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No Consensus About the Future

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As the election year progresses, we are exposed to wildly diverging predictions about the future of the American economy.  The Democrats are telling us that in President Obama’s capable hands, the American economy keeps improving every day – despite the constant efforts by Congressional Republicans to derail the Recovery Express.  On the other hand, the Republicans keep warning us that a second Obama term could crush the American economy with unrestrained spending on entitlement programs.  Meanwhile, in (what should be) the more sober arena of serious economics, there is a wide spectrum of expectations, motivated by concerns other than partisan politics.  Underlying all of these debates is a simple question:  How can one predict the future of the economy without an accurate understanding of what is happening in the present?  Before asking about where we are headed, it might be a good idea to get a grip on where we are now.  Nevertheless, exclusive fixation on past and present conditions can allow future developments to sneak up on us, if we are not watching.

Those who anticipate a less resilient economy consistently emphasize that the “rose-colored glasses crowd” has been basing its expectations on a review of lagging and concurrent economic indicators rather than an analysis of leading economic indicators.  One of the most prominent economists to emphasize this distinction is John Hussman of the Hussman Funds.  Hussman’s most recent Weekly Market Comment contains what has become a weekly reminder of the flawed analysis used by the optimists:

On the economy, our broad view is based on dozens of indicators and multiple methods, and the overall picture is much better described as a modest rebound within still-fragile conditions, rather than a recovery or a clear expansion.  The optimism of the economic consensus seems to largely reflect an over-extrapolation of weather-induced boosts to coincident and lagging economic indicators — particularly jobs data.  Recall that seasonal adjustments in the winter months presume significant layoffs in the retail sector and slow hiring elsewhere, and therefore add back “phantom” jobs to compensate.

Hussman’s kindred spirit, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), has been criticized for the predictiction he made last September that the United States would fall back into recession.  Nevertheless, the ECRI reaffirmed that position on March 15 with a website posting entitled, “Why Our Recession Call Stands”.  Again, note the emphasis on leading economic indicators – rather than concurrent and lagging economic indicators:

How about forward-looking indicators?  We find that year-over-year growth in ECRI’s Weekly Leading Index (WLI) remains in a cyclical downturn . . .  and, as of early March, is near its worst reading since July 2009.  Close observers of this index might be understandably surprised by this persistent weakness, since the WLI’s smoothed annualized growth rate, which is much better known, has turned decidedly less negative in recent months.

Unlike the partisan political rhetoric about the economy, prognostication expressed by economists can be a bit more subtle.  In fact, many of the recent, upbeat commentaries have quite restrained and cautious.  Consider this piece from The Economist:

A year ago total bank loans were shrinking.  Now they are growing.  Loans to consumers have risen by 5% in the past year, which has accompanied healthy gains in car sales (see chart).  Mortgage lending was still contracting as of late 2011 but although house prices are still edging lower both sales and construction are rising.

*   *   *

At present just four states are reporting mid-year budget gaps, according to the National Conference of State Legislatures; this time last year, 15 did; the year before that, 36. State and local employment, which declined by 655,000 between August 2008 and last December – a fall of 3.3% – has actually edged up since.

*   *   *

Manufacturing employment, which declined almost continuously from 1998 through 2009, has since risen by nearly 4%, and the average length of time factories work is as high as at any time since 1945.  Since the end of the recession exports have risen by 39%, much faster than overall GDP.  Neither is as impressive as it sounds:  manufacturing employment remains a smaller share of the private workforce than in 2007, and imports have recently grown even faster than exports as global growth has faltered and the dollar has climbed.  Trade, which was a contributor to economic growth in the first years of recovery, has lately been a drag.

But economic recovery doesn’t have to wait for all of America’s imbalances to be corrected.  It only needs the process to advance far enough for the normal cyclical forces of employment, income and spending to take hold.  And though their grip may be tenuous, and a shock might yet dislodge it, it now seems that, at last, they have.

A great deal of enthusiastic commentary was published in reaction to the results from the recent round of bank stress tests, released by the Federal Reserve.  The stress test results revealed that 15 of the 19 banks tested could survive a stress scenario which included a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices.  Time magazine published an important article on the Fed’s stress test results.  It was written by a gentleman named Christopher Matthews, who used to write for Forbes and the Financial Times.  (He is a bit younger than the host of Hardball.)  In a surprising departure from traditional, “mainstream media propaganda”, Mr. Matthews demonstrated a unique ability to look “behind the curtain” to give his readers a better idea of where we are now:

