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Return of the POMO Junkies

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Most investors have been lamenting the recent stock market swoon.  The Dow Jones Industrial Average has given up all of the gains earned during 2012.  The economic reports keep getting worse by the day.  Yet, for some people all of this is good news  .   .   .

You might find them scattered along the curbs of Wall Street   . . .  with glazed eyes  . . .  British teeth  . . .  and mysterious lesions on their skin.  They approach Wall Street’s upscale-appearing pedestrians, making such requests as:  “POMO?”   . . .  “Late-day rally?”  . . .   “Animal Spirits?”  These desperate souls are the “POMO junkies”.  Since the Federal Reserve concluded the last phase of quantitative easing in June of 2011, the POMO junkies have been hopeless.  They can’t survive without those POMO auctions, wherein the New York Fed would purchase Treasury securities – worth billions of dollars – on a daily basis.  After the auctions, the Primary Dealers would take the sales proceeds to their proprietary trading desks, where the funds would be leveraged and used to purchase high-beta, Russell 2000 stocks.  You saw the results:  A booming stock market – despite a stalled economy.

Since I first wrote about the POMO junkies last summer, they have resurfaced on a few occasions – only to slink back into the shadows as the rumors of an imminent Quantitative Easing 3 were debunked.

The recent spate of awful economic reports and the resulting stock market nosedive have rekindled hopes that the Federal Reserve will crank-up its printing press once again, for the long-awaited QE 3.  Economist John Hussman discussed this situation on Monday:

At this point, the S&P 500 has achieved a cumulative total return of less than 10% since April 2010. Meanwhile, of course, there remains a great deal of faith in the “Bernanke put,” because even though it’s fairly obvious that QE has done nothing durable for the economy or the financial markets over the last couple of years, a hit of QE might at least be good for a few months of “risk on” delirium.  If the American public can’t get thoughtful economic leadership, at least Wall Street’s speculative junkies can hope for a little taste of Q from Sugar Daddy.

One of the problems with QE here, however, is that it would essentially represent fiscal policy for the benefit of speculators, at taxpayer expense.  To see this, note that the 10-year Treasury yield is now down to less than 1.5%.  One wonders how Bernanke would be able to argue, with a straight face, that this is not low enough.  Nevertheless, a 10-year bond has a duration of 8 years – meaning that each 100 basis point fluctuation in interest rates is associated with a change of about 8% in the price of the bond.  So if you buy the bond and hold it for a full year, an interest rate change of of 1.5/8 = .1875, or less than 20 basis points, is enough to wipe out the annual interest and leave you with a negative total return.

*   *   *

“QE3 – subsidizing banks and bond speculators at taxpayer expense” – there’s a pithy slogan.  That doesn’t mean the Fed will refrain from more of its recklessness (which will be nearly impossible to reverse when it becomes necessary to do so), but does anyone actually believe by now that QE would improve the economy, durably elevate risky assets beyond a few months, or materially relieve global debt strains?

Obviously, the POMO junkies have no such concerns.  Beyond that, the Federal Reserve’s “third mandate” – keeping the stock market bubble inflated – will be the primary factor motivating the decision, regardless of whether those asset prices hold for more than a few months.

The POMO junkies are finally going to score.  As they do, a tragic number of retail investors will be led to believe that the stock market has “recovered”, only to learn – a few months down the road – that the latest bubble has popped.


 

Too Important To Ignore

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On March 21, the Federal Reserve Bank of Dallas released a fantastic document:  its 2011 Annual Report, featuring an essay entitled, “Choosing the Road to Prosperity – Why We Must End Too Big to Fail – Now”.  The essay was written by Harvey Rosenblum, the head of the Dallas Fed’s Research Department and the former president of the National Association for Business Economics.  Rosenblum’s essay provided an historical analysis of the events leading up to the 2008 financial crisis and the regulatory efforts which resulted from that catastrophe – particularly the Dodd-Frank Act.

While reading Harvey Rosenblum’s essay, I was constantly reminded of the creepy “JOBS Act” which is on its way to President Obama’s desk.  Simon Johnson (former chief economist for the International Monetary Fund) recently explained why the JOBS Act poses the same threat as the deregulatory measures which helped cause the financial crisis:

With the so-called JOBS bill, on which the Senate is due to vote Tuesday, Congress is about to make the same kind of mistake again – this time abandoning much of the 1930s-era securities legislation that both served investors well and helped make the US one of the best places in the world to raise capital.  We find ourselves again on a bipartisan route to disaster.

*   *   *

The idea behind the JOBS bill is that our existing securities laws – requiring a great deal of disclosure – are significantly holding back the economy.

The bill, HR3606, received bipartisan support in the House (only 23  Democrats voted against).  The bill’s title is JumpStart Our Business Startup Act, a clever slogan – but also a complete misrepresentation.

The bill’s proponents point out that Initial Public Offerings (IPOs) of stock are way down.  That is true – but that is also exactly what you should expect when the economy teeters on the brink of an economic depression and then struggles to recover because households’ still have a great deal of debt.

*   *   *

Professor John Coates hit the nail on the head:

“While the various proposals being considered have been characterized as promoting jobs and economic growth by reducing regulatory burdens and costs, it is better to understand them as changing, in similar ways, the balance that existing securities laws and regulations have struck between the transaction costs of raising capital, on the one hand, and the combined costs of fraud risk and asymmetric and unverifiable information, on the other hand.” (See p.3 of this December 2011 testimony.)

In other words, you will be ripped off more.  Knowing this, any smart investor will want to be better compensated for investing in a particular firm – this raises, not lowers, the cost of capital.  The effect on job creation is likely to be negative, not positive.

Simon Johnson’s last paragraph reminded me of a passage from Harvey Rosenblum’s Dallas Fed essay, wherein he was discussing why the economic recovery from the financial crisis has been so sluggish:

Similarly, the contributions to recovery from securities markets and asset prices and wealth have been weaker than expected.  A prime reason is that burned investors demand higher-than-normal compensation for investing in private-sector projects. They remain uncertain about whether the financial system has been fixed and whether an economic recovery is sustainable.

