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Elizabeth Warren Should Run Against Obama

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Now that President Obama has thrown Elizabeth Warren under the bus by nominating Richard Cordray to head the Consumer Financial Protection Bureau (CFPB), she is free to challenge Obama in the 2012 election.  It’s not a very likely scenario, although it’s one I’d love to see:  Warren as the populist, Independent candidate – challenging Obama, the Wall Street tool – who is already losing to a phantom, unspecified Republican.

A good number of people were disappointed when Obama failed to nominate Warren to chair the CFPB, which was her brainchild.  It was bad enough that Treasury Secretary “Turbo” Tim Geithner didn’t like her – but once the President realized he was getting some serious pushback about Warren from Senate Republicans – that was all it took.  Some Warren supporters have become enamored with the idea that she could challenge Scott Brown for his seat representing Massachusetts in the Senate.  However, many astute commentators consider that as a really stupid idea.  Here is the reaction from Yves Smith of Naked Capitalism:

We argued yesterday that the Senate was not a good vehicle for advancing Elizabeth Warren’s aims of helping middle class families, since she would have no more, and arguably less power than she has now, and would be expected to defend Democrat/Obama policies, many of which are affirmatively destructive to middle class interests (just less so than what the Republicans would put in place).

A poll conducted in late June by Scott Brown and the Republican National Committee raises an even more basic question:  whether she even has a shot at winning.

*   *   *

The poll shows a 25 point gap, which is a massive hurdle, and also indicates that Brown is seen by many voters as not being a Republican stalwart (as in he is perceived to vote for the state’s, not the party’s, interest).  A 25 point gap is a near insurmountable hurdle and shows that Warren’s reputation does not carry as far as the Democratic party hackocracy would like her fans to believe.  But there’s no reason not to get this pesky woman to take up what is likely to be a poisoned chalice.  If she wins, she’s unlikely to get on any important committees, given the Democratic party pay to play system, and will be boxed in by the practical requirements of having to make nice to the party and support Obama positions a meaningful portion of the time. And if she runs and loses, it would be taken as proof that her middle class agenda really doesn’t resonate with voters, which will give the corporocrats free rein (if you can’t sell a liberal agenda in a borderline Communist state like Massachusetts, it won’t play in Peoria either).

Obviously, a 2012 challenge to the Obama Presidency by Warren would be an uphill battle.  Nevertheless, it’s turning out to be an uphill battle for the incumbent, as well.  David Weidner of MarketWatch recently discussed how Obama’s failure to adequately address the economic crisis has placed the President under the same pressure faced by many Americans today:

He’s about to lose his job.

*   *   *

Blame as much of the problem on his predecessor as you like, the fact is Obama hasn’t come up with a solution.  In fact, he’s made things worse by filling his top economic posts with banking-friendly interests, status-quo advisers and milquetoast regulators.

And if there’s one reason Obama loses in 2012, it’ll be because he failed to surround himself with people willing to take drastic action to get the economy moving again.

In effect, Obama’s team has rewarded the banking industry under the guise of “saving the economy” while abandoning citizens and consumers desperate for jobs, credit and spending power.

There was the New York Fed banker cozy with Wall Street: Timothy Geithner.

There was the former Clinton administration official who was the architect of policies that led to the financial crisis: Larry Summers.

There was a career bureaucrat named to lead the Securities and Exchange Commission:  Mary Schapiro.

To see just how unremarkable this group is, consider that the most progressive regulator in the Obama administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, was a Republican appointed by Bush.

*   *   *

The lack of action by Obama’s administration of mediocrities is the reason the recovery sputters.  In essence, the turnaround depends too much on a private sector that, having escaped failure, is too content to sit out what’s supposed to be a recovery.

*   *   *

What began as a two-step approach:  1) saving the banks, and then 2) saving homeowners, was cut short after the first step.

Instead of extracting more lending commitments from the banks, forcing more haircuts on investors and more demands on business, Obama has let his team of mediocrities allow the debate to be turned on government.  The government caused the financial crisis.  The government ruined the housing market.

It wasn’t true at the start, but it’s becoming true now.