Christopher Whalen, a bank analyst and frequent critic of the big banks, penned an article in ZeroHedge questioning the assumptions, both by the Fed and the banks themselves, that went into the tests.  It’s well known that housing remains a thorn in the side of the big banks, and depressed real estate prices are the biggest risk to bank balance sheets.  The banks are making their own assumptions, however, with regards to the value of their real estate holdings, and Whalen is dubious of what the banks are reporting on their balance sheets. The Fed, he says, is happy to go along with this massaging of the data. He writes,

“The Fed does not want to believe that there is a problem with real estate. As my friend Tom Day wrote for PRMIA’s DC chapter yesterday:  ‘It remains hard to believe, on the face of it, that many of the more damaged balance sheets could, in fact, withstand another financial tsunami of the magnitude we have recenlty experienced and, to a large extent, continue to grapple with.’ ”

Even those that are more credulous are taking exception to the Fed’s decision to allow the banks to increase dividends and stock buybacks.  The Bloomberg editorial board wrote an opinion yesterday criticizing this decision:

 “Good as the stress tests were, they don’t mean the U.S. banking system is out of the woods.  Three major banks – Ally Financial Inc., Citigroup Inc. and SunTrust Banks Inc. – didn’t pass, and investors still don’t have much faith in the reported capital levels of many of the rest.  If the Fed wants the positive results of the stress tests to last, it should err on the side of caution in approving banks’ plans to pay dividends and buy back shares – moves that benefit shareholders but also deplete capital.”

So there’s still plenty for skeptics to read into Tuesday’s report.  For those who want to doubt the veracity of the banks’ bookkeeping, you can look to Whalen’s report.  For those who like to question the Fed’s decision making, Bloomberg’s argument is as good as any.  But at the same time, we all know from experience that things could be much worse, and Tuesday’s announcement appears to be another in a string of recent good news that, unfortunately, comes packaged with a few caveats.  When all is said and done, this most recent test may turn out to be another small, “I think I can” from the little recovery that could.

When mainstream publications such as Time and Bloomberg News present reasoned analysis about the economy, it should serve as reminder to political bloviators that the only audience for the partisan rhetoric consists of “low-information voters”.  The old paradigm – based on campaign funding payola from lobbyists combined with support from low-information voters – is being challenged by what Marshall McLuhan called “the electronic information environment”.  Let’s hope that sane economic policy prevails.


 

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.


 

John Ashcroft Was Right

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Many commentators have expressed surprise about the extensive criticism directed against President Obama by liberals.  During the new President’s third month in office, I pointed out how he had become the “Disappointer-In-Chief” – when he began to elicit groans from the likes of Keith Olbermann and Rachel Maddow.  President Obama has continued on that trajectory ever since.  More recently, Obama’s mishandling of the economic crisis resulted in a great cover story for New York Magazine by Frank Rich, entitled, “Obama’s Original Sin”.  Although Frank Rich may have been a bit restrained in his criticism of Obama, Marshall Auerback didn’t pull any punches in an essay he wrote for the New Economic Perspectives website entitled, “Barack Obama:  America’s First Tea Party President”:

Cutting public spending at this juncture is the last thing the US government should be doing.  Yet this President is pushing for the largest possible cuts that he can on the Federal government debt.  He is out-Hoovering the GOP on this issue.  He is providing “leadership” of the sort which is infuriating his base, but should endear him to the Tea Party.  This is “the big thing” for Barack Obama, as opposed to maximizing the potential of his fellow Americans by seeking to eliminate the scourge of unemployment.  Instead, his big idea is to become the president who did what George Bush could not, or did not, dare to do:  cut Medicare, Medicaid and Social Security.  What more could the Tea Party possibly want?

Glenn Greenwald of Salon has been a persistent critic of President Obama for quite a while.  Back in September of 2010, I referenced one of Glenn Greenwald’s exceptive essays about Obama with this thought:

Glenn Greenwald devoted some space from his Salon piece to illustrate how President Obama seems to be continuing the agenda of President Bush.  I was reminded of the quote from former Attorney General John Ashcroft in an article written by Jane Mayer for The New Yorker.  When discussing how he expected the Obama Presidency would differ from the Presidency of his former boss, George W. Bush, Ashcroft said:

“How will he be different?  The main difference is going to be that he spells his name ‘O-b-a-m-a,’ not ‘B-u-s-h.’ ”

John Ashcroft’s prescient remark could not have been more accurate.  Who else could have foreseen that the Obama Presidency would eventually be correlated with that of President George W. Bush?  Although it may have seemed like a preposterous notion at the time, it’s now beginning to make more sense, thanks to a very interesting piece I read at the Truthdig website entitled, “If McCain Had Won” by Fred Branfman.  Branfman began with a list of “catastrophes” we would have seen from a McCain administration, followed by this comment:

Nothing reveals the true state of American politics today more, however, than the fact that Democratic President Barack Obama has undertaken all of these actions and, even more significantly, left the Democratic Party far weaker than it would have been had McCain been elected.

