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Trouble Ahead

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Forget about what you’ve been told by the “rose-colored glasses” crowd.  We are headed for more economic trouble.  On September 17, economist Lakshman Achuthan gave his prognosis for the economy to Guy Raz, of NPR’s All Things Considered:

Achuthan, co-founder and chief operations officer of the Economic Cycle Research Institute, says all of his economic indicators point to more sputtering ahead.

“The risk of a new recession is quite high,” he says.

In Toronto, Michael Babad of The Globe And Mail saw fit to focus on the latest forecast from “Dr. Doom”:

Nouriel Roubini, the New York University professor who forecast the financial crisis, went further today, warning that “we are entering a recession.”   The question isn’t whether there will be a double-dip, he said on Twitter, but rather how deep it will be.

And the answer, added the chairman and co-founder of Roubini Global Economics, depends on the response of policy makers and developments in the euro zone’s ongoing crisis.

As Gretchen Morgenson reported for The New York Times, the European sovereign debt crisis is already beginning to “wash up on American shores”.  The steep exposure of European banks to the sovereign debt of eurozone countries has become a problem for the United States:

Some of these banks are growing desperate for dollars.  Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce.  Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.

Worries over the banks’ exposure to shaky European government debt have unsettled markets over there – shares of big French banks have taken a beating – but it is unclear how much this mess will hurt the economy back here.  American stock markets, at least, seem a bit blasé about it all:  the Standard & Poor’s 500-stock index rose 5.3 percent last week.

Last Thursday, I expressed my suspicion that the recent stock market exuberance was based on widespread expectation of another round of quantitative easing.  This next round is being referred to as “QE3”.   QE3 is good news for Wall Street because of those POMO auctions, wherein the New York Fed purchases Treasury securities – worth billions of dollars – on a daily basis.  After the auctions, the Primary Dealers take the sales proceeds to their proprietary trading desks, where the funds are leveraged and used to purchase high-beta, Russell 2000 stocks.  You saw the results during QE2:  A booming stock market – despite a stalled economy.

I believe that the European debt situation will become the controlling factor, which will turn the tide in favor of QE3 at the September 20-21 Federal Open Market Committee meeting.

Most pundits have expressed doubts that the Fed would undertake another round of quantitative easing.  Bill McBride of Calculated Risk put it this way:

QE3 is unlikely at the September meeting, but not impossible – however most observers think the FOMC will announce a program to change the composition of their balance sheet (extend maturities).  It is also possible that the FOMC will announce a reduction in the interest rate paid on excess reserves (currently 0.25%).

Tim Duy expressed a more skeptical outlook at his Fed Watch website:

Even more unlikely is another round of quantitative easing.  I don’t think there is much appetite at the Fed for additional asset purchases given the inflation numbers and the stability of longer-term inflation expectations relative to the events that prompted last fall’s QE2.

On the other hand, hedge fund manager Bill Fleckenstein presents a more persuasive case that the Fed can be expected to react to the “massive red ink in world equity markets” (due to floundering European bank stocks) by resorting to its favorite panacea – money printing:

So, to sum up my expectations, I believe that not only will we get a bold new round of QE from the Fed this week, but other central banks will join the party.  (The Bank of Japan and Swiss National Bank are already printing money in an attempt to weaken their currencies.)  If that happens, I believe that assets (stocks, bonds and commodities) will rally rather dramatically, at least for a while, with the length and size of the rally depending on the individual idea/asset.

If no QE is announced, and we basically see nothing done, it will probably be safe to short stocks for investors who can handle that strategy.  Markets would be pummeled until the central planners (i.e., these bankers) are forced to react to the carnage. Such is the nature of the paper-money-central-bank-moral-hazard standard that is currently in place.

The Fed will announce its decision at 2:15 on Wednesday, September 21.  Even if the FOMC proceeds with QE3, its beneficial effects will (again) be limited to the stock market.  The real American economy will continue to stagnate through its “lost decade”, which began in 2007.


 

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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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Barack Oblivious

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As I’ve been discussing here for quite a while, commentators from across the political spectrum have been busy criticizing the job performance of President Obama.  The mood of most critics seems to have progressed from disappointment to shock.  The situation eventually reached the point where, regardless of what one thought about the job Obama was doing – at least the President could provide us with a good speech.  That changed on Monday, August 8 – when Obama delivered his infamous “debt downgrade” speech – in the wake of the controversial decision by Standard and Poor’s to lower America’s credit rating from AAA to AA+.  This reaction from Joe Nocera of The New York Times was among the more restrained:

When did President Obama become such a lousy speech-maker?  His remarks on Monday afternoon, aimed at calming the markets, were flat and uninspired — as they have consistently been throughout the debt ceiling crisis.  “No matter what some agency may say,” he said, ”we’ve always been and always will be a triple-A country.”  Is that really the best he could do?  The markets, realizing he had little or nothing to offer, continued their swoon.  What is particularly frustrating is that the president seems to have so little to say on the subject of job creation, which should be his most pressing concern.

Actually, President Obama should have been concerned about job creation back in January of 2009.  For some reason, this President had been pushing ahead with his own agenda, while oblivious to the concerns of America’s middle class.  His focus on what eventually became an enfeebled healthcare bill caused him to ignore this country’s most serious problem:  unemployment.  Our economy is 70% consumer-driven.  Because the twenty-five million Americans who lost their jobs since the inception of the financial crisis have remained unemployed — goods aren’t being sold.  This hurts manufacturers, retailers and shipping companies.  With twenty-five million Americans persistently unemployed, the tax base is diminished – meaning that there is less money available to pay down America’s debt.  The people Barry Ritholtz calls the “deficit chicken hawks” (politicians who oppose any government spending programs which don’t benefit their own constituents) refuse to allow the federal government to get involved in short-term “job creation”.  This “savings” depletes taxable revenue and increases government debt.  President Obama — the master debater from Harvard – has refused to challenge the “deficit chicken hawks” to debate the need for any sort of short-term jobs program.