Despite his status as the incumbent and his $1 billion campaign war chest, President Obama could find himself voted out of office in 2012.  When you consider the fact that the Republican Party candidates who are currently generating the most excitement are women (Bachmann and the undeclared Palin) just imagine how many voters might gravitate to a populist female candidate with substantially more brains than Obama.

The disillusionment factor afflicting Obama is not something which can be easily overlooked.  The man I have referred to as the “Disappointer-In-Chief” since his third month in office has lost more than the enthusiasm of his “base” supporters – he has lost the false “progressive” image he had been able to portray.  Matt Stoller of the Roosevelt Institute explained how the real Obama had always been visible to those willing to look beyond the campaign slogans:

Many people are “disappointed” with Obama.  But, while it is certainly true that Obama has broken many many promises, he projected his goals in his book The Audacity of Hope.  In Audacity, he discussed how in 2002 he was going to give politics one more shot with a Senate campaign, and if that didn’t work, he was going into corporate law and getting wealthy like the rest of his peer group.  He wrote about how passionate activists were too simple-minded, that the system basically worked, and that compromise was a virtue in and of itself in a world of uncertainty. His book was a book about a fundamentally conservative political creature obsessed with process, not someone grounded in the problems of ordinary people.  He told us what his leadership style is, what his agenda was, and he’s executing it now.

I expressed skepticism towards Obama from 2005, onward.  Paul Krugman, Debra Cooper, and Tom Ferguson among others pegged Obama correctly from day one.  Obama broadcast who he was, through his conservative policy focus (which is how Krugman pegged him), his bank backers (which is how Ferguson pegged him), his political support of Lieberman (which is how I pegged him), and his cavalier treatment of women’s issues (which is how Debra Cooper pegged him).  He is doing so again, with his choice to effectively remove Elizabeth Warren from the administration.

I just wish Elizabeth Warren would fight back and challenge Obama for The White House.  If only   .   .   .


 

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Inviting More Trouble

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I frequently revert to my unending criticism of President Obama for “punting” on the 2009 economic stimulus program.  The most recent example was my June 13 posting, wherein I noted how Stephanie Kelton provided us with an interesting reminiscence of that fateful time during the first month of Obama’s Presidency, in a piece she published on William Black’s New Economic Perspectives website:

Some of us saw this coming.  For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery.  Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.

As it turned out – that is exactly what happened.  Obama’s lack of leadership and his apologetic, half-assed use of government power to fight the recession has brought us to where we are today.  It may also bring Barack Obama and his family to a new address in January of 2013.

At this point, the “austerian” economists are claiming that the attenuated stimulus program’s failure to bring us more robust economic growth is “proof” that Keynesian economics “doesn’t work”.  The fact that many of these economists speak the way they do as a result of conflicts of interest – arising from the fact that they are on the payrolls of private firms with vested interests in maintaining the status quo – is lost on the vast majority of Americans.  Unfortunately, President Obama is not concerned with rebutting the arguments of these “hired guns”.  A recent poll by Bloomberg News revealed that the American public has successfully been fooled into believing that austerity measures could somehow revive our economy:

As the public grasps for solutions, the Republican Party is breaking through in the message war on the budget and economy.  A majority of Americans say job growth would best be revived with prescriptions favored by the party:  cuts in government spending and taxes, the Bloomberg Poll shows.  Even 40 percent of Democrats share that view.

*   *   *

Though Americans rate unemployment and the economy as a greater concern than the deficit and government spending, the issues are now closely connected.  Sixty-five percent of respondents say they believe the size of the federal deficit is “a major reason” the jobless rate hasn’t dropped significantly.

*   *   *

Republican criticism of the federal budget growth has gained traction with the public.  Fifty-five percent of poll respondents say cuts in spending and taxes would be more likely to bring down unemployment than would maintaining or increasing government spending, as Obama did in his 2009 stimulus package.

The voters are finally buying the corporatist propaganda that unemployment will recede if the government would just leave businesses alone. Forget about any government “hiring programs” – we actually need to fire more government employees!  With those annoying regulators off their backs, corporations would be free to hire again and bring us all to Ayn Rand heaven.  You are supposed to believe that anyone who disagrees with this or contends that government can play a role in job creation is a socialist.