More important, the sentence immediately following that remark deserves special attention because it forms the crux of Branfman’s analysis:

Few issues are more important than seeing behind the screen of a myth-making mass media, and understanding what this demonstrates about how power in America really works – and what needs to be done to change it.

From there, Branfman went on to explain how and why McCain would have made the same decisions and enacted the same policies as Obama.  Beyond that, Branfman explained why Obama ended up doing things exactly as McCain would have:

Furious debate rages among Obama’s Democratic critics today on why he has largely governed on the big issues as John McCain would have done. Some believe he retains his principles but has been forced to compromise by political realities. Others are convinced he was a manipulative politico who lacked any real convictions in the first place.

But there is a far more likely – and disturbing – possibility.  Based on those who knew him and his books, there is little reason to doubt that the pre-presidential Obama was a college professor-type who shared the belief system of his liberalish set …

*   *   *

Upon taking office, however, Obama – whatever his belief system at that point – found that he was unable to accomplish these goals for one basic reason:  The president of the United States is far less powerful than media myth portrays.  Domestic power really is in the hands of economic elites and their lobbyists, and foreign policy really is controlled by U.S. executive branch national security managers and a “military-industrial complex.”

The ugly truth strikes again!  The seemingly “all-powerful” President of the United States is nothing more than a tool of the plutocracy.  It doesn’t matter whether the White House is occupied by a Democrat or a Republican – the policies (domestic, foreign, economic, etc.) will always be the same – because the people calling the shots are always the same plutocrats who control those “too big to fail” banks, the military industry and big pharma.  As Branfman put it:

.   .   .   anyone who becomes president has little choice but to serve the institutional interests of a profoundly amoral and violent executive branch and the corporations behind them.

Perhaps in response to the oft-cited criticism that “if you’re not part of the solution – you’re part of the problem”, Fred Branfman has offered us a proposal that could send us on the way to changing this intolerable status quo:

But however important the 2012 election, far more energy needs to be devoted to building mass organizations that challenge elite power and develop the kinds of policies – including massive investment in a “clean energy economic revolution,” a carbon tax and other tough measures to stave off climate change, regulating and breaking up the financial sector, cost-effective entitlements like single-payer health insurance, and public financing of primary and general elections – which alone can save America and its democracy in the painful decade to come.

Wait a minute!  Didn’t Obama already promise us all of that stuff?

Perhaps the only way to achieve those goals is by voting for Independent political candidates, who are not beholden to the Republi-cratic Corporatist Party or its financiers.  When the mainstream media go out of their way to pretend as though a particular candidate does not exist – you might want to give serious consideration to voting for that person.  When the media try to “disappear” a candidate by “hiding” that person “in plain sight”, they could be inadvertently providing the best type of endorsement imaginable.

The same level of energy that brought Obama to the White House could be used to bring us our first Independent President.  All we need is a candidate.


 

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Ignoring The Smart People

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The clowns in Washington seem to be going out of their way to ignore the advice of respected economists as they focus on deficit reduction while ignoring the worsening unemployment crisis.  The fact that mainstream news outlets are oblivious to the consequences of foolish economic policy doesn’t really help.  President Obama now finds himself wedded to a policy of economic destruction, while at the mercy of his opponents, simply because he ignored the good advice he was receiving back in 2009.

The urgency of our current predicament is lost on the asshats vested with the responsibility and authority to implement a “course correction”.  As I pointed out last month, bond guru Bill Gross of PIMCO made an effort to debunk the myth that balancing the budget “will magically produce 20 million jobs over the next 10 years”.  More recently, Princeton economics professor and former vice-chairman of the Federal Reserve, Alan Blinder, wrote an article for The Wall Street Journal entitled, “Our National Jobs Emergency”.  After discussing the most recent non-farm payrolls report from the Bureau of Labor Statistics, Professor Blinder made this observation:

The horrific June employment number made it two in a row.  With the latest revisions, job growth in May is now estimated to have clocked in at only 25,000 jobs.  So that’s 25,000 and 18,000 in consecutive months.  Given the immense size of total U.S. payroll employment (around 131 million) and the sampling error in the survey, those numbers are effectively zero.  Job creation has stopped for two months.

If we were at 5% unemployment, two bad payroll reports in a row would be of some concern yet tolerable.  But when viewed against the background of 9%-plus unemployment, they are catastrophic.

*   *   *

All this adds up to a national jobs emergency.  Tragically, however, it is not being treated as such.  When is the last time you heard one of our national leaders propose a serious job-creating program?