To repeat what Simon Johnson said, combined with the above-quoted paragraph:  the demand by “burned investors” for “higher-than-normal compensation for investing in private-sector projects” raises, not lowers, the cost of capital.  How quickly we forget the lessons of the financial crisis!

The Dallas Fed’s Annual Report began with an introductory letter from its president, Richard W. Fisher.  Fisher noted that while “memory fades with the passage of time” it is important to recall the position in which the “too-big-to fail” banks placed our economy, thus leading Congress to pass into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank).  Although Harvey Rosenblum’s essay was primarily focused on the Dodd-Frank Act’s efforts to address the systemic risk posed by the existence of those “too-big-to-fail” (TBTF) banks, other measures from Dodd-Frank were mentioned.  More important is the fact that the TBTFs have actually grown since the enactment of Dodd-Frank.  Beyond that, Rosenblum emphasized why this has happened:

The TBTF survivors of the financial crisis look a lot like they did in 2008.  They maintain corporate cultures based on the short-term incentives of fees and bonuses derived from increased oligopoly power.  They remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation.  Just as important, their significant presence in dozens of states confers enormous political clout in their quest to refocus banking statutes and regulatory enforcement to their advantage.

The ability of the financial sector “to resist the pressures of federal regulation” also happens to be the primary reason for the perverse effort toward de-regulation, known as the JOBS Act.  At the Seeking Alpha website, Felix Salmon reflected on the venality which is driving this bill through the legislative process:

There’s no good reason at all for this:  it’s basically a way for unpopular incumbent lawmakers who voted for Dodd-Frank to try to weasel their way back into the big banks’ good graces and thereby open a campaign-finance spigot they desperately need.

I don’t fully understand the political dynamics here.  A bill which was essentially drafted by a small group of bankers and financiers has managed to get itself widespread bipartisan support, even as it rolls back decades of investor protections.  That wouldn’t have been possible a couple of years ago, and I’m unclear (about) what has changed.  But one thing is coming through loud and clear:  anybody looking to Congress to be helpful in the fight to have effective regulation of financial institutions, is going to be very disappointed.  Much more likely is that Congress will be actively unhelpful, and will do whatever the financial industry wants in terms of hobbling regulators and deregulating as much activity as it possibly can.  Dodd-Frank, it seems, was a brief aberration.  Now, we’re back to business as usual, and a captured Congress.

The next financial crisis can’t be too far down the road   .   .   .


Running Out of Pixie Dust

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On September 18 of 2008, I pointed out that exactly one year earlier, Jon Markman of MSN.com noted that the Federal Reserve had been using “duct tape and pixie dust” to hold the economy together.  In fact, there were plenty of people who knew that our Titanic financial system was headed for an iceberg at full speed – long before September of 2008.  In October of 2006, Ambrose Evans-Pritchard of the Telegraph wrote an article describing how Treasury Secretary Hank Paulson had re-activated the Plunge Protection Team (PPT):

Mr Paulson has asked the team to examine “systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis”.

“We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?” he said, fretting about the secrecy of the world’s 8,000 unregulated hedge funds with $1.3 trillion at their disposal.

Among the massive programs implemented in response to the financial crisis was the Federal Reserve’s quantitative easing program, which began in November of 2008.  A second quantitative easing program (QE 2) was initiated in November of 2010.  The next program was “operation twist”.  Last week, Jon Hilsenrath of the Wall Street Journal discussed the Fed’s plan for another bit of magic, described by economist James Hamilton as “sterilized quantitative easing”.  All of these efforts by the Fed have served no other purpose than to inflate stock prices.  This process was first exposed in an August, 2009 report by Precision Capital Management entitled, A Grand Unified Theory of Market ManipulationMore recently, on March 9, Charles Biderman of TrimTabs posted this (video) rant about the ongoing efforts by the Federal Reserve to manipulate the stock market.

At this point, many economists are beginning to pose the question of whether the Federal Reserve has finally run out of “pixie dust”.  On February 23, I mentioned the outlook presented by economist Nouriel Roubini (a/k/a Dr. Doom) who provided a sobering counterpoint to the recent stock market enthusiasm in a piece he wrote for the Project Syndicate website entitled, “The Uptick’s Downside”.  I included a discussion of economist John Hussman’s stock market prognosis.  Dr. Hussman admitted that there might still be an opportunity to make some gains, although the risks weigh heavily toward a more cautious strategy:

The bottom line is that near-term market direction is largely a throw of the dice, though with dice that are modestly biased to the downside.  Indeed, the present overvalued, overbought, overbullish syndrome tends to be associated with a tendency for the market to repeatedly establish slight new highs, with shallow pullbacks giving way to further marginal new highs over a period of weeks.  This instance has been no different.  As we extend the outlook horizon beyond several weeks, however, the risks we observe become far more pointed.  The most severe risk we measure is not the projected return over any particular window such as 4 weeks or 6 months, but is instead the likelihood of a particularly deep drawdown at some point within the coming 18-month period.

In December of 2010, Dr. Hussman wrote a piece, providing “An Updated Who’s Who of Awful Times to Invest ”, in which he provided us with five warning signs:

The following set of conditions is one way to capture the basic “overvalued, overbought, overbullish, rising-yields” syndrome:

1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller P/E greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27%

On March 10, Randall Forsyth wrote an article for Barron’s, in which he basically concurred with Dr. Hussman’s stock market prognosis.  In his most recent Weekly Market Comment, Dr. Hussman expressed a bit of umbrage about Randall Forsyth’s remark that Hussman “missed out” on the stock market rally which began in March of 2009:

As of last week, the market continued to reflect a set of conditions that have characterized a wicked subset of historical instances, comprising a Who’s Who of Awful Times to Invest .  Barron’s ran a piece over the weekend that reviewed our case.  It’s interesting to me that among the predictable objections (mostly related to our flat post-2009 performance, but overlooking the 2000-2009 record), none addressed the simple fact that the prior instances of this condition have invariably turned out terribly.  It seems to me that before entirely disregarding evidence that is as rare as it is ominous, you have to ask yourself one question.  Do I feel lucky?