Nevertheless, prominent individuals from the world of business and finance are making an effort to debunk these myths.  Bond guru Bill Gross of PIMCO recently addressed the subject:

Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea. While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare.  Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.  President Obama’s long-term budget makes just such a claim and Republican alternatives go many steps further.  Former Governor Pawlenty of Minnesota might be the Republicans’ extreme example, but his claim of 5% real growth based on tax cuts and entitlement reductions comes out of left field or perhaps the field of dreams.  The United States has not had a sustained period of 5% real growth for nearly 60 years.

Both parties, in fact, are moving to anti-Keynesian policy orientations, which deny additional stimulus and make rather awkward and unsubstantiated claims that if you balance the budget, “they will come.”  It is envisioned that corporations or investors will somehow overnight be attracted to the revived competitiveness of the U.S. labor market:  Politicians feel that fiscal conservatism equates to job growth.

*   *   *

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.

Hedge fund manager, Barry Ritholtz discussed his own ideas for “Jump Starting the U.S. Economy” on his website, The Big Picture.  He concluded the piece by lamenting the fact that the federal debt/deficit debate is sucking all the air out of the room at the very time when people should be discussing job creation:

The focus on Deficits today is absurd, forcing us towards another 1938-type recession.  The time to reduce the government’s economic deficit and footprint is during a robust expansion, not during (or just after) major contractions.

During the de-leveraging following a credit crisis is the worst possible time to be deficit obsessed.

Don’t count on President Obama to say anything remotely similar to what you just read.  You would be expecting too much.


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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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Magic Numbers

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As soon as I got a look at the March Nonfarm Payrolls Report from the Bureau of Labor Statistics on April 1, I knew that the cheerleaders from the “rose-colored glasses” crowd would be trumpeting the onset of some sort of new era, or “golden age”.  I wasn’t too far off.  My own reaction to the BLS report was similar to that expressed by Bill McBride of Calculated Risk:

The March employment report was another small step in the right direction, but the overall employment situation remains grim:  There are 7.25 million fewer payroll jobs now than before the recession started in 2007 with 13.5 million Americans currently unemployed.  Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force.  Of those unemployed, 6.1 million have been unemployed for six months or more.

Nevertheless, the opening words of the BLS report, asserting that nonfarm payroll employment increased by 216,000 in March, were all that the cheerleaders wanted to hear.  My cynicism about the unjustified enthusiasm was shared by economist Dean Baker:

Okay, this celebration around the jobs report is really getting out of hand.  Both the Post and Times had front page pieces touting the good news.  The Post gets the award for being the more breathless of the two   .   .   .

Brad DeLong had some fun letting the air out of the party balloons floating around in a brief piece by Gregory Ip of The Economist.  Mr. Ip began with this happy thought:

TURN off the alarms.  After several weeks when the data pointed to a recovery still struggling to achieve escape velocity, the March employment report provided reassuring evidence that, at a minimum, it is still gaining altitude.

After completely deconstructing Mr. Ip’s essay by emphasizing the painfully not-so-happy undercurrents lurking within the piece (apparently included out of concern that the Federal Reserve might take away the Quantitative Easing crack pipe) Professor DeLong re-visited Ip’s initial statement in the sobering light of day:

There is “recovery” in a sense that the output gap and the employment gap are no longer shrinking — and so that real GDP is growing at the rate of growth of potential output.  But this is not reason to “turn off the alarms.”  This is not reason to talk about “pieces [of recovery] … falling into place.”  And I am not sure I would describe this as “gaining altitude” with respect to the state of the business cycle.

The exploitation of the March Nonfarm Payrolls Report for bolstering claims that economic conditions are better than they really are is just the latest example of how the beauty of a given statistic can exist in the eye of the beholder – depending on the context in which that statistic is presented.   Economist David J. Merkel recently wrote an interesting essay, which concluded with this important admonition:

Be wary.  Look at a broader range of statistics, and take apart the existing statistics.  Don’t just take the pronouncements of our government at face value.  They are experts in saying what is technically true, while implying what is false.  Be wary.

David Merkel’s posting focused on the positive spin provided by a representative of Morgan Stanley concerning 4th Quarter 2010 Gross Domestic Product.  Merkel’s analysis of this statistic included some good advice:

In 4Q 2010 real GDP rose 3.1%, while real Gross Domestic Purchases fell 0.2%.  Why?  Energy and other import costs rose which depressed the price indexes for GDP versus Gross Domestic Purchases.