The operative word here is “serious.”  Every day brings new proposals to slash government spending.  But as I noted on this page last month, those are ways to kill jobs, not create them.  As a matter of fact, despite all the cries of “big government” or even “socialism,” public-sector employment has been falling.

Fortunately, Professor Blinder had some good ideas for private-sector job creation.  One such idea was a tax credit for firms that create new jobs:

As one concrete example, companies might be offered a tax credit equal to 10% of the increase in their wage bills (over 2011 levels, say).  No increase, no reward.

You might think Republicans would embrace an idea like that. After all, it’s a business tax cut and all the new jobs would be in the private sector.  But you’d be wrong.  Frankly, I’m not sure why. Maybe it’s seen as “left-wing social engineering.”

Professor Blinder then proposed an alternative:

Suppose we allow firms to repatriate profits at some super-low tax rate, but only to the extent that they increase their wage payments subject to Social Security.  For example, if XYZ Corporation paid wages covered by Social Security of $1.5 billion in 2011, and then boosted that amount to $1.6 billion in 2012, it would be allowed to repatriate $100 million at a tax rate of 5% or 10% instead of the usual 35% rate.  The tax savings to the company would thus be $25 million-$30 million for raising its payroll by $100 million.  That’s a powerful incentive.

Did anyone in Washington pay serious attention to Professor Blinder’s Wall Street Journal article  . . .  or were they all too busy shorting Treasuries to give a damn?

Oxford-educated economist Martin Wolf wrote a piece for the Financial Times, in which he lamented the antics of those entrusted with the power of managing financial and economic policy:

It is not that tackling the US fiscal position is urgent.  At a time of private sector deleveraging, it is helpful.  The US is able to borrow on easy terms, with yields on 10-year bonds close to 3 per cent, as the few non-hysterics predicted.  The fiscal challenge is long term, not immediate.  A decision not to allow the government to borrow to finance the programmes Congress has already mandated would be insane…. Yet, astonishingly, many of the Republicans opposed to raising the US debt ceiling do not merely wish to curb federal spending:  they enthusiastically desire a default.  Either they have no idea how profound would be the shock to their country’s economy and society of a repudiation of debt legally contracted by their state, or they fall into the category of utopian revolutionaries, heedless of all consequences.

*   *   *

These are dangerous times.  The US may be on the verge of making among the biggest and least-necessary financial mistakes in world history.  The eurozone might be on the verge of a fiscal cum financial crisis that destroys not just the solvency of important countries but even the currency union and, at worst, much of the European project.  These times require wisdom and courage among those in charge of our affairs.  In the US, utopians of the right are seeking to smash the state that emerged from the 1930s and the second world war.  In Europe, politicians are dealing with the legacy of a utopian project which requires a degree of solidarity that their peoples do not feel.  How will these clashes between utopia and reality end? In late August, when I return from my break, we may know at least some of the answers.

At this point, those “answers” are beginning to look pretty scary.  Of course, the Republicans are not the only ones to blame.  Let’s take a look at the wonderful job Mike Whitney of CounterPunch did when he dropped the entire matter back onto President Obama’s lap:

How do you light a fire under Washington, that’s the question?  Is Congress even aware that we’re undergoing a major jobs crisis or are they too busy bickering over tax cuts for fatcats or how much money they can divert from Social Security to Wall Street?

Look; unemployment is over 9% and rising.  The states are firing tens of thousands of teachers and public employees every month because they need to balance their budgets and they’re not taking in enough revenue.  The stimulus is dwindling (which means that fiscal policy is actually contractionary in real terms) And the 10-year Treasury has dipped below 3 percent (as of Monday morning.)  In other words, the bond market is signaling “recession”, even while the dope in the White House is doing his utmost to slice $4 trillion off the deficits.

Does that make any sense?

Maybe if you’re Herbert Hoover, it does.  But it makes no sense at all if you were elected with a mandate to “change” the way Washington operates and put the country back to work.  Obama is just making a bad situation worse by gadding about in his golf togs blabbering about belt tightening.  It’s enough to make you sick.

Get with the program, Barry, or resign.  That would be even better.  Then maybe we can find someone who’s serious about running the country.

As I pointed out on November 4, 2010  . . .  someone has to challenge Obama for the 2012 Democratic nomination and I have someone in mind   .   .   .


 

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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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Morgenson Watch Continues

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I was recently reminded of the late Tanta (a/k/a Doris Dungey) of the Calculated Risk blog, who wrote the recurring “Morgenson Watch” for that site.