Bond guru Bill Gross of PIMCO recently lamented this administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

Back in July of 2009 – five months after the economic stimulus bill was passed – I pointed out how many prominent economists – including at least one of Obama’s closest advisors, had been emphasizing that the stimulus was inadequate and that we could eventually face a double-dip recession:

A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”.  Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum.  “We probably have already 2.5 million more job losses than anticipated.”

Economist Brad DeLong recently provided us with a little background on the thinking that had been taking place within the President’s inner circle during 2009:

In the late spring of 2009, Barack Obama had five economic policy principals: Tim Geithner, who thought Obama had done enough to boost demand and needed to turn to long-run deficit reduction; Ben Bernanke, who thought that the Fed had done enough to boost demand and that the administration needed to turn to deficit reduction; Peter Orszag, who thought the administration needed to turn to deficit reduction immediately and could also use that process to pass (small) further stimulus; Larry Summers, who thought that long-run deficit reduction could wait until the recovery was well-established and that the administration needed to push for more demand stimulus; and Christina Romer, who thought that long-run deficit reduction should wait until the recovery was well-established and that the administration needed to push for much more demand stimulus.

Now Romer, Summers, and Orszag are gone.  Their successors – Goolsbee, Sperling, and Lew – are extraordinary capable civil servants but are not nearly as loud policy voices and lack the substantive issue knowledge of their predecessors.  The two who are left, Geithner and Bernanke, are the two who did not see the world as it was in mid-2009.  And they do not seem to have recalibrated their beliefs about how the world works – they still think that they were right in mid-2009, or should have been right, or something.

I fear that they still do not see the situation as it really is.

And I do not see anyone in the American government serving as a counterbalance.

Meanwhile, the dreaded “double-dip” recession is nearly at hand.  Professor DeLong recently posted a chart on his blog, depicting daily Treasury real yield curve rates under the heading, “Treasury Real Interest Rates Now Negative Out to Ten Years…”  He added this comment:

If this isn’t a market prediction of a double-dip and a lost decade (or more), I don’t know what would be.  At least Hoover was undertaking interventions in financial markets–and not just blathering about how cutting spending was the way to call the Confidence Fairy…

President Obama has been oblivious to our nation’s true economic predicament since 2009.  Even if there were any Hope that his attentiveness to this matter might Change – at this point, it’s probably too late.


 

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Obama And The TARP

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I always enjoy it when a commentator appearing on a talk show reminds us that President Obama has become a “tool” for the Wall Street bankers.  This theme is usually rebutted with the claim that the TARP bailout happened before Obama took office and that he can’t be blamed for rewarding the miscreants who destroyed our economy.  Nevertheless, this claim is not entirely true.  President Bush withheld distribution of one-half of the $700 billion in TARP bailout funds, deferring to his successor’s assessment of the extent to which the government should intervene in the banking crisis.  As it turned out, during the final weeks of the Bush Presidency, Hank Paulson’s Treasury Department declared that there was no longer an “urgent need” for the TARP bailouts to continue.  Despite that development, Obama made it clear that anyone on Capitol Hill intending to get between the banksters and that $350 billion was going to have a fight on their hands.  Let’s jump into the time machine and take a look at my posting from January 19, 2009 – the day before Obama assumed office:

On January 18, Salon.com featured an article by David Sirota entitled:  “Obama Sells Out to Wall Street”.  Mr. Sirota expressed his concern over Obama’s accelerated push to have immediate authority to dispense the remaining $350 billion available under the TARP (Troubled Asset Relief Program) bailout:

Somehow, immediately releasing more bailout funds is being portrayed as a self-evident necessity, even though the New York Times reported this week that “the Treasury says there is no urgent need” for additional money.  Somehow, forcing average $40,000-aires to keep giving their tax dollars to Manhattan millionaires is depicted as the only “serious” course of action.  Somehow, few ask whether that money could better help the economy by being spent on healthcare or public infrastructure.  Somehow, the burden of proof is on bailout opponents who make these points, not on those who want to cut another blank check.

Discomfort about another hasty dispersal of the remaining TARP funds was shared by a few prominent Democratic Senators who, on Thursday, voted against authorizing the immediate release of the remaining $350 billion.  They included Senators Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington).  The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds.  Earlier last week, Obama had threatened to veto this resolution if it passed.  The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it).  At this juncture, Obama is engaged in a game of “trust me”, assuring those in doubt that the next $350 billion will not be squandered in the same undocumented manner as the first $350 billion.  As Jeremy Pelofsky reported for Reuters on January 15:

To win approval, Obama and his team made extensive promises to Democrats and Republicans that the funds would be used to better address the deepening mortgage foreclosure crisis and that tighter accounting standards would be enforced.

“My pledge is to change the way this plan is implemented and keep faith with the American taxpayer by placing strict conditions on CEO pay and providing more loans to small businesses,” Obama said in a statement, adding there would be more transparency and “more sensible regulations.”

Of course, we all know how that worked out  .   .   .  another Obama promise bit the dust.