Over the long haul, the two series are close to equal, but when they diverge, they tell a story.  The current story is that average consumers in the US are doing badly, while those benefiting from high corporate profits, and increasing exports are doing well.

In general, I am not impressed with statistics collected by our government, or how they use them.  But it’s useful to understand what they mean — to understand the limitations of the statistics, so that when naive/conniving politicians use them wrongly, one can see through the error.

David Merkel’s point about “understanding the limitations of the statistics” is something that a good commentator should “fess up to” when discussing particular stats.  Michael Shedlock’s analysis of the March Nonfarm Payrolls Report provides a refreshing example of that type of candor:

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 8.8%.  However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is.  That number is in the last row labeled U-6.

While the “official” unemployment rate is an unacceptable 8.8%, U-6 is much higher at 15.7%.

Things are much worse than the reported numbers would have you believe.

That said, this was a solid jobs report, not as measured by the typical recovery, but one of the better reports we have seen for years.

On the negative side, wages are not keeping up with the CPI, wage growth is skewed to the top end, and full time jobs are hard to come by.

At the current pace, the unemployment number would ordinarily drop, but not fast.  However, many of those millions who dropped out of the workforce could start looking if they think jobs may be out there.  Should that happen, the unemployment rate could rise, even if the economy adds jobs at this pace.  It is very questionable if this pace of jobs keeps up.

In other words, if a significant number of those people the BLS has ignored as having “dropped out of the workforce” prove the BLS wrong by actually applying for new job opportunities as they appear, the BLS will have to reconcile their reporting with that “new reality”.  Perhaps many of those “phantom people” were really there all along and the only thing preventing their detection was the absence of job opportunities.  As those “workforce dropouts” return to the BLS radar screen by applying for new job opportunities, the BLS will report it as a “rise” in the unemployment rate.  In reality, that updated statistic will reflect what the unemployment rate had been all along.  An improving job market will just make it easier to face the truth.




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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Grasping Reality With The Opinions Of Others

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In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary.  Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution.  The incident was recently discussed by Brad DeLong.  (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.)  Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy.  On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15.  Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog.  Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:

duffolonious says:

Megan McArdle?  Seriously?  I’ve seen so many people rip her to shreds that I’ve completely ignored her.

Is she another example of nepotism?  Like Bill Kristol.

Procopius says:

Basically yes, although not quite as blatant.  Her old man was an inspector of contracting in New York City.  He got surprisingly rich.  From that he went to starting his own contracting business.  He got surprisingly rich.  Then he went back to New York City in an even higher level supervisory job.  He got surprisingly rich.  So Megan went to good schools and had her daddy’s network of influential “friends” to help her with her “job search” when she graduated.  Of course, she’s no dummy, and did a professional job of networking with all the “right” people she met at school, too.

For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers.  The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.

Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:

The argument defenders of the deal make are twofold:  this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities.  And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama had put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems.  Timothy Geithner was even doing victory laps last month in Europe.  To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs.  But these losses exist already.  The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal.  Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:

More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team.  Volcker, Summers, Orszag, and Romer are all gone.  So Geithner’s vision of bailouts and settlements is the one that carries the most weight.

What is Geithner saying with his policies?

  • The financial system was on the verge of collapse.  We all know that now – about US banks and European ones too.  Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King.  The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.
  • When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent.  It is still unclear whether this was a political or an economic decision.
  • The most difficult political aspect of the banking crisis response was socialising bank lossesAll banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent.  That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.
  • Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror.  Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds.  That is the Geithner view.
  • Once the system is healthy again, it should expand.  The reason you need to bail the banks out is that they have expansion opportunities abroad.  As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit.  American finance can’t profit if you break up the banks.

I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets.  His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.

I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done.  The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery.  With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services.  I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.

I strongly disagree with this vision of America’s future economic development.  But this is the road we are on.

Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?


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Some Good News For Once

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Since the Great Recession began three years ago, Americans have been receiving a daily dose of the most miserable news imaginable.  Our prevalent nightmare concerns the possibility that gasoline prices could find their way up to $10 per gallon as Muammar Gawdawful takes Libya into a full-scale civil war.