As soon as I saw the title of Gretchen Morgenson’s most recent article at the top of the Sunday link list at Real Clear Politics, I suspected there would be trouble:  “U.S. Has Binged.  Soon It’ll Be Time to Pay the Tab.”  After reading as far as the first sentence of the second paragraph, my concern was validated.  Here’s how the piece began:

SAY this about all the bickering over the federal debt ceiling:  at least people are talking openly about our nation’s growing debt load.  This $14.3 trillion issue is front and center – exactly where it should be.

Into the fray comes a thoughtful new paper by Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics, which studies economic policy.

The Peterson Institute was formerly the Institute for International Economics, founded by C. Fred Bergsten.  It was subsequently taken over by the Peter G. Peterson Foundation, a foundation established and managed by Richard Nixon’s former Commerce Secretary (and co-founder of Blackstone Group), Pete Peterson.  The Peterson Institute is a “think tank” (i.e. propaganda mill) most recognized for its advocacy of “economic austerity” (which usually involves protecting the interests of the wealthy at the expense of the middle class and the impoverished).

Yves Smith of Naked Capitalism, is always quick to rebut the pronouncements of those economists, acting as “hired guns” to spread the gospel of the Peterson Institute.  Needless to say, once Gretchen Morgenson began to parrot the Peterson Institute dogma in her aforementioned article, Yves Smith didn’t hesitate to pounce:

I’m generally a Gretchen Morgenson fan, since she’s one of the few writers with a decent bully pulpit who regularly ferrets out misconduct in the corporate and finance arenas. But when she wanders off her regular terrain, the results are mixed, and her current piece is a prime example. She also sometimes pens articles based on a single source, which creates the risk of serving as a mouthpiece for a particular point of view.

(As an aside, a good example of this process has been Ms. Morgenson’s continuing fixation on “mortgage mania” as a cause of the financial crisis after having been upbraided by Barry Ritholtztwice – for “pushing the Fannie-Freddie CRA meme”.)

After pointing out Morgenson’s uncritical acceptance of the economic model used in the Peterson Institute report (by Gagnon and Hinterschweiger) Yves Smith directed our attention to the very large elephant in the room:  the proven fact that au-scare-ity doesn’t work in our post-financial crisis, anemic-growth milieu.  Ms. Smith focused on this aspect of the Peterson Institute report:

It also stunningly shows the howler of the Eurozone showing improvements in debt to GDP ratios as a result of the austerity programs being implemented. The examples of Latvia and Ireland have demonstrated that austerity measures have worsened debt to GDP ratios, dramatically in both cases, and the same deflationary dynamics look to be kicking in for Spain.

The article repeats the hoary cliche that deficit cuts must be made to “reassure the markets” as in appease the Bond Gods. Gee, how is that working out in Europe, the Peterson Institute’s obedient student?

Ms. Smith supported her argument with this report, which appeared in Bloomberg News on May 27:

European confidence in the economic outlook weakened for a third straight month in May as the region’s worsening debt crisis and surging commodity costs clouded growth prospects.

An index of executive and consumer sentiment in the 17- member euro region slipped to 105.5 from 106.1 in April, the European Commission in Brussels said today. Economists had forecast a drop to 105.7, the median of 27 estimates in a Bloomberg survey showed. The euro-area economy is showing signs of a slowdown as governments toughen austerity measures to lower budget gaps as investors grow increasingly concerned that Greece may default, while oil-driven inflation squeezes household incomes. European manufacturing growth slowed this month….

Be sure to read Yves Smith’s entire essay, which addressed the tired canard about those phantom “bond vigilantes”, etc.  Ms. Smith’s closing paragraph deserves repetition:

But the idea of government spending has become anathema in the US, despite plenty of targets (start with our crumbing infrastructure).  The banks got first dibs on the “fix the economy” money in the crisis, and continue to balk at measures that would shrink a bloated and highly leveraged banking sector down to a more reasonable size.  Evidence already shows the size of the banking sector is constraining growth, yet a full bore campaign is on to gut social spending out of a concern that sometime down the road the size of the government sector will serve as a drag on the economy.  In addition, the banksters need to preserve their ability to go back to the well the next time they crash the markets for fun and profit.  So the attack on deficits is financial services industry ideology, packaged to make it look like it’s good for the little guy. We have too many people who should know better like Morgenson enabling it.

The reader comments to Ms. Smith’s essay were quite interesting.  Many of the readers who have been outraged by Smith’s ongoing rebuttals to the Peterson Institute gospel and other Austerian dogma would do well to familiarize themselves with this bit of legalese:

EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104 Stat. 1388-623, provided that:  Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of – (1) the budget of the United States Government as submitted by the President, (2) the congressional budget, or (3) the Balanced Budget and Emergency Deficit Control Act of 1985.