The new President’s efforts to enrich the Wall Street banks at taxpayer expense didn’t end with TARP.  By mid-April of 2009, the administration’s “special treatment” of those “too big to fail” banks was getting plenty of criticism.  As I wrote on April 16 of that year:

Criticism continues to abound concerning the plan by Turbo Tim and Larry Summers for getting the infamous “toxic assets” off the balance sheets of our nation’s banks.  It’s known as the Public-Private Investment Program (a/k/a:  PPIP or “pee-pip”).

*   *   *

One of the harshest critics of the PPIP is William Black, an Economics professor at the University of Missouri.  Professor Black gained recognition during the 1980s while he was deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC).

*   *   *

I particularly enjoyed Black’s characterization of the PPIP’s use of government (i.e. taxpayer) money to back private purchases of the toxic assets:

It is worse than a lie.  Geithner has appropriated the language of his critics and of the forthright to support dishonesty.  That is what’s so appalling — numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies.  He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent.  He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything.  He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Although President Obama’s hunt for Osama bin Laden was a success, his decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – became Obama’s own “Tora Bora moment”, at which point he allowed economic recovery to continue on its elusive path away from us.  Economist Steve Keen recently posted this video, explaining how Obama’s failure to promote an effective stimulus program has guaranteed us something worse than a “double-dip” recession:  a quadruple-dip recession.

Many commentators are currently discussing efforts by Republicans to make sure that the economy is in dismal shape for the 2012 elections so that voters will blame Obama and elect the GOP alternative.  If Professor Keen is correct about where our economy is headed, I can only hope there is a decent Independent candidate in the race.  Otherwise, our own “lost decade” could last much longer than ten years.


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Why Au-scare-ity Still Has Traction

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Many economists have been watching Britain’s experiment with austerity for quite a while.  Britain has been following a course of using cuts in government programs along with mass layoffs of public sector workers in attempt to stimulate economic growth.  Back in February, economist Dean Baker made this observation:

Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom.  The reason was the new coalition government’s commitment to prosperity through austerity.  As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That’s bad news for the citizens of the United Kingdom.  They will be forced to suffer through years of unnecessarily high unemployment.  They will also have to endure cutbacks in support for important public services like healthcare and education.

But the pain for the people in England could provide a useful example for the United States.

*   *   *

Prior to this episode, there was already a solid economic case that large public deficits were necessary to support the economy in the period following the collapse of an asset bubble. The point is simply that the private sector is not prepared to make up the demand gap, at least in the short term.  Both short-term and long-term interest rates are pretty much as low as they can be.

*   *   *

From this side of the pond, though, the goal is simply to encourage people to pay attention.  The UK might be home to 60 million people, but from the standpoint of US economic policy, it is simply exhibit A:  it is the country that did what our deficit hawks want to do in the US.

The takeaway lesson should be “austerity does not work; don’t go there.”  Unfortunately, in the land of faith-based economics, evidence does not count for much.  The UK may pursue a disastrous austerity path and those of us in the United States may still have to follow the same road anyhow.

After discussing the above-quoted commentary by Dean Baker, economist Mark Thoma added this:

Yes — it’s not about evidence, it’s about finding an excuse to implement an ideology.  The recession got in the way of those efforts until the idea that austerity is stimulative came along. Thus, “austerity is stimulative” is being used very much like “tax cuts increase revenues.”  It’s a means of claiming that ideological goals are good for the economy so that supporters in Congress and elsewhere have a means of rationalizing the policies they want to put in place.  It’s the idea that matters, and contrary evidence is brushed aside.

There seems to be an effort in many quarters to deny that the financial crisis ever happened.  Although it will eventually become absolutely imperative to get deficits under control, most sober economists emphasize that attempting to do so before the economy begins to recover and before the unemployment crisis is even addressed – would destroy any chance of economic recovery.  Barack Obama’s opponents know that the easiest route toward subverting the success of his re-election campaign involves undermining any efforts toward improving the economy to any degree by November of 2012.  Beyond that, the fast-track implementation of a British-style austerity program could guarantee a double-dip recession, which could prove disastrous to Obama’s re-election hopes.  As a result, the pressure is on to initiate some significant austerity measures as quickly as possible.  The propaganda employed to expedite this effort involves scaring the sheeple into believing that the horrifying budget deficit is about to bite them in the ass right now.  There is a rapidly increasing drumbeat to crank-up the scare factor.

Of course, the existence of this situation is the result of Obama’s own blunder.  Although he did manage to defeat Osama bin Laden, President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  In April of 2009, Obama chose to parrot the discredited “money multiplier” myth, fed to him by Larry Summers and “Turbo” Tim Geithner, in order to justify continuous corporate welfare for the megabanks.  If Obama had followed the right course, by pushing a stronger, more infrastructure-based stimulus program through the Democrat-controlled Senate and House, we would be enjoying a more healthy economy right now.  A significant number of the nearly fifteen million people currently unemployed could have found jobs from which they would now be paying income taxes, which reduce the deficit.  But that didn’t happen.  President Obama has no one else to blame for that error.  His opponents are now attempting to “snowball” that mistake into a disaster that could make him a one-term President.

Former Labor Secretary Robert Reich saw this coming back in March:

House Majority Leader Eric Cantor recently stated the Republican view succinctly:  “Less government spending equals more private sector jobs.”

In the past I’ve often wondered whether they’re knaves or fools.  Now I’m sure.  Republicans wouldn’t mind a double-dip recession between now and Election Day 2012.

They figure it’s the one sure way to unseat Obama.  They know that when the economy is heading downward, voters always fire the boss.  Call them knaves.

