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Austeri-FAIL

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I have never accepted the idea that economic austerity could be at all useful in resolving our unending economic crisis.  I posted my rant about this subject on December 19, 2011:

The entire European economy is on its way to hell, thanks to an idiotic, widespread belief that economic austerity measures will serve as a panacea for the sovereign debt crisis.  The increasing obviousness of the harm caused by austerity has motivated its proponents to crank-up the “John Maynard Keynes was wrong” propaganda machine.  You don’t have to look very far to find examples of that stuff.  On any given day, the Real Clear Politics (or Real Clear Markets) website is likely to be listing at least one link to such a piece.  Those commentators are simply trying to take advantage of the fact that President Obama botched the 2009 economic stimulus effort.  Many of us realized – a long time ago – that Obama’s stimulus measures would prove to be inadequate.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I pointed out that another stimulus program would be necessary because the American Recovery and Reinvestment Act of 2009 was not going to accomplish its intended objective.  Beyond that, it was already becoming apparent that the stimulus program would eventually be used to support the claim that Keynesian economics doesn’t work.  Economist Stephanie Kelton anticipated that tactic in a piece she published at the New Economic Perspectives website  . . .

It has finally become apparent to most rational thinkers that economic austerity is of no use to any national economy’s attempts to recover from a severe recession.  There have been loads of great essays published on the subject this week and I would like to direct you to a few of them.

Henry Blodget of The Business Insider wrote a great piece which included this explanation:

This morning brings news that Europe may finally be beginning to soften on the “austerity” philosophy that has brought it nothing but misery over the past several years.

The “austerity” idea, you’ll remember, was that the huge debt and deficit problem had ushered in a “crisis of confidence” and that, once business-people saw that governments were serious about debt reduction, they’d get confident and start spending again.

That hasn’t worked.

Instead, spending cuts have led to cuts in GDP which has led to greater deficits and the need for more spending cuts.  And so on.

On April 23, Nicholas Kulich wrote an article for The New York Times which began with the ugly truth that austerity has turned out to be a fiasco:

With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.

“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain.  “Does this mean that Merkel has lost completely?  No.  But it does mean that the very nature of the debate about the euro-zone crisis is changing.”

A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.

Joe Weisenthal of The Business Insider provided us with this handy round-up of essays proclaiming the demise of economic austerity.  Here is his own nail in the coffin:

As we wrote this morning, the bad news for Angela Merkel is that the jig is up: There’s almost nobody left who is willing to go along with the German idea that the sole solution forEurope is spending discipline and “reform,” whatever that means.

One of the best essays on this subject was written by Hale Stewart for The Big Picture.  The title of the piece was “People Are Finally Figuring Out: Austerity is Stupid”.

Those in denial about the demise of economic austerity have found it necessary to ignore the increasing refutations of the policy from conservative economists, which began appearing early this year.  The most highly-publicized of these came from Harvard economic historian Niall Ferguson.  Mike Shedlock (a/k/a Mish) criticized the policy on a number of occasions, such as his posting of January 11, 2012:

Austerity measures in Italy, Spain, Portugal, Greece and France combined with escalating trade wars ensures the recession will be long and nasty.

One would think that a consensus of reasonable people, speaking out against this ill-conceived policy, should be enough to convince The Powers That Be to pull the plug on it.  In a perfect world   .  .  .



Voices Of Reason For An Audience Of Psychotics

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A “double-dip” recession?  Maybe not.  In his August 30 article for the Financial Times, economist Martin Wolf said the 2008 recession never ended:

Many ask whether high-income countries are at risk of a “double dip” recession.  My answer is:  no, because the first one did not end.  The question is, rather, how much deeper and longer this recession or “contraction” might become.  The point is that, by the second quarter of 2011, none of the six largest high-income economies had surpassed output levels reached before the crisis hit, in 2008 (see chart).  The US and Germany are close to their starting points, with France a little way behind.  The UK, Italy and Japan are languishing far behind.

If that sounds scary – it should.  The fact that nothing was done by our government to address the problems which caused the financial crisis is just part of the problem.  The failure to make an adequate attempt to restore the economy (i.e.  facilitate growth in GDP as well as a reduction in unemployment) poses a more immediate risk.  Here’s more from Martin Wolf:

Now consider, against this background of continuing fragility, how people view the political scene.  In neither the US nor the eurozone, does the politician supposedly in charge – Barack Obama, the US president, and Angela Merkel, Germany’s chancellor – appear to be much more than a bystander of unfolding events, as my colleague, Philip Stephens, recently noted.  Both are – and, to a degree, operate as – outsiders.  Mr Obama wishes to be president of a country that does not exist.  In his fantasy US, politicians bury differences in bipartisan harmony.  In fact, he faces an opposition that would prefer their country to fail than their president to succeed.  Ms Merkel, similarly, seeks a non-existent middle way between the German desire for its partners to abide by its disciplines and their inability to do any such thing.  The realisation that neither the US nor the eurozone can create conditions for a speedy restoration of growth – indeed the paralysing disagreements over what those conditions might be – is scary.