Some people tried to find a thread of hope in the latest non-farm payrolls report from the Bureau of Labor Statistics.  The report was spun in several opposing directions by various commentators.  The single statement from the BLS report which seemed most important to me was the remark in the first sentence that    “. . .  the unemployment rate was little changed at 8.9 percent . . .”.  Nevertheless, David Leonhardt of The New York Times noted his suspicion that “the government is understating actual job growth” while providing his own upbeat read of the report.  On the other hand, at the Zero Hedge website, Tyler Durden made this observation:

Wonder why the unemployment rate is at an artificially low 8.9%?  Three simple words:  Labor Force Participation.  At 64.2%, it was unchanged from last month, and continues to be at a 25 year low.  Should the LFP return to its 25 trendline average of 66.1%, the unemployment rate would be 11.6%.

Indeed, the ugly truth is that as you spend more time pondering the current unemployment situation, you find an increasingly dismal picture.  Economist Mark Thoma came up with a “back of the envelope calculation” of the benchmarks he foresees as the unemployment situation abates:

7% unemployment in July of 2012

6% unemployment in March of 2013

5% unemployment in December of 2013

4% unemployment in September of 2014

If anything, relative to the last two recoveries, this forecast is optimistic.  Even so, it will still take two years to get to 6% unemployment (and if the natural rate is closer to 5.5% at that time, as I expect it will be, it will take another five months to fully close the gap). Things may be looking up, but we have a long way to go and it’s too soon to turn our backs on the unemployed.

Only three more years until we return to pre-crisis levels!  Whoopie!

For those in search of genuinely good news, I went on a quest to come up with some for this piece.  Here’s what I found:

For the truly desperate, the Salon website has introduced a new weekly feature entitled, “The Week In Uppers”.  It is a collection of stories, often including video clips, which will (hopefully) make you smile.  The items are heavy on good deeds – sometimes by celebrities.

I was quite surprised by this next “good news” item:  A report by Rex Nutting of MarketWatch, revealing this welcome fact:

.   .   .  the United States remains the biggest manufacturing economy in the world, producing about 20% of the value of global output in 2010  . . .  (Although fast-growing China will pass the United States soon enough.)

Even though we may soon drop to second place, at least our unemployment rate should be in decline by that point.  Here are some more encouraging factoids from Rex Nutting’s essay:

In 2010, U.S. factories shipped $5.03 trillion worth of goods out the door, up 9% from 2009’s horribly depressed output, according to the Census Bureau.

*   *   *

In 2010 alone, productivity in the manufacturing sector surged 6.7%. Fortunately for workers, it looks as if companies have squeezed as much extra output out of labor as they can right now.  For the first time since 1997, factories actually added jobs during the calendar year in 2010, as they hired 112,000 additional workers.

There will be further job gains as factories ramp up their production to meet rising demand, economists say.

According to the Institute for Supply Management’s monthly survey of corporate purchasing managers, business is booming.  The ISM index rose for a seventh straight month in February to 61.4%, matching the highest reading since 1983.

*   *   *

What is the ISM telling us?  “The manufacturing sector is on fire,” says Stephen Stanley, chief economist for Pierpont Securities.  The new orders index rose to 68%, the highest since 2004, and the employment index rose to 64.5%, the highest since 1973.

Factories are hiring because orders are stacking up faster than they can produce goods.

What’s behind the boom?  In part, it’s domestic demand for capital goods and consumer goods.  Businesses are finally beginning to believe in the recovery, so they’re starting to expand, which means new equipment must be purchased.

Be sure to read the full report if you want to re-ignite those long, lost feelings of optimism.

It’s nice to know that if you look hard enough you can still find some good news (at least for now).