What about the Democrats?  Most know how fragile the economy is but they’re afraid to say it because the White House wants to paint a more positive picture.

And most of them are afraid of calling for what must be done because it runs so counter to the dominant deficit-cutting theme in our nation’s capital that they fear being marginalized.  So they’re reduced to mumbling “don’t cut so much.”  Call them fools.

Professor Simon Johnson, former Chief Economist of the International Monetary Fund, recently brought the focus of the current economic debate back to where it belongs:

In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in December 2010) towards “we must immediately cut the budget deficit.”  The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt – and any further significant increase will likely ruin us all.

This way of framing the debate is misleading – and very much at odds with US fiscal history.  It masks the deeper and important issues here, which are much more about distribution, in particular how much are relatively wealthy Americans willing to transfer to relatively poor Americans?

*   *   *

The real budget debate is not about a few billion here or there – for example in the context of when the government’s “debt ceiling” will be raised.  And it is not particularly about the last decade’s jump in government debt level – although this has grabbed the headlines, this is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay and on what basis in the form of transfers to relatively poor people – and how rising healthcare costs should affect those transfers.

As the Tea Partiers flock to movie theaters to watch Atlas Shrugged, perhaps it’s time for a porno send-up, based on a steamy encounter between Ayn Rand and Gordon Gekko called, Greed Feels Good.


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The Wrong Playbook

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President Obama is still getting it wrong.  Nevertheless, we keep hearing that he is such a clever politician.  Count me among those who believe that the Republicans are setting Obama up for failure and a loss to whatever goofball happens to win the GOP Presidential nomination in 2012 – solely because of a deteriorating economy.  Obama had the chance to really save the economy and “right the ship”.  When he had the opportunity to confront the greatest economic crisis since the Great Depression, President Obama violated Rahm Emanuel’s infamous doctrine, “You never want a serious crisis to go to waste”.  The new President immediately made a point of squandering the opportunity to overcome that crisis.  I voiced my frustration about this on October 7, 2010:

The trouble began immediately after President Obama assumed office.  I wasn’t the only one pulling out my hair in February of 2009, when our new President decided to follow the advice of Larry Summers and “Turbo” Tim Geithner.  That decision resulted in a breach of Obama’s now-infamous campaign promise of “no more trickle-down economics”.  Obama decided to do more for the zombie banks of Wall Street and less for Main Street – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  At the Calculated Risk website, Bill McBride lamented Obama’s strident posturing in an interview conducted by Terry Moran of ABC News, when the President actually laughed off the idea of implementing the so-called “Swedish solution” of putting those insolvent banks through temporary receivership.

In September of 2009, I discussed a fantastic report by Australian economist Steve Keen, who explained how the “money multiplier” myth, fed to Obama by the very people who caused the financial crisis, was the wrong paradigm to be starting from in attempting to save the economy.  The Australian professor (Steve Keen) was right and Team Obama was wrong.  In analyzing Australia’s approach to the financial crisis, economist Joseph Stiglitz made this observation on August 5, 2010:

Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world.  He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon.  So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.

Rudd’s stimulus worked:  Australia had the shortest and shallowest of recessions of the advanced industrial countries.

On October 6, 2010, Michael Heath of Bloomberg BusinessWeek provided the latest chapter in the story of how America did it wrong while Australia did it right:

Australian Employers Added 49,500 Workers in September

Australian employers in September added the most workers in eight months, driving the country’s currency toward a record and bolstering the case for the central bank to resume raising interest rates.

The number of people employed rose 49,500 from August, the seventh straight gain, the statistics bureau said in Sydney today.  The figure was more than double the median estimate of a 20,000 increase in a Bloomberg News survey of 25 economists.  The jobless rate held at 5.1 percent.

Meanwhile, America’s jobless rate has been hovering around 9 percent and the Federal Reserve found it necessary to print-up another $600 billion for a controversial second round of quantitative easing.  If that $600 billion had been used for the 2009 economic stimulus (and if the stimulus program had been more infrastructure-oriented) we would probably have enjoyed a result closer to that experienced by Australia.  Instead, President Obama chose to follow Japan’s strategy of perpetual bank bailouts (by way of the Fed’s “zero interest rate policy” or ZIRP and multiple rounds of quantitative easing), sending America’s economy into our own “lost decade”.

The only member of the Clinton administration who deserves Obama’s ear is being ignored.  Bill Clinton’s Secretary of Labor, Robert Reich, has been repeatedly emphasizing that President Obama is making a huge mistake by attempting to follow the Clinton playbook:

Many of President Obama’s current aides worked for Clinton and vividly recall Clinton’s own midterm shellacking in 1994 and his re-election two years later – and they think the president should follow Clinton’s script. Obama should distance himself from congressional Democrats, embrace deficit reduction and seek guidance from big business.  They assume that because triangulation worked for Clinton, it will work for Obama.

They’re wrong.  Clinton’s shift to the right didn’t win him re-election in 1996. He was re-elected because of the strength of the economic recovery.

By the spring of 1995, the American economy already had bounced back, averaging 200,000 new jobs per month.  By early 1996, it was roaring – creating 434,000 new jobs in February alone.

Obama’s 2011 reality has us losing nearly 400,000 jobs per month.  Nevertheless, there is this misguided belief that the “wealth effect” caused by inflated stock prices and the current asset bubble will somehow make the Clinton strategy relevant.  It won’t.  Instead, President Obama will adopt a strategy of “austerity lite”, which will send America into a second recession dip and alienate voters just in time for the 2012 elections.  Professor Reich recently warned of this:

House Majority Leader Eric Cantor recently stated the Republican view succinctly:  “Less government spending equals more private sector jobs.”