*   *   *

Investors Intelligence notes that corporate insiders are now selling shares at levels associated with “near panic action.”  Since corporate insiders typically receive stock as part of their compensation, it is normal for insiders to sell about 2 shares on the open market for every share they purchase outright.  Recently, however, insider sales have been running at a pace of more than 8-to-1.

*   *   *

While investors and the economic consensus has largely abandoned any concern about a fresh economic downturn, we remain uncomfortable with the divergence between reliable leading measures – which are still actually deteriorating – and more upbeat coincident/lagging measures on which public optimism appears to be based.

Nevertheless, Randall Forsyth’s article was actually supportive of Hussman’s opinion that, given the current economic conditions, discretion should mandate a more risk-averse investment strategy.  The concluding statement from the Barron’s piece exemplified such support:

With the Standard & Poor’s 500 up 24% from the October lows, it may be a good time to take some chips off the table.

Beyond that, Mr. Forsyth explained how the outlook expressed by Walter J. Zimmermann concurred with John Hussman’s expectations for a stock market swoon:

Walter J. Zimmermann Jr., who heads technical analysis for United-ICAP, a technical advisory firm, puts it more succinctly:  “A perfect financial storm is looming.”

*   *   *

THERE ARE AMPLE FUNDAMENTALS to knock the market down, including the well-advertised surge in gasoline prices, which Zimmermann calculates absorbed the discretionary spending power for half of America.  And the escalating tensions over Iran’s nuclear program “is the gift that keeps on giving…if you like fear-inflated energy prices,” he wrote in the client letter.

At the same time, “the euro-zone response to their deflationary debt trap continues to be further loans to the hopelessly indebted, in return for crushing austerity programs.

So, evidently, not content with another mere recession, euro-zone leaders are inadvertently shooting for another depression.  They may well succeed.”

The euro zone is (or was, he stresses) the world’s largest economy, and a buyer of 22% of U.S. exports, which puts the domestic economy at risk, he adds.

Given the fact that the Federal Reserve has already expended the “heavy artillery” in its arsenal, it seems unlikely that the remaining bit of pixie dust in Ben Bernanke’s pocket – “sterilized quantitative easing” – will be of any use in the Fed’s never-ending efforts to inflate stock prices.


 

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Rampant Stock Market Pumping

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It has always been one of my pet peeves.  The usual stock market cheerleaders start chanting into the echo chamber.  Do they always believe that their efforts will create a genuine, consensus reality?  A posting at the Daily Beast website by Zachary Karabell caught my attention.  The headline said, “Bells Are Ringing!  Confidence Rises as the Dow –  Finally – Hits 13,000 Again”.  After highlighting all of the exciting news, Mr. Karabell was thoughtful enough to mention the trepidation experienced by a good number of money managers, given all the potential risks out there.  Nevertheless, the piece concluded with this thought:

The crises that have obsessed markets for the past years – debt and defaults, housing markets, Europe and Greece– are winding down.  And markets are gearing up.  Maybe it’s time to focus on that.

As luck would have it, my next stop was at the Pragmatic Capitalism blog, where I came across a clever essay by Lance Roberts, which had been cross-posted from his Streettalklive website.  The title of the piece, “Media Headlines Will Lead You To Ruin”, jumped right out at me.  Here’s how it began:

It’s quite amazing actually.   Two weeks ago Barron’s ran the cover page of “Dow 15,000?.  Over the weekend Alan Abelson ran a column titled “Everyone In The Pool”.  Today, CNBC leads with “Dow 13,000 May Finally Lure Investors Back Into Stocks”.   Unfortunately, for most investors, the headline is probably right.  Investors, on the whole, have a tendency to do exactly the opposite of what they should do when it comes to investing – “Buy High and Sell Low.”  The reality is that the emotions of greed and fear do more to cause investors to lose money in the market than being robbed at the point of a gun.

Take a look at the chart of the data from ICI who tracks flows of money into and out of mutual funds.  When markets are correcting investors panic and sell out of stocks with the majority of the selling occurring near the lows of the market.  As the markets rally investors continue to sell as they disbelieve the rally intially and are just happy to be getting some of their money back.  However, as the rally continues to advance from oversold conditions – investors are “lured” back into the water as memories of the past pain fades and the “greed factor” overtakes their logic.  Unfortunately, this buying always tends to occur at, or near, market peaks.

Lance Roberts provided some great advice which you aren’t likely to hear from the cheerleading perma-bulls – such as, “getting back to even is not an investment strategy.”

As a longtime fan of the Zero Hedge blog, I immediately become cynical at the first sign of irrational exuberance demonstrated by any commentator who downplays economic headwinds while encouraging the public to buy, buy, buy.  Those who feel tempted to respond to that siren song would do well to follow the Weekly Market Comments by economist John Hussman of the Hussman Funds.  In this week’s edition, Dr. Hussman admitted that there may still be an opportunity to make some gains, although the risks weigh heavily toward a more cautious strategy:

The bottom line is that near-term market direction is largely a throw of the dice, though with dice that are modestly biased to the downside.  Indeed, the present overvalued, overbought, overbullish syndrome tends to be associated with a tendency for the market to repeatedly establish slight new highs, with shallow pullbacks giving way to further marginal new highs over a period of weeks.  This instance has been no different.  As we extend the outlook horizon beyond several weeks, however, the risks we observe become far more pointed.  The most severe risk we measure is not the projected return over any particular window such as 4 weeks or 6 months, but is instead the likelihood of a particularly deep drawdown at some point within the coming 18-month period.

Economist Nouriel Roubini (a/k/a Dr. Doom) provided a sobering counterpoint to the recent stock market enthusiasm in a piece he wrote for the Project Syndicate website entitled, “The Uptick’s Downside”.  Dr. Roubini focused on the fact that “at least four downside risks are likely to materialize this year”.  These include:  “fiscal austerity pushing the eurozone periphery into economic free-fall” as well as “evidence of weakening performance in China and the rest of Asia”.  The third and fourth risks were explained in the following terms:

Third, while US data have been surprisingly encouraging, America’s growth momentum appears to be peaking.  Fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown, as will the expiration of tax benefits that boosted capital spending in 2011.  Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued; indeed, two percentage points of the 2.8% expansion in the last quarter of 2011 reflected rising inventories rather than final sales.  And, as for external demand, the generally strong dollar, together with the global and eurozone slowdown, will weaken US exports, while still-elevated oil prices will increase the energy import bill, further impeding growth.