I include myself among those who are “generally” Gretchen Morgenson fans.  Nevertheless, it has become obvious that with Tanta gone, the spirit of “Morgenson Watch” shall endure for as long as the frailties of being a New York Times pundit continue to manifest themselves.


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Congress Could Be Quite Different After 2012 Elections

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They come up for re-election every two years.  Each of the 435 members of the House of Representatives is in a constant “campaign mode” because the term of office is so short.  Lee White of the American Historical Association summed-up the impact of the 2010 elections this way:

On Tuesday, November 2, 2010, U.S. voters dramatically changed the landscape in Washington.  Republicans gained control of the House and, although the Democrats retained control of the Senate their margin in that body has been reduced to 53-47.

*   *   *

Clearly the most dramatic change will be in the House with new Republican committee and subcommittee chairs taking over.

Voter discontent was revealed by the fact that just before the 2010 elections, the Congressional approval rating was at 17 percent.  More recently, according to a Gallup poll, taken during April 7-11 of 2011, Congressional job approval is now back down to 17 percent, after a bump up to 23 percent in February.  Of particular interest were the conclusions drawn by the pollsters at Gallup concerning the implications of the latest polling results:

Congress’ approval rating in Gallup’s April 7-11 survey is just four points above its all-time low.  The probability of a significant improvement in congressional approval in the months ahead is not high. Congress is now engaged in a highly contentious battle over the federal budget, with a controversial vote on the federal debt ceiling forthcoming in the next several months.  The Republican-controlled House often appears to be battling with itself, as conservative newly elected House members hold out for substantial cuts in government spending.  Additionally, Americans’ economic confidence is as low as it has been since last summer, and satisfaction with the way things are going in the U.S. is at 19%.

At this point, it appears as though we could be looking at an even larger crop of freshmen in the 2013 Congress than we saw in January, 2011.  (According to polling guru, Nate Silver, the fate of the 33 Senate incumbents is still an open question.)

One poster child for voter ire could be Republican Congressman Spencer Bachus of Alabama.  You might recall that at approximately this time last year, Matt Taibbi wrote another one of his great exposés for Rolling Stone entitled, “Looting Main Street”.  In his exceptional style, Taibbi explained how JPMorgan Chase bribed the local crooked politicians into replacing Jefferson County’s bonds, issued to finance an expensive sewer project, with variable interest rate swaps (also known as synthetic rate swaps).  Then came the financial crisis.  As a result, the rate Jefferson County had to pay on the bonds went up while the rates paid by banks to the county went down.  It didn’t take long for the bond rating companies to downgrade those sewer bonds to “junk” status.

JPMorgan Chase unsuccessfully attempted to dismiss a lawsuit arising from this snafu.  Law 360 reported on April 15 that the Alabama Supreme Court recently affirmed the denial of JPMorgan’s attempt to dismiss the case, which was based on these facts:

Jefferson County accuses JPMorgan of paying bribes to county officials in exchange for an appointment as lead underwriter for what turned out to be a highly risky refinancing of the county’s sewer debt, which caused Jefferson County billions of dollars in losses.  According to the complaint, JPMorgan, JPMorgan Chase and underwriting firm Blount Parrish & Co. handed out bribes, kickbacks and payoffs to swindle the county out of millions in inflated fees.

JPMorgan claimed that only the Governor of Alabama had authority to bring such a suit.  I wonder why former Alabama Governor Bob Riley didn’t bother to join Jefferson County as a party plaintiff, making the issue moot and saving Jefferson County some legal fees, before the case found its way to the state Supreme Court?

Joe Nocera of The New York Times recently put the spotlight on another character from Alabama politics:

Has Spencer Bachus, as the local congressman, decried this debacle?  Of course – what local congressman wouldn’t?  In a letter last year to Mary Schapiro, the chairwoman of the S.E.C., he said that the county’s financing schemes “magnified the inherent risks of the municipal finance market.”

*   *   *

Bachus is not just your garden variety local congressman, though.  As chairman of the Financial Services Committee, he is uniquely positioned to help make sure that similar disasters never happen again – not just in Jefferson County but anywhere.  After all, the new Dodd-Frank financial reform law will, at long last, regulate derivatives.  And the implementation of that law is being overseen by Bachus and his committee.

Among its many provisions related to derivatives – all designed to lessen their systemic risk – is a series of rules that would make it close to impossible for the likes of JPMorgan to pawn risky derivatives off on municipalities.  Dodd-Frank requires sellers of derivatives to take a near-fiduciary interest in the well-being of a municipality.

You would think Bachus would want these regulations in place as quickly as possible, given the pain his constituents are suffering.  Yet, last week, along with a handful of other House Republican bigwigs, he introduced legislation that would do just the opposite:  It would delay derivative regulation until January 2013.