In the past I’ve often wondered whether they’re knaves or fools.  Now I’m sure.  Republicans wouldn’t mind a double-dip recession between now and Election Day 2012.

They figure it’s the one sure way to unseat Obama.  They know that when the economy is heading downward, voters always fire the boss.  Call them knaves.

What about the Democrats?  Most know how fragile the economy is but they’re afraid to say it because the White House wants to paint a more positive picture.

And most of them are afraid of calling for what must be done because it runs so counter to the dominant deficit-cutting theme in our nation’s capital that they fear being marginalized.  So they’re reduced to mumbling “don’t cut so much.”  Call them fools.

If inviting a double-dip recession weren’t dumb enough – how about a second financial crisis?  Just add more systemic risk and presto! The banks won’t have any problems because the Fed and the Treasury will provide another round of bailouts.  Edward Harrison of Credit Writedowns recently wrote an essay focused on Treasury Secretary Geithner’s belief that we need big banks to be even bigger.

Even if the Republicans nominate a Presidential candidate who espouses a strategy of simply relying on Jesus to extinguish fires at offshore oil rigs and nuclear reactors – Obama will still lose.  May God help us!


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Double Bubble

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I’m sure there has been a huge number of search engine queries during the past few days, from people who are trying to find out what is meant by the term: “quantitative easing”.  My cynical, home-made definition of the term goes like this:

Quantitative easing involves the Federal Reserve’s purchase of Treasury securities as well as mortgage-backed securities from those privileged, too-big-to-fail banks.

The curiosity about quantitative easing has increased as a result of the release of the notes from the most recent meeting of the Federal Open Market Committee (FOMC) which boosted expectations that there will be another round of quantitative easing (often referred to as QE II).  On October 15, Federal Reserve chairman Ben Bernanke delivered a speech at the Federal Reserve Bank of Boston.  After discussing how weak the economic recovery has been (as demonstrated by lackluster consumer spending and the miserable unemployment crisis) Bernanke pointed out that the Fed’s current predicament results from the fact that it has already lowered short-term, nominal interest rates to near-zero.  He then noted that the federal funds rate will be kept low “for longer than the markets expect”.  Bernanke finally got to the point that people wanted to hear him discuss:  whether there will be another round of quantitative easing.  Here is what he said:

In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate.  Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee’s actions are contingent on incoming information about the economic outlook and financial conditions.

In other words:  They’re still thinking about it.  Meanwhile, former Secretary of  Labor, Robert Reich, wrote a great essay telling us that the Fed will go ahead with more quantitative easing.  After defining the term, Professor Reich added this important tidbit:

Problem is, it won’t work.  Businesses won’t expand capacity and jobs because there aren’t enough consumers to buy additional goods and services.

I’m sure that was a helluva lot more common sense than many people were expecting from a professor at Berkeley.  Beyond that, Professor Reich gave us the rest of the bad news:

So where will the easy money go?  Into another stock-market bubble.

It’s already started.  Stocks are up even though the rest of the economy is still down because money is already so cheap. Bondholders (who can’t get much of any return from their loans) are shifting their portfolios into stocks.  Companies are buying back more shares of their own stock.  And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.

When our elected representatives can’t and won’t come up with a real jobs program, the Fed feels pressed to come up with a fake one that blows another financial bubble.  And we know what happens when financial bubbles get too big.

Another bubble currently under expansion is the “junk bond” bubble.  Sy Harding wrote an important article for Forbes entitled, “Fed Still Blowing Bubbles?“.  Here is some of what he said:

The economy’s problems at this point don’t seem to be the level of interest rates, but the lack of jobs, dismal consumer confidence, and the unwillingness of banks to make loans.

However, just the anticipation of additional quantitative easing and still lower long-term interest rates has already potentially begun to pump up the next bubbles, as investors have moved out the risk curve in an effort to find higher rates of return. Money has been flowing at a dramatic pace into high-yield junk bonds, commodities, and gold.  And the stock market has surged up 12% just since its August low when talk of another round of quantitative easing began.  Meanwhile, the U.S. dollar has been trashed further on expectations that the Fed will be ‘printing’ more dollars to finance another round of quantitative easing.

Nevertheless, Sy Harding isn’t so sure that QE II is a “done deal”.  After making his own cost-benefit analysis, Mr. Harding reached this conclusion:

It’s a no-brainer.  Blow another bubble and worry about the consequences down the road.

Yet in his speech Friday morning Fed Chairman Bernanke did not go all in on quantitative easing, stopping short of announcing a new policy, saying only that the Fed contemplates doing more, but “will take into account the potential costs and risks.”

So uncertainty remains for a market that has probably already factored in a substantial new round of stimulus.

This raises an important question:  How will the markets react if the consensual assumption that there will be a QE II turns out to be wrong?

Bond guru, Mohamed El-Erian of PIMCO,  recently wrote a piece for the Financial Times, in which he asserted his conclusion that judging from the FOMC minutes, “it is virtually a foregone conclusion” that the Fed will proceed with QE II.  El-Erian described this anticipated action by the Fed as an effort to “push” investors “to move out on the risk spectrum and buy corporate bonds and stocks”.

Getting back to my earlier question:  If the Fed decides not to proceed with QE II, will the bubbles that have been inflated up to that point make such a large pop as to drive the economy toward that dreaded second dip into recession?  On the other hand, if the Fed does proceed to implement QE II:  What will be the ultimate cost to taxpayers for something Robert Reich describes as a “fake” jobs program “that blows another financial bubble” and accomplishes nothing else?