Finally, geopolitical risks in the Middle East are rising, owing to the possibility of an Israeli military response to Iran’s nuclear ambitions.  While the risk of armed conflict remains low, the current war of words is escalating, as is the covert war in which Israel and the US are engaged with Iran; and now Iran is lashing back with terrorist attacks against Israeli diplomats.

Any latecomers to the recent festival of bullishness should be mindful of the fact that their fellow investors could suddenly feel inspired to head for the exits in response to one of these risks.  Lance Roberts said it best in the concluding paragraph of his February 21 commentary:

With corporate earnings now slowing sharply, the economy growing at a sub-par rate, the Eurozone headed towards a prolonged recession and the American consumer facing higher gas prices and reduced incomes, a continued bull market rally from here is highly suspect.   Add to those economic facts the technical aspects of a very extended market with overbought internals – the reality is that this is a better place to be selling investments versus buying them.  Or – go to Vegas and bet on black.


 

Once Upon A Crisis

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As the 2012 Presidential election campaign heats up, there is plenty of historical revisionism taking place with respect to the 2008 financial / economic crisis.  Economist Dean Baker wrote an article for The Guardian, wherein he debunked the Obama administration’s oft-repeated claim that the newly-elected President saved us from a “Second Great Depression”:

While the Obama administration, working alongside Ben Bernanke at the Fed, deserves credit for preventing a financial meltdown, a second great depression was never in the cards.

*   *   *

The attack on the second Great Depression myth is not simply an exercise in semantics.  The Obama Administration and the political establishment more generally want the public to be grateful that we managed to avoid a second Great Depression. People should realize that this claim is sort of like keeping our kids safe from tiger attacks.  It’s true that almost no kids in the United States are ever attacked by tigers, but we don’t typically give out political praise for this fact, since there is no reason to expect our kids to be attacked by tigers.

In the same vein, we all should be very happy we aren’t in the middle of a second Great Depression; however, there was never any good reason for us to fear a second Great Depression.  What we most had to fear was a prolonged period of weak growth and high unemployment.  Unfortunately, this is exactly what we are seeing.   The only question is how long it will drag on.

Joe Weisenthal of The Business Insider directed our attention to the interview with economist Paul Krugman appearing in the current issue of Playboy.  Krugman, long considered a standard bearer for the Democratic Party’s economic agenda, was immediately thrown under the bus as soon as Obama took office.  I’ll never forget reading about the “booby prize” roast beef dinner Obama held for Krugman and his fellow Nobel laureate, Joseph Stiglitz – when the two economists were informed that their free advice would be ignored. Fortunately, former Chief of Staff Rahm Emanuel was able to make sure that pork wasn’t the main course for that dinner.  Throughout the Playboy interview, Krugman recalled his disappointment with the new President.  Here’s what Joe  Weisenthal had to say about the piece:

There’s a long interview with Paul Krugman in the new Playboy, and it’s excellent.

We tend to write a lot about his economic commentary here, but he probably doesn’t get enough credit for his commentary on politics, and his assessment of how things will play out.

Go back and read this column, from March 2009, and you’ll see that he basically called things correctly, that the stimulus would be too small, and that the GOP would be emboldened and gain success arguing that the problem was that we had stimulus at all.

*   *   *
At least as Krugman sees it, the times called for a major boost in spending and so on, and Obama never had any intention to deliver.

What follows is the prescient excerpt from Krugman’s March 9, 2009 essay, referenced by Joe Weisenthal:

The broader public, by contrast, favors strong action.  According to a recent Newsweek poll, a majority of voters supports the stimulus, and, more surprising, a plurality believes that additional spending will be necessary.  But will that support still be there, say, six months from now?

Also, an overwhelming majority believes that the government is spending too much to help large financial institutions.  This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital.

So here’s the picture that scares me:  It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up.  Obama finally concedes that a bigger stimulus is needed.  But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts.  And as a result, the recession rages on, unchecked.

In early July of 2009, I wrote a piece entitled, “The Second Stimulus”, in which I observed that President Obama had already reached the milestone anticipated by Krugman for September of that year.  I made a point of including a list of ignored warnings about the inadequacy of the stimulus program.  Most notable among them was the point that there were fifty economists who shared the concerns voiced by Krugman, Stiglitz and Jamie Galbraith:

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.

Mike Grabell of ProPublica has written a new book entitled, Money Well Spent? which provided an even-handed analysis of what the stimulus did – and did not – accomplish.  As I pointed out on February 13, some of the criticisms voiced by Mike Grabell concerning the programs funded by the Economic Recovery Act had been previously expressed by Keith Hennessey (former director of the National Economic Council under President George W. Bush) in a June 3, 2009 posting at Hennessey’s blog.  I was particularly intrigued by this suggestion by Keith Hennessey from back in 2009:

Had the President instead insisted that a $787 B stimulus go directly into people’s hands, where “people” includes those who pay income taxes and those who don’t, we would now be seeing a stimulus that would be:

  • partially effective but still quite large – Because it would be a temporary change in people’s incomes, only a fraction of the $787 B would be spent.  But even 1/4 or 1/3 of $787 B is still a lot of money to dump out the door.  The relative ineffectiveness of a temporary income change would be offset by the enormous amount of cash flowing.
  • efficient – People would be spending money on themselves. Some of them would be spending other people’s money on themselves, but at least they would be spending on their own needs, rather than on multi-year water projects in the districts of powerful Members of Congress.  You would have much less waste.
  • fast – The GDP boost would be concentrated in Q3 and Q4 of 2009, tapering off heavily in Q1 of 2010.

Why did the President not do this?  Discussions with the Congress began in January before he took office, and he faced a strong Speaker who took control and gave a huge chuck of funding to House Appropriations Chairman Obey (D-WI).  I can think of three plausible explanations:

  1. The President and his team did not realize the analytical point that infrastructure spending has too slow of a GDP effect.
  2. They were disorganized.
  3. They did not want a confrontation with their new Congressional allies in their first few days.