As Joe Nocera suggested, this might be more than simply a delaying tactic, to keep derivatives trading unregulated for another two years.  Bachus could be counting on Republican takeovers of the Senate and the White House after the 2012 election cycle.  At that point, Bachus and his fellow Tools of Wall Street could finally drive a stake through the heart of the nearly-stillborn baby known as “financial reform”.

On the other hand, the people vested with the authority to cast those votes that keep Spencer Bachus in office, could realize that he is betraying them in favor of the Wall Street banksters.  The “public memory” may be short but – fortunately – the term of office for a Congressman is equally brief.


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Crazy Like Fox

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Donald Trump has enjoyed a good deal of publicity during the past few weeks, since he jumped on the “birther” bandwagon, voicing skepticism as to whether Barack Obama was really born in the United States.  Many of Trump’s critics insist that The Donald is not a serious Presidential candidate and that his newfound “birther” agenda demonstrates that his Presidential campaign is nothing more than a flimflam publicity stunt.

I have a different theory.  I believe that Trump is running a “decoy” campaign.  Keep in mind that Trump is currently the #2 contender for the Republican nomination.  Remember also that the Republican Presidential primaries for 11 states (and the District of Columbia) are conducted on a “winner-take-all” basis – meaning that when a candidate wins a state primary, that candidate wins all of the delegates who will represent that state at the Republican National Convention.  If Trump can win a few of those states, he could amass an impressive amount of “pledged” delegates.  I suspect that Trump’s goal is to win the support from the extreme right wing of the Republican Party and “hijack” those delegates who would have been otherwise pledged to candidates acceptable to the Tea Party.  Bill O’Reilly’s intervention to defuse the “birther” controversy (at which point he insisted that Trump has not been seriously seeking the nomination) was apparently motivated by the fact that the candidates most likely to be eliminated from contention because of Trump’s presence – Michele Bachmann and Sarah Palin – are both darlings of Fox News.  In fact, Palin is a Fox News contributor.

At the 2012 Republican Convention in Tampa, Trump could step aside and support Willard Romney, who is despised my many Tea Party activists for having created what is now known as “Obamacare”.  Trump’s elimination of the Tea Party favorites before the convention would solve Romney’s problem with that voting bloc.  Romney can be expected to have an equally difficult time winning the support of dog lovers, as a result of his decision to strap the family dog, Seamus, to the car roof for a 12-hour family vacation drive to Ontario.  Despite his “Presidential” appearance, this Homer Simpson-esque episode from Romney’s life has already impaired efforts to portray him as a potentially effective Commander-In-Chief.

Meanwhile, President Obama is busy trumpeting his newly-minted, false campaign promises.  Gallup reported that on April 15, Obama’s approval rating had tied its all-time low of 41%.  More interestingly, his approval rating among African-American and Hispanic voters is beginning to slip from its enormously-high levels:

Though majorities of blacks (85%) and Hispanics (54%) continue to approve of the job Barack Obama is doing as president, his ratings among these groups slipped in March and have set or tied new lows.

*   *   *

Obama, elected to office with strong support from minority voters, has averaged better than 90% approval among blacks, and 65% among Hispanics, during his term.  Prior to March, Obama’s lowest monthly average among blacks was 88% in July 2010 and December 2010.  The president’s 54% March job approval rating among Hispanics ties the low from July and August 2010.

Despite the efforts of Republican commentators, such as Peggy Noonan, to create a narrative to the effect that Obama’s waning popularity – as well as the losses sustained by the Democrats in the 2010 elections – resulted from voter concern about government spending and the deficit, I suspect that Americans have simply become alienated by the failure of Obama and his party to deliver on their 2008 promises.  Worse yet, the capitulation to the interests of Wall Street by Democrats who promised “reform” has reinforced voter apathy – the real factor in the 2010 Democratic setbacks.

Cord Jefferson of Good provided this graphic of what Congress would look like if it truly represented America.  The failure of Democrats to win the support of Independent and centrist voters is readily apparent.  You can blame gerrymandering all you want, but as long as the Democrats fail to provide alternatives to Republican policies, they will continue to lose.  I believe it was William Black who said:

Under America’s two-party system, we have one party that is owned by big business and another party that sells out to big business.

I was pleased to see my own sentiments shared and articulated quite well by Mike Kimel of the Presimetrics Blog, in his recent posting entitled, “Why I Will Not be Voting for Obama in 2012”.  Although Mr. Kimel doesn’t have an alternative candidate in mind, the very reason for his disillusionment with Obama is that – with respect to the nation’s most significant problems – our current President has proposed no alternative policies to those of his predecessor:

And yes, there are a handful of things Obama did that GW might not do, but let’s be realistic – this has looked from the very beginning like GW’s third term.