As Professor Reich has pointed out, the Fed itself is the one being “pushed” to take action here because “our elected representatives can’t and won’t come up with a real jobs program”.  Unfortunately, any “jobs program” initiated by the government has become a “third rail” issue with mid-term elections looming.   As I stated previously, if the economic crisis had been properly addressed two years ago, when the political will for an effective solution still existed, the Fed would not be faced with the current dilemma.  But here we are   .  .  .   just blowing more bubbles.


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The End

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July 29, 2010

The long-awaited economic recovery seems to be coming to a premature end.  For over a year, many pundits have been anticipating a “jobless recovery”.  In other words:  don’t be concerned about the fact that so many people can’t find jobs – the economy will recover anyway.  These hopes have been buoyed by the widespread corporate tactic of cost-cutting (usually by mass layoffs) to gin-up the bottom line in time for earnings reports.  This helps inflate stock prices and produce the illusion that the broader economy is experiencing a sustained recovery.  The “jobless recovery” advocates ignore the extent to which the American economy is consumer-driven.  If those consumers don’t have jobs, they aren’t going to be spending money.

Although many observers seem to take comfort in the assumption that the jobless rate is below ten percent, many are beginning to question the validity of the statistics to that effect provided by the Department of Labor.  AOL’s Daily Finance website provided this commentary on the June, 2010 unemployment survey conducted by Raghavan Mayur, president of TechnoMetrica Market Intelligence:

The June poll turned up 27.8% of households with at least one member who’s unemployed and looking for a job, while the latest poll conducted in the second week of July showed 28.6% in that situation.  That translates to an unemployment rate of over 22%, says Mayur, who has started questioning the accuracy of the Labor Department’s jobless numbers.

*   *   *

In fact, Austan Goolsbee, who is now part of the White House Council of Economic Advisers, wrote in a 2003 New York Times piece titled “The Unemployment Myth,” that the government had “cooked the books” by not correctly counting all the people it should, thereby keeping the unemployment rate artificially low.  At the time, Goolsbee was a professor at the University of Chicago.  When asked whether Goolsbee still believes the government undercounts unemployment, a White House spokeswoman said Goolsbee wasn’t available to comment.

Such undercounting of unemployment can be an enormously dangerous exercise today.  It could lead  some lawmakers to underestimate the gravity of the labor market’s problems and base their policymaking on a far-less-grim picture than actually exists.  Economically, and socially, that would make a bad situation much worse for America.

“The implications of such undercounting is that policymakers aren’t going to be thinking as big as they should be,” says Ginsburg, also a professor emeritus of economics at Brooklyn College.  “It also means that [consumer] demand is not going to be there, because the income from people who are employed isn’t going to be there.”

Frank Aquila of Sullivan & Cromwell recently wrote an article for Bloomberg BusinessWeek, discussing the possibility that we could be headed into the second leg of a “double-dip” recession:

The sputtering economy and talk of a possible second recession have certainly rattled an already fragile American consumer.  Consumer confidence is now at its lowest level in a year, and consumer spending tumbled in May and June.  Since consumer spending accounts for more than two-thirds of  U.S. economic growth, a nervous consumer is not a good omen for a robust recovery.

Job creation is a key factor in increasing consumer confidence.  While economists estimate that we need economic growth of 4 percent or more to stimulate significant job creation, the economy has grown at only about 2 percent to 3 percent, with a slowdown expected in the second half.

*   *   *

With governments struggling under the weight of ballooning budget deficits and businesses waiting for the return of sustained growth, it is the American consumer who will have to lift the global economy out of the mire.  Given the recent news and current consumer sentiment, that appears to be an unlikely prospect in the near term.

The same government that found it necessary to provide corporate welfare to those “too big to fail” financial institutions has now become infested with creatures described by Barry Ritholtz as “deficit chicken hawks”.  The deficit chicken hawks are now preaching the gospel of “austerity” as an excuse for roadblocking any further efforts to use any form of stimulus to end the economic crisis.  One of the gurus of the deficit chicken hawks is economic historian Niall Ferguson.  Because Ferguson is just an economic historian, a real economist – Brad DeLong — had no trouble exposing the hypocrisy exhibited by the Iraq war cheerleader, while revisiting an article Ferguson had written for The New York Times, back in 2003.  Matthew Yglesias had even more fun compiling and publishing a Ferguson (2003) vs. Ferguson (2010) debate.

At The Daily Beast, Sir Harry Evans emphasized how the sudden emphasis on “austerity” is worse than hypocrisy:

As for the banks, one of the obscenities of our time is that so many in the financial community who owe their survival to the massive taxpayer bailouts, not only rewarded themselves with absurd bonuses, but now have the gall to sport the plumage of deficit hawks.  The unemployed?  Let them eat cake, the day after tomorrow.

Gerald Celente, publisher of The Trends Journal, wrote a great essay for The Daily Reckoning website entitled, “Let Them Eat Losses”.  He pointed out how the kleptocracy violated and destroyed the “very essence of functioning capitalism”.  Worse yet, our government betrayed us by forcing the taxpayers “to finance the failed financiers”:

No individual, business, institution, nation or empire is too-big-to-fail.  Had true capitalism been allowed to function unimpeded, the bloated, over-extended, inefficient and gluttonous firms and industries would have failed.  There would have been hardships and losses but, finally rid of its financial tapeworms, the purged system could be restored to health.