Given the fact that the American economy is 70% consumer-driven, Keith Hennessey’s proposed stimulus would have boosted that sorely-missing consumer demand as far back as two years ago.  We can only wonder where our unemployment level and our Gross Domestic Product would be now if Hennessey’s plan had been implemented – despite the fact that it would have been limited to the $787 billion amount.


 

Recession Watch

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A recession relapse is the last thing Team Obama wants to see during this election year.  The President’s State of the Union address featured plenty of “happy talk” about how the economy is improving.  Nevertheless, more than a few wise people have expressed their concerns that we might be headed back into another period of at least six months of economic contraction.

Last fall, the Economic Cycle Research Institute (ECRI) predicted that the United States would fall back into recession.  More recently, the ECRI’s weekly leading index has been showing small increments of improvement, although not enough to dispel the possibility of a relapse.  Take a look at the chart which accompanied the January 27 article by Mark Gongloff of The Wall Street Journal.  Here are some of Mr. Gongloff’s observations:

The index itself actually ticked down a bit, to 122.8 from 123.3 the week before, but that’s still among the highest readings since this summer.

*   *   *

That’s still not great, still in negative territory where it has been since the late summer.  But it is the best growth rate since September 2.

Whatever that means.  It’s hard to say this index is telling us whether a recession is coming or not, because the ECRI’s recession call is based on top-secret longer leading indexes.

Economist John Hussman of the Hussman Funds has been in full agreement with the ECRI’s recession call since it was first published.  In his most recent Weekly Market Comment, Dr. Hussman discussed the impact of an increasingly probable recession on deteriorating stock market conditions:

Once again, we now have a set of market conditions that is associated almost exclusively with steeply negative outcomes.  In this case, we’re observing an “exhaustion” syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo).  Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. – despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels.  Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo.

My concern is that an improbably large number of things will have to go right in order to avoid a major decline in stock market value in the months ahead.

Another fund manager expressing similar concern is bond guru Jeffrey Gundlach of DoubleLine Capital. Daniel Fisher of Forbes recently interviewed Gundlach, who explained that he is more afraid of recession than of higher interest rates.

Many commentators have discussed a new, global recession, sparked by a recession across Europe.  Mike Shedlock (a/k/a Mish), recently emphasized that “without a doubt Europe is already in recession.”  It is feared that the recession in Europe – where America exports most of its products – could cause another recession in the United States, as a result of decreased demand for the products we manufacture.  The January 24 World Economic Outlook Update issued by the IMF offered this insight:

The euro area economy is now expected to go into a mild recession in 2012 – consistent with what was presented as a downside scenario in the January 2011 WEO Update.

*   *   *

For the United States, the growth impact of such spillovers is broadly offset by stronger underlying domestic demand dynamics in 2012.  Nonetheless, activity slows from the pace reached during the second half of 2011, as higher risk aversion tightens financial conditions and fiscal policy turns more contractionary.

On January 28, Steve Odland of Forbes suggested that the Great Recession, which began in the fourth quarter of 2007, never really ended.  Odland emphasized that the continuing drag of the housing market, the lack of liquidity for small businesses to create jobs, despite trillions of dollars in cash on the sidelines, has resulted in an “invisible recovery”.

Jennifer Smith of The Wall Street Journal explained how this situation has played out at law firms:

Conditions at law firms have stabilized since 2009, when the legal industry shed 41,900 positions, according to the Labor Department.  Cuts were more moderate last year, with some 2,700 positions eliminated, and recruiters report more opportunities for experienced midlevel associates.

But many elite firms have shrunk their ranks of entry-level lawyers by as much as half from 2008, when market turmoil was at its peak.

Regardless of whether the economic recovery may have been “invisible”, economist Nouriel Roubini (a/k/a Dr. Doom) has consistently described the recovery as “U-shaped” rather than the usual “V-shaped” graph pattern we have seen depicting previous recessions.  Today Online reported on a discussion Dr. Roubini held concerning this matter at the World Economic Forum’s meeting in Davos:

Slow growth in advanced economies will likely lead to “a U-shaped recovery rather than a typical V”, and could last up to 10 years if there is too much debt in the public and private sector, he said.

At a panel discussion yesterday, Dr Roubini also said Greece will probably leave Europe’s single currency within 12 months and could soon be followed by Portugal.

“The euro zone is a slow-motion train wreck,” he said.  “Not only Greece, other countries as well are insolvent.”

In a December 8 interview conducted by Tom Keene on Bloomberg Television’s “Surveillance Midday”, Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, explained his position:

“The downturn we have now is very different than the downturn in 2010, which did not persist.  This one is persisting.”

*  *  *

“If there’s no recession in Q4 or in the first half I’d say of 2012, then we’re wrong.  …   You’re not going to know whether or not we’re wrong until a year from now.”

I’m afraid that we might know the answer before then.


 

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Too Cool To Fool

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It’s always reassuring to see that there are a good number of people among us who aren’t easily manipulated by “the powers that be”.  Let’s take a look at some examples:

Glen Ford is the executive editor of the Black Agenda Report.  On January 11, Mr. Ford discussed how – up until now – the Occupy Wall Street movement has managed to avoid being co-opted by the Democratic Party and MoveOn.org.  Unfortunately, the Obama regime may have succeeded in establishing a grip on OWS.  Glen Ford offered this explanation:

The Democratic Party may have entered the Occupy Wall Street movement through the “Black door,” in the form of Occupy The Dream, the Black ministers’ group led by former NAACP chief and Million Man March national director Dr. Benjamin Chavis and Baltimore mega-church pastor Rev. Jamal Bryant.  Both are fervent supporters of President Obama.

*   *   *

It appears that Occupy Wall Street’s new Black affiliate is also in “lock-step” with the corporate Democrat in the White House, whose administration has funneled trillions of dollars to Wall Street and greatly expanded U.S. theaters of war.

*   *   *

Black ministers in campaign mode routinely depict Obama’s political troubles as indistinguishable from threats to “The Dream,” whose embodiment is ensconced in the White House.  That’s simply common currency among Black preachers pushing for Obama.

