November 27, 2008
We are now approaching the winter solstice (December 21 – the time at which the sun is at its most southern distance from the equator during the year – a/k/a: “the shortest day of the year” for those of us in the northern hemisphere). President-elect Obama’s appointment of Larry Summers as Director of the National Economic Council reminds me of another definition of the word “solstice”: a turning point. For all his faults (most notably, his infamous remarks as President of Harvard University, about the involvement of women in the study of science) he is no longer considered so much of a “supply sider” as a centrist in the world of economics. Summers has apparently passed a turning point in his economic philosophy.
For those unfamiliar with Larry Summers, David Leonhardt’s article, “The Return of Larry Summers” in the November 25 New York Times is worth reading. I’ve been hearing reverberations of Leonhardt’s commentary throughout the mainstream media lately. Here is an important observation from Mr. Leonhardt’s piece:
He (Summers) is also the centrist who has made it safe for other centrist Democrats to move to the left. Both times I’ve interviewed Mr. Obama this year, he has brought up Mr. Summers, unbidden, and pointed out that Mr. Summers was now writing a lot more about the plight of the middle class than about budget deficits. At Monday’s news conference, Mr. Obama called him “a thought leader.”
The “thought leader” remark came up in the following context when Barack Obama announced his appointment of Summers to the National Economic Council post on November 24.
As a thought leader, Larry has urged us to confront the problems of income inequality and the middle class squeeze, consistently arguing that the key to a strong economy is a strong, vibrant, growing middle class.
This idea is at the core of my own economic philosophy and will be the foundation of all of my economic policies. And as one of the great economic minds of our time, Larry has earned a global reputation for being able to cut to the heart of the most complex and novel policy challenges.
Looking back to June 10, 2007, we find another article in the New York Times written by David Leonhardt, entitled: “Larry Summers’s Evolution”. As we revisit this commentary in light of our current economic crisis, the pronouncements made by Summers seem almost prophetic:
The model that most appeals to Summers is, in fact, the United States — in the decades after World War II. At the time, this country was opening itself to more global competition, by rebuilding Europe and signing financial agreements like Bretton Woods. But it was also taking concrete steps to build the modern middle class. In addition to the G.I. Bill, there were the Federal Housing Administration, the Interstate Highway System and a very different tax code. The history of progressivism “has been one of the market being protected from its own excesses,” Summers says. “And I think now the challenge is, again, to protect a basic market system based on open trade and globalization, to make it one that works for everyone or for almost everyone, at a time when market forces are often producing outcomes that seem increasingly problematic to middle-class families.”
That essay inspired The Economist to post a piece on its Free Exchange blog on the following day, entitled “Has Larry Summers Gone Soft?”
Nevertheless, conservative writers such as Kevin Hassett of Forbes still think of Summers as an opponent to increased capital gains taxation and hence, an advocate of “supply side” economics. Conservative writer, David Harsanyi of the Denver Post exhibited similar enthusiasm about the appointment of Summers. However, in the November 24 National Review, Larry Kudlow saw Obama’s appointment of Summers as a move to the center:
As for Summers, while he has been mau-maued by Democratic feminists and some of the unions, he is a tough, clear-headed thinker who has for years tried to merge Keynesian and supply-side policies. No mean feat.
At this point, many pundits are attempting to “read the tea leaves” for hints as to whether President Obama will act to reverse the Bush tax cuts or let them expire in 2011. The consensus suggests that he may simply let them expire. This has drawn some anxious criticism from the left. On the November 25 broadcast of the program, Democracy Now, author Naomi Klein made the following remark about Obama’s appointment of Summers: “I think this is really troubling.” However, on that same program, economics professor Robert Kuttner (the chief economics adviser to Rep. Dennis Kucinich) explained that he was “less pessimistic” than Ms. Klein about the Summers appointment:
I think even Larry Summers, because he is such an opportunist, has lately been calling for very large stimulus package, has been calling for tighter regulation of banks.
The influence of Larry Summers on the Obama Administration’s economic policy will be a continuing saga for the next few years. At this point, the “change you can believe in” seems to absorb more than a little input from the center.