No “ism” or “ology” — regardless of purity of intent or moral foundation — is immune to corruption and abuse.  While capitalism itself is being blamed for the excesses that brought on financial chaos, prior to the most recent gambling binge, in tandem with the blanket dismantling of safeguards and the overt takeover of Washington by Wall Street, capitalism was responsible for creating one of the world’s most successful and universally admired societies.

As I discussed on July 8, because President Obama lacked the political courage to advance an effective economic stimulus package last year, the effects of his “semi-stimulus” have now abated and we are headed into another recession.  Reuters reported on July 27 that Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor’s S&P/Case-Shiller Index, gave us this unsettling macroeconomic prognostication:

“For me a double-dip is another recession before we’ve healed from this recession … The probability of that kind of double-dip is more than 50 percent,” Shiller said.

“I actually expect it.”

During the last few months of 2009, did you ever think that someday you would be looking back at that time as “the good old days”?




Wading In Quicksand

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July 12, 2010

The recent Gallup Poll, revealing that President Obama’s approval rating has dropped to 38% among independent voters, has resulted in an outpouring of (unsolicited) advice offered to the President by numerous commentators.  As I pointed out in my last posting, Matt Miller’s July 8 Washington Post article set out a really great plan, which he described as “a radically centrist ‘Jobs Now, Deficits Soon’ package”.   Nevertheless, Mr. Miller’s piece was not written as advice to the President, as some of the more recent articles have been.  I recently read one of those “advice to Obama” pieces that the President would do well to ignore.  It was written by a former Bill Clinton pollster named Douglas Schoen for the New York Daily News Schoen’s plan focused on this premise:

The independent swing voters who hold the fate of the Democratic Party in their hands are looking for candidates and parties that champion fiscal discipline, limited government, deficit reduction and a free market, pro-growth agenda.

Not true.  The independent swing voters are disappointed with Obama because the candidate’s promise of “hope and change” turned out to be a “bait and switch” scam to sell the public more cronyism.  At this point, it appears as though the entire Democratic Party will suffer the consequences in the 2010 elections.

The shortcomings of the Obama administration were more accurately summed up by Robert Kuttner for The Huffington Post:

But even a dire economic crisis and a Republican blockade of needed remedies have not fundamentally altered the temperament, trajectory, or tactical instincts of this surprisingly aloof  president.  He has not been willing or able to use his office to move public opinion in a direction that favors more activism.  Nor has Obama, for the most part, seized partisan and ideological opportunities that hapless Republicans and clueless corporate executives keep lobbing him like so many high, hanging curve balls.

*   *   *

But despite our hopes, Barack Obama is unlikely to offer bolder policies or give tougher speeches any time soon, even as threats of a double-dip recession and an electoral blowout in November loom.  This is just not who he is.  If the worst economic crisis in eight decades were going to change his assumptions about how to govern and how to lead, it would have done so by now.

*   *   *

I have also watched Obama’s loyal opposition –people like Joseph Stiglitz, Paul Krugman, Elizabeth Warren, Sheila Bair — be proven right by events, again and again.  So there are alternative paths, as there always are.  But the White House has disdained them.

And I’ve noticed that it is the populists among Democratic elected officials who are best defended against defeat in November.  That tells you something, too.  Why should the project of rallying the common people against elites in Washington, on Wall Street, and in the media, be ceded to the far right?  But that is what this White House is doing.

E. J. Dionne of The Washington Post demonstrated a good understanding of why independent voters have become fed up with Obama and how this has ballooned into a larger issue of anti-Democrat sentiment:

On the one hand, independent voters are turning on them.  Democratic House candidates enjoyed a 51 percent to 43 percent advantage over Republicans in 2008.  This time, the polls show independents tilting Republican by substantial margins.

But Democrats are also suffering from a lack of enthusiasm among their own supporters.  Poll after poll has shown that while Republicans are eager to cast ballots, many Democrats seem inclined to sit out this election.

The apathy of the rank-and-file Democrats and the alienation of the independents is best explained by the Administration’s faux-reform agenda.  The so-called healthcare “reform” bill turned out to be a giveaway to big pharma and the health insurance industry.  Worse yet, the financial “reform” bill not only turned out to be a hoax – it did nothing to address systemic risk.  In other words, if one of those five “untouchable” Wall Street banks fails, it will take the entire financial system down with it — in the absence of another huge, trillion-dollar bailout from the taxpayers.

Mike Konczal of the Roosevelt Institute documented the extent to which Obama’s Treasury Department undermined the financial reform bill at every step:

Examples?  Off the top of my head, ones with a paper trail:  They fought the Collins amendment for quality of bank capital, fought leverage requirements like a 15-to-1 cap, fought prefunding the resolution mechanism, fought Section 716removed foreign exchange swaps and introduced end user exemption from derivative language between the Obama white paper and the House Bill, believed they could have gotten the SAFE Banking Amendment to break up the banks but didn’t try, pushed against the full Audit the Fed and encouraged the Scott Brown deal. spinning out swap desks,

You can agree or disagree with any number of those items, think they are brilliant or dumb, reasonable or a pipe dream.  But what is worth noting is that they always end up leaving their fingerprints on the side of less structural reform and in favor of the status quo on Wall Street.

The Obama administration is apparently operating from the mistaken perspective that the voters are too stupid to see through their antics.  Sending Joe Biden to appear on Jay Leno’s Tonight Show to dissuade the public from considering the motives of politicians will not solve the administration’s problem of sinking approval ratings.