*   *   *

It is highly unlikely – damn near inconceivable – that Occupy The Dream will do anything that might embarrass this president.  Its ministers can be expected to electioneer for Obama at every opportunity.  Their January 16 actions are directed at the Federal Reserve, which is technically independent from the executive branch of government – although, in practice, the Fed has been Obama’s principal mechanism for bailing out the banks.  Will the ministers pretend, next Monday, that the president is somehow removed from the Fed’s massive transfers of the people’s credit and cash to Wall Street over the past three years?

*   *   *

At this late stage, there is no antidote to the potential cooptation, except to rev up the movement’s confrontation with the oligarchic powers-that-be – including Wall Street’s guy in the White House.  Let’s see what happens if OWS demonstrators join with Occupy The Dream at Federal Reserve sites on January 16 carrying placards unequivocally implicating Obama in the Fed’s bailouts of the banksters, as Occupy demonstrators have done so often in the past.  Will the Dream’s leadership be in “lock-step” with that?  Maybe so – I’ve heard that miracles sometimes do happen.

Anyone who challenges the Obama administration’s symbiotic relationship with the Wall Street banksters invites accusations of advancing the Republican agenda for regaining control of the White House.  This problem will be solved once a populist third-party or Independent candidate rises to pose a serious challenge to the incumbent.  Beyond that, an African-American commentator who dares to expose Obama as a tool of Wall Street is likely to face harsh criticism.  Glen Ford has demonstrated more courage than most Americans by taking a stand against this venal administration.

Another exemplary individual, whose opinions were never compromised to justify or rationalize the current administration’s tactics, has been economist Joseph Stiglitz – the Nobel laureate who found himself ignored and shut out by the Obama administration ab initio.  Professor Stiglitz recently wrote a commentary entitled, “The Perils of 2012” in which he dared to predict an election year fraught with economic despair.  Such conditions make for an incumbent President’s worst nightmare.  As a result, non-Republican economists are expected to avoid such prognostication.  Nevertheless, Professor Stiglitz proceeded to paint an ugly picture of what we can expect in the near term, after first reminding us that there has been no sound policy advanced for mitigating the devastation experienced by the middle class as a result of the 2008 financial crisis:

The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope.  President John F. Kennedy once said that a rising tide lifts all boats.  But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.”  Now those dreams, too, are receding.  By 2011, the savings of those who had lost their jobs in 2008 or 2009 had been spent.  Unemployment checks had run out.  Headlines announcing new hiring – still not enough to keep pace with the number of those who would normally have entered the labor force – meant little to the 50 year olds with little hope of ever holding a job again.

Indeed, middle-aged people who thought that they would be unemployed for a few months have now realized that they were, in fact, forcibly retired.  Young people who graduated from college with tens of thousands of dollars of education debt cannot find any jobs at all.  People who moved in with friends and relatives have become homeless.  Houses bought during the property boom are still on the market or have been sold at a loss.  More than seven million American families have lost their homes.

*   *   *

The pragmatic commitment to growth that one sees in Asia and other emerging markets today stands in contrast to the West’s misguided policies, which, driven by a combination of ideology and vested interests, almost seem to reflect a commitment not to grow.

As a result, global economic rebalancing is likely to accelerate, almost inevitably giving rise to political tensions.  With all of the problems confronting the global economy, we will be lucky if these strains do not begin to manifest themselves within the next twelve months.

Another commentator who has been “too cool to fool” is equities market analyst, Barry Ritholtz.  One of his recent blog postings documented how Ritholtz never accepted the propagandistic pronouncements of the National Retailers Association about Christmas season retail sales.  Once the hype began on Black Friday, Ritholtz began his own campaign of debunking the questionable data, touted to boost unjustified confidence about the direction of our economy.  Ritholtz concluded the piece with this statement:

Those of you who may have downplayed the potential for a recession to start over the next 12-18 months way want to revisit your views on this.  It is far from the low possibility many economists have it pegged at.

Fortunately, not everyone has been as imperceptive as those on the Obama administration’s economic team who admitted that as late as 2009, they underestimated the extent of economic contraction resulting from the 2008 crisis.  It’s time for the voting public to dis-employ the political hacks who have allowed this condition to fester.  One effective path toward this goal involves voting against incumbents in primary elections.  Keep in mind that America’s Congressional districts have been gerrymandered to protect incumbents.  As a result, any plan to defeat those officeholders in a general election could be an exercise in futility.  Voting against current members of Congress during the primary process can open the door for more capable candidates during the general election.  Peter Schweizer’s cause – as expressed in his book, Throw Them All Out, should be on everyone’s front burner during the 2012 primary season.


 

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Trouble Ahead

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I find it very amusing that we are being bombarded with so many absurd election year “talking points” and none of them concern the risk of a 2012 economic recession.  The entire world seems in denial about a global problem which is about to hit everyone over the head.  I’m reminded of the odd brainstorming session in September of 2008, when Presidential candidates Obama and McCain were seated at the same table with a number of econ-honchos, all of whom were scratching their heads in confusion about the financial crisis.  Something similar is about to happen again.  You might expect our leaders to be smart enough to avoid being blindsided by an adverse economic situation – again – but this is not a perfect world.  It’s not even a mediocre world.

After two rounds of quantitative easing, the Kool-Aid drinkers are sipping away, in anticipation of the “2012 bull market”.  Even the usually-bearish Doug Kass recently enumerated ten reasons why he expects the stock market to rally “in the near term”.  I was more impressed by the reaction posted by a commenter – identified as “Skateman” at the Pragmatic Capitalism blog.  Kass’ reason #4 is particularly questionable:

Mispaced preoccupation with Europe:  The European situation has improved.   .  .  .

Skateman’s reaction to Kass’ reason #4 makes more sense:

The Europe situation has not improved.  There is no escape from ultimate disaster here no matter how the deck chairs are rearranged.  Market’s just whistling past the graveyard.

Of particular importance was this recent posting by Mike Shedlock (a/k/a Mish), wherein he emphasized that “without a doubt Europe is already in recession.”  After presenting his readers with the most recent data supporting his claim, Mish concluded with these thoughts:

Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd.  If banks did increase loans, it would add to bank losses.  The smart thing for banks to do is exactly what they are doing, parking cash at the ECB.