Centrism continues to get a bad name because two of the world’s most powerful leaders have used that term to “re-brand” passivity.

Martin Wolf is not the only pundit expressing apprehension about the future of the global economy.  Margaret Brennan of Bloomberg Television interviewed economist Nouriel Roubini (a/k/a “Dr. Doom”) on August 31.  Roubini noted that there is no reason to believe that Republicans will consent to any measures toward restoring the economy during this election year because “if things get worse – it’s only to their political benefit”.  He estimated a “60% probability of recession next year”.  Beyond that, Roubini focused on the forbidden topic of stimulus.  He pointed out that the limited 2009 stimulus program prevented a recession from becoming another Great Depression “but it was not significant enough”.  Nevertheless, a real economic stimulus is still necessary – but don’t count on it:

With millions of unemployed construction workers, we need a trillion-dollar, five-year program just for infrastructure – but that’s not politically feasible, and that’s why there will be a fiscal drag and we will have a recession.

Nick Baker of Bloomberg BusinessWeek observed that Dr. Roubini’s remarks negatively impacted the stock market on Wednesday, “offsetting reports showing faster-than-estimated growth in American business activity and factory orders.”

If you aren’t worried yet, the most recent Weekly Market Comment by economist John Hussman of the Hussman Funds might get you there.  Pay close attention to Hussman’s distinction between opinion and evidence:

It is now urgent for investors to recognize that the set of economic evidence we observe reflects a unique signature of recessions comprising deterioration in financial and economic measures that is always and only observed during or immediately prior to U.S. recessions.  These include a widening of credit spreads on corporate debt versus 6 months prior, the S&P 500 below its level of 6 months prior, the Treasury yield curve flatter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Purchasing Managers Index below 54, year-over-year growth in total nonfarm payrolls below 1%, as well as important corroborating indicators such as plunging consumer confidence.  There are certainly a great number of opinions about the prospect of recession, but the evidence we observe at present has 100% sensitivity (these conditions have always been observed during or just prior to each U.S. recession) and 100% specificity (the only time we observe the full set of these conditions is during or just prior to U.S. recessions). This doesn’t mean that the U.S. economy cannot possibly avoid a recession, but to expect that outcome relies on the hope that “this time is different.”

While the reduced set of options for monetary policy action may seem unfortunate, it is important to observe that each time the Fed has attempted to “backstop” the financial markets by distorting the set of investment opportunities that are available, the Fed has bought a temporary reprieve only at the cost of amplifying the later fallout.

Be sure to read Hussman’s entire essay.  It provides an excellent account of the Fed’s role in helping to cause the financial crisis, as well as its reinforcement of a “low level equilibrium” in the economy.  In response to those hoping for another round of quantitative easing, Hussman provided some common sense:

The upshot is that it remains unclear whether the Fed will revert to reckless policy in September, or whether the growing disagreement within the FOMC will result in a more enlightened approach – abandoning the “activist Fed” role, and passing the baton to public policies that encourage objectives such as productive investment, R&D, broad-benefit infrastructure, and mortgage restructuring – rather than continuing reckless monetary interventions that defend and encourage the continued misallocation of resources and the repeated emergence of speculative bubbles.

President Obama should look to John Hussman if he wants to learn the difference between centrism and passivity.


 

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From Disappointing To Creepy

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It was during Barack Obama’s third month in the White House, when I realized he had become the “Disappointer-In-Chief”.  Since that time, the disappointment felt by many of us has progressed into a bad case of the creeps.

Gretchen Morgenson of The New York Times has been widely praised for her recent report, exposing the Obama administration’s vilification of New York State Attorney General Eric Schneiderman for his refusal to play along with Team Obama’s efforts to insulate the fraud-closure banks from the criminal prosecution they deserve.  The administration is attempting to pressure each Attorney General from every state to consent to a settlement of any and all claims against the banksters arising from their fraudulent foreclosure practices.  Each state is being asked to release the banks from criminal and civil liability in return for a share of the $20 billion settlement package.  The $20 billion is to be used for loan modifications.  Leading the charge on behalf of the administration are Shaun Donovan, the Secretary of Housing and Urban Development, as well as a number of high-ranking officials from the Justice Department, led by Attorney General Eric Hold-harmless.  Here are some highlights from Ms. Morgenson’s article:

Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.

*   *   *

Mr. Schneiderman has also come under criticism for objecting to a settlement proposed by Bank of New York Mellon and Bank of America that would cover 530 mortgage-backed securities containing Countrywide Financial loans that investors say were mischaracterized when they were sold.

The deal would require Bank of America to pay $8.5 billion to investors holding the securities; the unpaid principal amount of the mortgages remaining in the pools totals $174 billion.

