out of the doldrums quickly enough.
It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden told it as it is when he said the administration misread how bad the economy was. The administration inherited the problem, but then it failed to understand how ineffective its solution would be. The program was supposed to be about jobs, jobs, and jobs. It wasn’t. The recovery act may have been a single piece of legislation, but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency.
An additional $150 billion, which was allocated to state coffers so as to continue existing programs like Medicaid, did not add new jobs. Hundreds of billions of dollars were set aside for tax cuts and for new benefits for the poor and the unemployed, and that did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb.
Next year, state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending or raise taxes, or both. The complete state and local government sector, which makes up about 15 percent of the economy, is beginning the worst contraction in postwar history in the face of a deficit gap of $166 billion for fiscal year 2010, according to the Center on Budget and Policy Priorities, and a cumulative gap of $350 billion in fiscal year 2011.
Similarly, households overburdened with historic levels of debt will be saving more. The savings rate has already jumped from zero in 2007 to almost 7 percent of after-tax income now, and it is still rising. Every dollar of saving comes out of consumption. Because consumer spending is the economy’s main driver, we are going to have a weak consumer sector, and many businesses simply won’t have the means or the need to hire employees. In the aftermath of the 1990-1991 recession, Americans bought houses, cars, and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won’t be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so.
In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated: borrowing against the once rising price of their homes and tapping plentiful credit cards. No longer. The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs. This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of the excessive debt has been completed. Until then, the private economy will be deprived of adequate profits and cash flow, and businesses will not start to hire. Nor will they race to make capital expenditures when they have vast idle capacity.
In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround. Consumer spending and residential investment could be even weaker than most estimates, and, as the level of fiscal stimulus begins its decline in the second half of 2010, we may be facing an even more difficult future.
No wonder poll after poll shows a steady erosion of confidence in the stimulus measures. One survey even showed 45 percent believe the limited results suggest they should simply be abandoned midway. The disappointment is understandable–but that would only make things worse. So what kind of second-act stimulus program should we look for? This time, it should not be an excuse to pass a lot of programs like those in the first stimulus package that do not really have the kind of multiplier effect on job creation and on economic growth that was intended. In any event, given the trends, it is absolutely critical that the Obama administration not play politics with the issue but really begin to prepare a second stimulus program, so that if the economy does take a major downturn, it will be possible this time to provide much more rapid government support to infrastructure spending that will maximize the creation of jobs. The time to get ready is now.
July 18th, 2009
Despite the administration’s aggressive and costly economic policy initiatives, there is trouble all around.
Barely six months in office, President Obama already finds himself in an economic box. For despite his aggressive and costly economic policy initiatives, the jobs market shows no sign of healing. At the same time, the housing market foreclosure crisis continues apace, while renewed questions are again surfacing about the soundness of the U.S. banking system. To complicate matters, financial markets are now starting to fret about the longer-run inflationary consequences of the unusually large budget deficits in prospect for as far as the eye can see.
In January 2009, on presenting its $780 billion fiscal stimulus package, the Obama administration assured the public that because of that stimulus package U.S. unemployment would not exceed 8 percent. Yet already by June 2009, unemployment had risen to 9.5 percent; including part-time workers, who would prefer to be working full time, unemployment rose to a staggering post-war high of over 16 percent. Worse still, the jobs market shows every sign of being far from bottoming out.
The degree to which unemployment has exceeded the administration’s forecasts has to raise basic questions about the appropriateness and coherence of President Obama’s economic policy approach.
The degree to which unemployment has exceeded the administration’s forecasts has to raise basic questions about the appropriateness and coherence of President Obama’s economic policy approach. These questions pertain not simply to the very poor design of the fiscal stimulus package. Rather they pertain to the adequacy of the measures aimed at stabilizing the housing market and at resolving the country’s most wrenching credit crisis in the post-war period.
At the most basic level, one has to question how much sense it made for President Obama to allow the fiscal package to become excessively back-loaded at time when the economy needed immediate large scale support. If a large fiscal stimulus was indeed needed, why has only $60 billion of that package been dribbled out by June? And why is less than a third of the package scheduled to come into effect in 2009, the year when the package is most sorely needed?
Similarly one has to wonder about the heavy price that the Obama administration paid for effectively outsourcing the package’s design to House Speaker Nancy Pelosi and the rest of the Democratic congressional leadership. Should it really have come as a surprise to us that the resulting stimulus package would be laden with pork and with expenditures that are going to be very difficult to roll back? Or should we now be shocked that the package fell sadly short of including fast acting and effective fiscal stimulus measures that might have gotten the most bang for the buck?
Perhaps the most troubling aspect of the Obama fiscal stimulus package is the serious way in which it compromises the country’s long-run public finances and fans long-run inflationary expectations. The nonpartisan Congressional Budget Office estimates that the Obama budget not only implies unusually large budget deficits over the next two years but it implies that, even when the economy eventually fully recovers, the deficit will remain in the region of between 4 and 6 percentage points of GDP. As a result, over the next decade, the public debt will rise in a manner that has never occurred before in peacetime, from around 41 percent of GDP in 2008 to 82 percent of GDP by 2019.
Over the next decade, the public debt will rise in a manner that has never occurred before in peacetime from around 41 percent of GDP in 2008 to 82 percent of GDP by 2019.
The rising tide of unemployment must also raise questions about the Obama administration’s efforts to stabilize the housing market, which the administration correctly views as a necessary condition for producing a meaningful economic recovery. One has to expect that a weaker job market will only exacerbate the country’s present foreclosure crisis, which is adding supply to an already glutted housing market. The Center for Responsible Lending estimates that 2.4 million homes could be in foreclosure in 2009 and as many as 8.1 million homes over the next four years. Yet, the Obama administration’s loan modification program announced earlier this year has to date only resulted in 190,000 offers at mortgage loan modification.
Rising unemployment also has to raise questions about whether the Obama administration is not being overly sanguine about the health of the U.S. banking system. For it would seem that unemployment will now well exceed the worst-case scenario in the bank stress test presented by the administration earlier this year. Yet, despite a weakening unemployment outlook that is sure to boost bank losses, the Obama administration is now cavalierly backing away from its earlier initiatives to reduce the toxic assets that remain on the banks’ balance sheets.
Less than six months into his term, President Obama already faces difficult economic policy choices. He can choose, as he now seems to be doing, to counsel patience and assure us that all is well at considerable cost to his credibility on economic policy management. Or he can own up to the facts that he misread the economy in January and that his economic team now needs to go back to the drawing board. For the sake of the U.S. economy, one has to hope that he has the courage to review the overall coherence of his policy approach before it is too late.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was managing director and chief emerging market economic strategist at Salomon Smith Barney and a deputy director in the International Monetary Fund’s policy and review department.
Obama Is Stuck In an Economic Box – Desmond Lachman, The American
July 15th, 2009
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