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Troublesome Creatures

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A recent piece by Glynnis MacNicol of The Business Insider website led me to the conclusion that Shepard Smith deserves an award.  You might recognize Shep Smith as The Normal Guy at Fox News.  In case you haven’t heard about it yet, a controversy has erupted over a 20-minute crank telephone call made to Wisconsin Governor Scott Walker by a man who identified himself as David Koch, one of two billionaire brothers, famous for bankrolling Republican politicians.  The caller was actually blogger Ian Murphy, who goes by the name, Buffalo Beast.  In a televised discussion with Juan Williams concerning the controversy surrounding Wisconsin Governor Walker, Shep Smith focused on the ugly truth that the Koch brothers are out to “bust labor”.  Here are Smith’s remarks as they appeared at The Wire blog:

It’s all political isn’t it?  Isn’t it just 100% politics? … Have you looked at the list of the top 10 donors to political campaigns?  Seven of those 10 donate to Republicans.  The other three that remain of those top 10, they all donate to Democrats and they are all unions.  Bust the unions, it’s over … . And this started when?  It started with the Koch brothers.  The Koch brothers were organizing…

*   *   *

I’m not taking a side on this, I’m telling you what’s going on … The facts!  But people don’t want to hear the facts … let them get angry, facts are troublesome creatures from time to time.  The Koch brothers, and others, were organized to bust labor, it’s what big business wants to do … this isn’t a new concept.  So they gave a bunch of money to the governor’s campaign.  The governor’s campaign is over.  Now, away we go!  We’re going to try to bust this union up, and that’s what they’re doing … this is political and everyone in the middle is a pawn.

Those “troublesome creatures” called facts have been finding their way into the news to a refreshing degree lately.  Emotional rhetoric has replaced news reporting to such an extreme level that most people seem to have accepted the premise that facts are relative to one’s perception of reality.  The lyrics to “Crosseyed and Painless” by the Talking Heads (written more than 30 years ago) seem to have been a prescient commentary about this situation:

Facts all come with points of view
Facts don’t do what I want them to
Facts just twist the truth around
Facts are living turned inside out

Budgetary disputes are now resolved on an emotional battlefield where facts usually take a back seat to ideology.  Despite this trend, there are occasional commentaries focused on fact-based themes.  One recent example came from David Leonhardt of The New York Times, entitled “Why Budget Cuts Don’t Bring Prosperity”.  The article began with the observation that because so many in Congress believe that budget cuts are the path to national prosperity, the only remaining question concerns how deeply spending should be cut this year.  Mr. Leonhardt provided those misled “leaders” with the facts:

The fundamental problem after a financial crisis is that businesses and households stop spending money, and they remain skittish for years afterward.  Consider that new-vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million last year.  Single-family home sales, which peaked at 7.5 million in 2005, continued falling last year, to 4.6 million.  No wonder so many businesses are uncertain about the future.

Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape.  Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.

That’s the historical lesson of postcrisis austerity movements.  The history is a rich one, too, because people understandably react to a bubble’s excesses by calling for the reverse.  When Franklin Roosevelt was running for president in 1932, he repeatedly called for a balanced budget.

But no matter how morally satisfying austerity may be, it’s the wrong answer.

Leonhardt’s  objective analysis drew this response from Yves Smith of Naked Capitalism:

Did a memo go out?   Leonhardt almost always hews to neoclassical orthodoxy.  This is a big change for him.

Those “troublesome creatures” called facts became the subject of an opinion piece about the budget, written by Bill Schneider for Politico.  While dissecting the emotional motivation responsible for “a dangerous political arms race where the stakes keep escalating”, Schneider set about isolating the fact-based signal from the emotional noise clouding the budget debate:

Many of the programs targeted for big cuts by the House Republicans have a suspiciously ideological tinge:  Planned Parenthood, the Environmental Protection Agency, funds to implement the new health care reform law, National Public Radio, the Corporation for Public Broadcasting, President Bill Clinton’s AmeriCorps program, money for a White House climate change czar.  The Washington Post calls the House budget “an assault on bedrock Democratic priorities.’’

The public is certainly worried about the deficit.  But do people believe the deficit is a crisis demanding immediate and radical action?  That’s not so clear.

In a Pew Research Center poll taken this month, the public was split over whether the federal government’s priority should be reducing the deficit (49 percent) or spending to help the economic recovery (46 percent).  What economic issue worries people the most? Jobs tops the list (44 percent). Fewer than half that say the deficit (19 percent).

Yes, there is an economic crisis in the country.  The crisis is jobs.  So Republicans have to argue that spending cuts will create jobs — an argument that mystifies many economists.

Let’s hope that those “troublesome creatures” keep turning up at debates, “town hall” meetings and in commentaries.  If they cause widespread allergic reactions, let nature run its course.


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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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