The News Nobody Wants To Hear
December 11, 2008
You can’t watch a news program these days without hearing some “happy talk” about how our dismal economy is “on the verge of recovery”. You have to remember that many of these shows are sponsored by brokerage firms. That fact must be taken into consideration when you decide how much weight you will give the opinions of the so-called “experts” appearing on those programs to tell you that the stock market has reached “the bottom” and that it is now time to jump back in and start buying stocks. Similarly, those people interested in making a home purchase (i.e. millionaires, who don’t have to worry about getting a mortgage) want to know when the residential real estate market will hit “bottom” so they can get the best value. If I had a thousand dollars for every time during the past six months that some prognosticator has appeared on television to tell us that the stock market has “hit bottom”, I would have enough money to start my own geothermal power utility.
People interested in making investments have been scared away from stocks due to the pummeling that the markets have taken since the “mortgage crisis” raised its ugly head and devastated the world economy. If those folks believe the hype and start buying stocks now, they are taking a greater risk than the enthusiastic promoters on TV might be willing to disclose.
People just don’t like bad news, especially when it is about the future and worse yet, if it’s about the economy. On Friday, December 5, the stock market rallied, despite the dismal news that November’s non-farm employment loss was the greatest monthly employment decline in 34 years. More than half a million people lost their jobs in November. Despite this news, all of the major stock indices were up at least 3 percent for that day alone. Have all these people bought into the magical thinking described in The Secret? Do that many people believe that wishing hard enough can cause a dream to become reality?
There is one authority on the subject of economics, who earned quite a bit of “street cred” when our current economic crisis hit the fan. He is Nouriel Roubini, a professor of economics at New York University’s Stern School of Business. He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later. In this time of uncertainty, many people (myself included) pay close attention to what Dr. Roubini has to say by regularly checking in on his website. On December 5, we were surprised to hear Doctor Doom’s admission to Aaron Task (on the web TV show, Tech Ticker) that his own 401(k) plan is comprised entirely of stocks. Dr. Roubini explained that he is not in the “Armageddon camp” and that for the long haul, stocks are still a good investment (although currently not a good idea for investors with more short-term goals). Upon learning of this, I began to wonder if the revelation about Doctor Doom’s stock holdings could have been the reason for the stock market rally that day.
Yesterday, I had the pleasure of meeting Dr. Roubini at a lecture he gave within staggering distance of my home. I was able to talk to him about my concern over Federal Reserve Chairman, Ben Bernanke’s idea of having the federal government purchase stocks in order to pep-up a depressed stock market. How could this possibly be accomplished? How could the Fed decide which stocks to buy to the exclusion of others? Dr. Roubini told me that the government has already done this by purchasing preferred shares of stock issued by the banks participating in the TARP program. He explained that rather than purchasing selected stocks of particular companies, the government would, more likely, invest in stock indices. Before I get to Doctor Doom’s other points from his lecture, I will share this photo taken of yours truly and Doctor Roubini (who appears on your left):
Dr. Roubini told the audience that he believes this recession will be worse than everyone expects. During the next few months, “the flow of macroeconomic news will be awful and worse than expected”. He opined that people are going to be surprised if they think that the stock market “bottom” will come in mid-2009. He expects that by the end of 2009 “things will still be bad” and unemployment will peak at 9% in early 2010. He thinks that the consensus on earnings-per-share estimates for stocks during the next year is “delusional”. He anticipates risk aversion among investors to be severe next year. We are now in a global recession and this has caused commodity prices to fall 30%. He pointed out that commodity prices could still fall another 20%. He considers it “very likely” that between 500 to 600 hedge funds will go out of business within the next six months. As this happens, the stocks held by these funds must be dumped onto the market. With respect to the beleaguered residential real estate market, he pointed out that home prices could fall another 15-20% by early 2010.
The good news provided by Dr. Roubini is that the global recession should end by the close of 2009. However, he expects recovery to be “weak” in 2010. He surmised that the possibility of a systemic meltdown has been minimized by the actions taken at the recent G7 meeting and most particularly with the G7 resolution to prevent further “Lehman Brothers-type” bankruptcies from taking place. He concluded that this recession should be nothing like the Japanese recession of the 1990s, which lasted nearly a decade.
So there you have it: The news (almost) nobody wants to hear. You can say these are the predictions voiced by one man who could be wrong. Nevertheless, given Dr. Roubini’s track record, I and many others hold his opinions in high regard. Now, let’s see how this all plays out.