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

*   *   *

Don’t expect the US to be immune from a Eurozone recession and a Chinese slowdown.  Unlike 2011, it will not happen again.

Back on October 8, Jeff Sommer wrote an article for The New York Times, discussing the Economic Cycle Research Institute’s forecast of another recession:

“If the United States isn’t already in a recession now it’s about to enter one,” says Lakshman Achuthan, the institute’s chief operations officer.  It’s just a forecast.  But if it’s borne out, the timing will be brutal, and not just for portfolio managers and incumbent politicians.  Millions of people who lost their jobs in the 2008-9 recession are still out of work.  And the unemployment rate in the United States remained at 9.1 percent in September.  More pain is coming, says Mr. Achuthan.  He thinks the unemployment rate will certainly go higher.  “I wouldn’t be surprised if it goes back up into double digits,” he says.

Mr. Achuthan’s outlook was echoed by economist John Hussman of the Hussman Funds, who pointed out in his latest Weekly Market Comment that investors have been too easily influenced by recent positive economic data such as payroll reports and Purchasing Managers Indices:

I can understand this view in the sense that the data points are correct – economic data has come in above expectations for several weeks, the Chinese, European and U.S. PMI’s have all ticked higher in the latest reports, new unemployment claims have declined, and December payrolls grew by 200,000.

Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome.  Specifically, the data set continues to imply a nearly immediate global economic downturn.  Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, “then, we’re wrong.”  Frankly, I’ll be surprised if the U.S. gets through the first quarter without a downturn.

At the annual strategy seminar held by Société Générale, their head of strategy – Albert Edwards – attracted quite a bit of attention with his grim prognostications.  The Economist summarized his remarks this way:

The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example).  The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable.

Larry Elliott of The Guardian focused on what Albert Edwards had to say about China and he provided more detail concerning Edwards’ remarks about the United States:

“There is a likelihood of a China hard landing this year.  It is hard to think 2013 and onwards will be any worse than this year if China hard-lands.”

*   *   *

He added that despite the recent run of more upbeat economic news from the United States, the risk of another recession in the world’s biggest economy was “very high”.  Growth had slowed to an annual rate of 1.5% in the second and third quarters of 2011, below the “stall speed” that historically led to recession.  It was unlikely that the economy would muddle through, Edwards said.

So there you have it.  The handwriting is on the wall.  Ignore it at your peril.


 

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Be Sure To Catch These Items

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As we reach the end of 2011, I keep stumbling across loads of important blog postings which deserve more attention.  These pieces aren’t really concerned with the usual, “year in review”- type of subject matter.  They are simply great items which could get overlooked by people who are too busy during this time of year to set aside the time to browse around for interesting reads.  Accordingly, I’d like to bring a few of these to your attention.

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

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.

Despite the current “ridicule and scorn” campaign against Keynesian economics, a fantastic, unbiased analysis of the subject has been provided by Henry Blodget of The Business Insider.  Blodget’s commentary was written in easy-to-read, layman’s terms and I can’t say enough good things about it.  Here’s an example:

The reason austerity doesn’t work to quickly fix the problem is that, when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy.  And when you further reduce tax revenue, you increase the deficit and create the need for more austerity.  And that even further clobbers the economy and tax revenue.  And so on.

Another “must read” blog posting was provided by Mike Shedlock (a/k/a Mish).  Mish directed our attention to a rather extensive list of “Things to Say Goodbye To”, which was written last year by Clark McClelland and appeared on Jeff Rense’s website.  (Clark McClelland is a retired NASA aerospace engineer who has an interesting background.  I encourage you to explore McClelland’s website.)  Mish pared McClelland’s list down to nine items and included one of his own – loss of free speech:

A bill in Congress with an innocuous title – Stop Online Piracy Act (SOPA) – threatens to do much more.

*  *  *

This bill’s real intent is not to stop piracy, but rather to hand over control of the internet to corporations.

At his Financial Armageddon blog, Michael Panzner took a similar approach toward slimming down a list of bullet points which reveal the disastrous state of our economy:  “50 Economic Numbers From 2011 That Are Almost Too Crazy To Believe,” from the Economic Collapse blog.  Panzner’s list was narrowed down to ten items – plenty enough to undermine those “sunshine and rainbows” prognostications about what we can expect during 2012.

The final item on my list of “must read” essays is a rebuttal to that often-repeated big lie that “no laws were broken” by the banksters who caused the financial crisis.  Bill Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City in the Department of Economics and the School of Law.  Black directed litigation for the Federal Home Loan Bank Board (FHLBB) from 1984 to 1986 and served as deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC) in 1987.  Black’s refutation of the “no laws were broken by the financial crisis banksters” meme led up to a clever homage to Dante’s Divine Comedy describing the “ten circles of hell” based on “the scale of ethical depravity by the frauds that drove the ongoing crisis”.  Here is Black’s retort to the big lie:

Sixty Minutes’ December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions.

I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.

*   *   *

I offer the following scale of unethical banker behavior related to fraudulent mortgages and mortgage paper (principally collateralized debt obligations (CDOs)) that is illegal and deserved punishment.  I write to prompt the rigorous analytical discussion that is essential to expose and end Obama and Bush’s “Presidential Amnesty for Contributors” (PAC) doctrine.  The financial industry is the leading campaign contributor to both parties and those contributions come overwhelmingly from the wealthiest officers – the one-tenth of one percent that thrives by being parasites on the 99 percent.

I have explained at length in my blogs and articles why:

• Only fraudulent home lenders made liar’s loans
• Liar’s loans were endemically fraudulent
• Lenders and their agents put the lies in liar’s loans
• Appraisal fraud was endemic and led by lenders and their agents
• Liar’s loans could only be sold through fraudulent reps and warranties
• CDOs “backed” by liar’s loans were inherently fraudulent
• CDOs backed by liar’s loans could only be sold through fraudulent reps and warranties
• Liar’s loans hyper-inflated the bubble
• Liar’s loans became roughly one-third of mortgage originations by 2006

Each of these frauds is a conventional fraud that could be prosecuted under existing laws.