Delaying A Tough Decision

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June 3, 2010

A recent article by David Lightman for the McClatchy Newspapers bemoaned the fact that the Senate took off for a ten-day break without voting on the “Jobs Bill” passed by the House of Representatives (H.R.4213).   Mr. Lightman’s piece expressed particular concern about the fact that a summer jobs program for approximately 330,000 “at-risk youths” has been hanging in the balance between deficit distress and economic recovery efforts.  Of particular concern is the fact that time is of the essence for keeping the youth jobs program alive for this summer:

The longer the wait, the less the program can reduce joblessness among the nation’s most vulnerable population.  Unemployment among 16- to 19-year-olds was 25.4 percent in April.

“Summer’s only so long, and it is a summer youth program,” said Mark Mattke, the work force strategy and planning director at the Spokane Area Workforce Development Council.  More than 5,700 people in Washington state got summer jobs through government programs last year.

Financial expert, Janet Tavakoli, recently wrote an essay for The Huffington Post, discussing the cause-and-effect relationship between hard economic times and the crime rate.  With municipal budget cutbacks reducing the ranks of our nation’s law enforcement personnel, a failure to extend unemployment benefits, as provided by the Jobs Bill, could be a dangerous experiment.  Ms. Tavakoli discussed how the current recession has precipitated an increase in Chicago’s street crime:

Last summer gang violence ruled the night at Leland and Sheridan, a neighborhood in the process of gentrifying.

In the upscale Lincoln Park area, just a little further south of this unrest, men alone at night were accosted by groups of three to six men and severely beaten, robbed, and hospitalized.  Seven muggings occurred in a five-day period from July 30 to August 4, 2009.

This kind of activity was unusual for these areas of Chicago until last summer.

Current Escalating Violent Crime and Chicago’s Prime Lakefront Areas

Shootings are way up in Chicago, and ordinary citizens — along with shorthanded police — are angry.  Chicago has a gun ban, yet on Wednesday, May 19, Thomas Wortham IV, a Chicago police officer and Iraq War veteran, was shot when four gang members attempted to steal the new motorcycle the officer had brought to show his father, a retired police officer.  Shots were fired, and his father saw the skirmish, ran for his gun, and managed to get off a few rounds.  Two gang members were shot while two sped away dragging his fallen son’s body some distance in the process.

Nine people were shot on Sunday night (May 24), and Chicago is currently in the grips of a massive crime wave that has overwhelmed our under funded police force.

Gangland violence and shootings now occur up and down Chicago’s lakefront.

*   *   *

This escalation and geographical spread of violence is new, and I believe it is related to our Great Recession and budget issues.  I don’t believe that Chicago is alone in its budget problems.  If new patterns in Recession-related-violence have not yet affected other major cities in the U.S. the way they have affected Chicago, they may affect them soon.  It is also likely that crime is being underreported as crime-fighting budgets are cut.

Given the current momentum for deficit hawkishness, the Senate’s break before the vote on this bill could be advantageous.  After all, the bill barely passed in the House.  Our Senators need to carefully consider the consequences of the failure to pass this bill.  David Leonhardt of The New York Times presented a reasoned argument to his readers from the Senate on June 1, recommending passage of the Jobs Bill:

It would still add about $54 billion to the deficit over the next decade. On the other hand, it could also do some good.  Among other things, it would cut taxes for businesses, expand summer jobs programs and temporarily extend jobless benefits for some of today’s 15 million unemployed workers.

*   *   *

Including the jobs bill, the deficit is projected to grow to about $1.3 trillion next year (and that’s assuming the White House can persuade Congress to make some proposed spending cuts and repeal the Bush tax cuts for the affluent).  To be at a level that economists consider sustainable, the deficit needs to be closer to $400 billion.  Only then would normal economic growth be able to pay it off.

So Congress would need to find almost $900 billion in savings.  By voting down the jobs bill, it would save more than $50 billion by 2015 and get 7 percent of the way to the goal.  That’s not nothing.  In a nutshell, it’s the case against the bill.

*   *   *

Of course, even if the bill is not very expensive, it is worth passing only if it will make a difference.  And economists say it will.

Last year’s big stimulus program certainly did.  The Congressional Budget Office estimates that 1.4 million to 3.4 million people now working would be unemployed were it not for the stimulus.  Private economists have made similar estimates.

There are two arguments for more stimulus today.  The first is that, however hopeful the economic signs, the risk of a double-dip recession remains. Financial crises often bring bumpy recoveries.  The recent troubles in Europe surely won’t help.

The second argument is that the economy has a terribly long way to go before it can be considered healthy.  Here is a sobering way to think about the situation:  If the next four years were to bring job growth as fast as the job growth during the best four years of the 1990s boom — which isn’t likely — the unemployment rate would still be higher in 2014 than when the recession began in late 2007.

Voters may not like deficits, but they really do not like unemployment.

Looking at the problem this way makes the jobs bill seem like less of a tough call.  Luckily, the country’s two big economic problems — the budget deficit and the job market — are not on the same timeline.  The unemployment rate is near a 27-year high right now.  Deficit reduction can wait a bit, given that lenders continue to show confidence in Washington’s ability to repay the debt.

Remember that by way of Maiden Lane III, “Turbo” Tim Geithner, as president of the New York Fed, gave away $30 billion of taxpayer money to the counterparties of AIG – even though most of them didn’t need it.  A “clawback” of that money from those banks (including Goldman Sachs – a $19 billion recipient) could pay for more than half the cost of the Jobs Bill.   If the $30 billion wasted on Maiden Lane III can be so easily forgotten – why not spend $54 billion to avoid a “double-dip” recession and a hellish increase in street crime?



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