*   *   *

This month, Mr. Schneiderman sued to block that deal, which had been negotiated by Bank of New York Mellon as trustee for the holders of the securities.

The passage from Gretchen Morgenson’s report which drew the most attention concerned a statement made to Schneiderman by Kathryn Wylde.  Ms. Wylde is a “Class C” Director of the Federal Reserve Bank of New York.  The role of a Class C Director is to represent the interests of the public on the New York Fed board.  Barry Ritholtz provided this reaction to Ms. Wylde’s encounter with Mr. Schneiderman:

If the Times report is accurate, and the quote below represents Ms. Wylde’s comments, than that position is a laughable mockery, and Ms. Wylde should resign effective immediately.

The quote in question, which was reported to have occurred at Governor Hugh Carey’s funeral (!?!)  was as follows:

“It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it.  Wall Street is our Main Street — love ’em or hate ’em.  They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

I do not know if Ms. Wylde understands what her proper role should be, but clearly she is somewhat confused.  She appears to be far more interested in representing the banks than the public.

Robert Scheer of Truthdig provided us with some background on Obama’s HUD Secretary, Shaun Donovan, one of the administration’s arm-twisters in the settlement effort :

Donovan has good reason not to want an exploration of the origins of the housing meltdown:  He has been a big-time player in the housing racket for decades.  Back in the Clinton administration, when government-supported housing became a fig leaf for bundling suspect mortgages into what turned out to be toxic securities, Donovan was a deputy assistant secretary at HUD and acting Federal Housing Administration commissioner.  He was up to his eyeballs in this business when the Clinton administration pushed through legislation banning any regulation of the market in derivatives based on home mortgages.

Armed with his insider connections, Donovan then went to work for the Prudential conglomerate (no surprise there), working deals with the same government housing agencies that he had helped run.  As The New York Times reported in 2008 after President Barack Obama picked him to be secretary of HUD, “Mr. Donovan was a managing director at Prudential Mortgage Capital Co., in charge of its portfolio of investments in affordable housing loans, including Fannie Mae and the Federal Housing Administration debt.”

Obama has been frequently criticized for stacking his administration with people who regularly shuttle between corporations and the captured agencies responsible for regulating those same businesses.  Risk management guru, Christopher Whalen lamented the consequences of Obama’s cozy relationship with the Wall Street banks – most tragically, those resulting from Obama’s unwillingness to adopt the “Swedish solution” of putting the insolvent zombie banks through temporary receivership:

The path of least resistance politically has been to temporize and talk.  But by following the advice of Rubin and Summers, and avoiding tough decisions about banks and solvency, President Obama has only made the crisis more serious and steadily eroded public confidence.  In political terms, Obama is morphing into Herbert Hoover, as I wrote in one of my first posts for Reuters.com, “In a new period of instability, Obama becomes Hoover.”

Whereas two or three years ago, a public-private approach to restructuring insolvent banks could have turned around the economic picture in relatively short order, today the cost to clean up the mess facing Merkel, Obama and other leaders of western European nations is far higher and the degree of unease among the public is growing.  You may thank Larry Summers, Robert Rubin and the other members of the “do nothing” chorus around President Obama for this unfortunate outcome.

We are now past the point of blaming Obama’s advisors for the President’s recurrent betrayal of the public interest while advancing the goals of his corporate financiers.  Yves Smith of Naked Capitalism has voiced increasingly harsh appraisals of Obama’s performance.  By August 22, it became clear to Ms. Smith that the administration’s efforts to shield the fraud-closure banks from liability exposed a scandalous degree of venality:

It is high time to describe the Obama Administration by its proper name:  corrupt.

Admittedly, corruption among our elites generally and in Washington in particular has become so widespread and blatant as to fall into the “dog bites man” category.  But the nauseating gap between the Administration’s propaganda and the many and varied ways it sells out average Americans on behalf of its favored backers, in this case the too big to fail banks, has become so noisome that it has become impossible to ignore the fetid smell.

*   *   *

Team Obama bears all the hallmarks of being so close to banks and big corporations that it has lost all contact with and understanding of mainstream America.

The latest example is its heavy-handed campaign to convert New York state attorney general Eric Schneiderman to a card carrying member of the “be nice to our lords and masters the banksters” club.  Schneiderman was the first to take issue with the sham of the so-called 50 state attorney general mortgage settlement.  As far as the Administration is concerned, its goal is to give banks a talking point and prove to them that Team Obama is protecting their backs in a way that the chump public hopefully won’t notice.

*   *   *

Yet rather than address real, serious problems, senior administration officials are instead devoting time and effort to orchestrating a faux grass roots campaign to con a state AG into thinking his supporters are deserting him because he has dared challenge the supremacy of the banks.

I would include Eric Schneiderman in a group with Elizabeth Warren and Maria Cantwell as worthy challengers to Barack Obama in the 2012 Presidential Election.  I wish one of them would step forward.


 

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