It’s nice to see someone finally take a stand against the “Presidential Amnesty for Contributors” (PAC) doctrine.  Every time Obama attempts to invoke that doctrine – he should be called on it.  The Apologist-In-Chief needs to learn that the voters are not as stupid as he thinks they are.


 

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Obama Backpedals To Save His Presidency

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President Obama’s demotion of his Chief of Staff, Bill Daley, has drawn quite a bit of attention – despite efforts by the White House to downplay the significance of that event.  The demotion of Daley is significant because it indicates that Obama is now trying to back away from his original strategy of helping Wall Street at the expense of Main Street.  This move appears to be an attempt by Obama to re-cast himself as a populist, in response to the widespread success of the Occupy Wall Street movement.

In September of 2010, I wrote a piece entitled, “Where Obama Went Wrong”.  Despite the subsequent spin by right-wing pundits, to the effect that voters had been enamored with the Tea Party’s emphasis on smaller government, the true reasons for the mid-term disaster for the Democrats had become obvious:

During the past week, we’ve been bombarded with explanations from across the political spectrum, concerning how President Obama has gone from wildly-popular cult hero to radioactive force on the 2010 campaign trail.  For many Democrats facing re-election bids in November, the presence of Obama at one of their campaign rallies could be reminiscent of the appearance of William Macy’s character from the movie, The Cooler.  Wikipedia’s discussion of the film provided this definition:

In gambling parlance, a “cooler” is an unlucky individual whose presence at the tables results in a streak of bad luck for the other players.

*   *   *

The American people are hurting because their President sold them out immediately after he was elected.  When faced with the choice of bailing out the zombie banks or putting those banks through temporary receivership (the “Swedish approach” – wherein the bank shareholders and bondholders would take financial “haircuts”) Obama chose to bail out the banks at taxpayer expense.  So here we are  . . .  in a Japanese-style “lost decade”.  In case you don’t remember the debate from early 2009 – peruse this February 10, 2009 posting from the Calculated Risk website.  After reading that, try not to cry after looking at this recent piece by Barry Ritholtz of The Big Picture entitled, “We Should Have Gone Swedish  . . .”

Back in December of 2009, Bill Daley – a minion of The Dimon Dog at JPMorgan Chase – wrote an op-ed piece for The Washington Post, which resonated with Wall Street’s tool in the White House.  Daley claimed that Obama and other Democrats were elected to office in 2008 because voters had embraced some pseudo-centrist ideas, which Daley referenced in these terms:

These independents and Republicans supported Democrats based on a message indicating that the party would be a true Big Tent — that we would welcome a diversity of views even on tough issues such as abortion, gun rights and the role of government in the economy.

*   *   *

All that is required for the Democratic Party to recover its political footing is to acknowledge that the agenda of the party’s most liberal supporters has not won the support of a majority of Americans — and, based on that recognition, to steer a more moderate course on the key issues of the day, from health care to the economy to the environment to Afghanistan.

Unfortunately, Obama was pre-disposed to accept this rationale, keeping his policy decisions on a trajectory which has proven as damaging to his own political future as it has been to the future of the American middle class.

On November 8, Jonathan Chait wrote a piece for New York magazine’s Daily Intel blog, wherein he explained that the demotion of Bill Daley revealed a “course correction” by Obama, in order to a pursue a strategy “in line with the realities of public opinion”.  Jonathan Chait explained how the ideas espoused by Daley in his 2009 Washington Post editorial, had been a blueprint for failure:

Daley, pursuing his theory, heavily courted business leaders.  He made long-term deficit reduction a top priority, and spent hours with Republican leaders, meeting them three-quarters of the way in hopes of securing a deal that would demonstrate his centrism and bipartisanship.  The effort failed completely.

The effort failed because Daley’s analysis – which is also the analysis of David Brooks and Michael Bloomberg – was fatally incorrect.  Americans were not itching for Obama to make peace with corporate America.  Americans are in an angry, populist mood – distrustful of government, but even more distrustful of business.  In the most recent NBC/The Wall Street Journal poll, 60 percent of Americans strongly agreed with the following statement:

The current economic structure of the country is out of balance and favors a very small proportion of the rich over the rest of the country.  America needs to reduce the power of major banks and corporations and demand greater accountability and transparency.  The government should not provide financial aid to corporations and should not provide tax breaks to the rich.

At the website of economist Brad DeLong, a number of comments were posted in response to Jonathan Chait’s essay.  One can only hope that our President has the same, clear understanding of this situation as do the individuals who posted these comments:

Full Employment Hawk said:

.   .   .   The defeat of the Democrats was due to the fact that the Obama administration did too little, not because it did too much.

Daley’s view that it was because the moderately progressive policies of the Obama administration were too far left for the center was totally wrong.  And listening to Daley’s advice to further shift from job creation to deficit reduction was a major blunder that reinforced the blunder of the first two years of dropping the ball on making the economy grow fast enough for the unemployment rate to be coming down significantly by the time of the Fall election.

In reply to the comment posted by Full Employment Hawk, a reader, identified as “urban legend” said this:

Obama should have been making the point over and over and over and over that getting more money into the hands of more Americans — principally right now by creating jobs — is the most pro-business stance you can take.  Continuing to let the 1% dictate everything in their favor is the most anti-business thing you can do.  We are the ones who want demand to rise for the goods and services of American business.  Right-wingers don’t care much about that.  What they do care about is maintaining their theology against all the evidence of its massive failure.

At Politico, Jonathan Chait’s essay provoked the following comment from Ben Smith:

It is entirely possible that no staff shift, and no ideological shift, can save Obama from a bad economy.  You don’t get to run controlled experiments in politics.

But it does seem worth noting that this argument pre-dates Daley: It’s the substance of the 2008 debate between Hillary Clinton and Obama, with Clinton portraying Obama as naive in his dream of bipartisan unity, and the Republicans as an implacable foe.  It’s the Clinton view, the ’90s view, that has prevailed here.

Indeed, it would be nice for all of us if Obama could get a “Mulligan” for his mishandling of the economic crisis.  Unfortunately, this ain’t golf.


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