Which leaves just one question – if the policies of the Republicans are even worse than Obama’s – and they tend to support anti-growth tax policies (calling them pro-growth doesn’t change the data), what should a rational person do?  I don’t know.  But I think if I’m going to see Republican policies enacted, I’d prefer to see them run under a Republican label.  See, Democratic policies may not be very good, but historically they have tended to produce better results than Republican policies.  (BTW – Michael Kanell and I have an entire book called Presimetrics looking at how Presidents performed on a wide range of topics.)  Another four years spent bringing the feeble Democratic brand down to the levels of the even more feeble Republican brand will cause lasting damage.

Obama will never re-ignite the enthusiasm of 2008 by presenting himself to the voters as “the devil you know” or “the lesser of two evils”.  What America’s middle class really needs is an honest, Independent candidate to make a run for The White House in 2012.


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Leadership Void

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In my last posting, I re-ran a passage from what I wrote on December 2, which was supported by Robert Reich’s observation that, unlike Bill Clinton, Barack Obama is not at the helm of a country with an expanding economy.  As I said on December 2:

After establishing an economic advisory team consisting of retreads from the Clinton White House, President Obama has persisted in approaching the 2010 economy as though it were the 1996 economy.

After I posted my April 7 piece, I felt a bit remorseful about repeating a stale theme.  Nevertheless, a few days later, Ezra Klein’s widely-acclaimed Washington Post critique of President Obama’s misadventure in “negotiating” the 2011 budget was entitled, “2011 is not 1995”.  Ezra Klein validated the point I was trying to make:

Clinton’s success was a function of a roaring economy.  The late ‘90s were a boom time like few others — and not just in America.  The unemployment rate was less than 6 percent in 1995, and fell to under 5 percent in 1996. Cutting deficits was the right thing to do at that time.  Deficits should be low to nonexistent when the economy is strong, and larger when it is weak.  The Obama administration’s economists know that full well.  They are, after all, the very people who worked to balance the budget in the 1990s, and who fought to expand the deficit in response to the recession.

Right now, the economy is weak.  Giving into austerity will weaken it further, or at least delay recovery for longer.  And if Obama does not get a recovery, then he will not be a successful president, no matter how hard he works to claim Boehner’s successes as his own.

President Obama’s attempt at spin control with a claim of “bragging rights” for ending the budget stalemate brought similar criticism from economist Brad DeLong:

To reduce federal government spending by $38 billion in the second and third quarters of 2011 when the unemployment rate is 8.9% and the U.S. Treasury can borrow on terms that make pulling spending forward from the future into the present essentially free is not an accomplishment.

It will knock between 0.5% and 1.0% off the growth rate of real GDP in the second half of 2011, and leave us at the start of 2012 with an unemployment rate a couple of tenths of a percent higher than it would have been otherwise.

Robert Reich expressed his disappointment with the President’s handling of the 2011 budget deal by highlighting Mr. Obama’s failure to put the interests of the middle class ahead of the goals of the plutocracy:

He is losing the war of ideas because he won’t tell the American public the truth:  That we need more government spending now – not less – in order to get out of the gravitational pull of the Great Recession.

That we got into the Great Recession because Wall Street went bonkers and government failed to do its job at regulating financial markets.  And that much of the current deficit comes from the necessary response to that financial crisis.

That the only ways to deal with the long-term budget problem is to demand that the rich pay their fair share of taxes, and to slow down soaring health-care costs.

And that, at a deeper level, the increasingly lopsided distribution of income and wealth has robbed the vast working middle class of the purchasing power they need to keep the economy going at full capacity.

“We preserved the investments we need to win the future,” he said last night.  That’s not true.

The idea that a huge portion of our current deficit comes from the response to the financial crisis created by Wall Street banks was explored in more detail by Cullen Roche of Pragmatic Capitalism.  The approach of saving the banks, under the misguided notion that relief would “trickle down” to Main Street didn’t work.  The second round of quantitative easing (QE 2) has proven to be nothing more than an imprudent decision to follow Japan’s ineffective playbook:

And in 2008 our government was convinced by Timothy Geithner, Hank Paulson and Ben Bernanke that if we just saved the banks we would fix the economy.  So we embarked on the “recovery” plan that has led us to one of the weakest recoveries in US economic history.  Because of the keen focus on the banking system there is a clear two tier recovery.  Wall Street is thriving again and Main Street is still struggling.

Thus far, we have run budget deficits that have been large enough to offset much of the deleveraging of the private sector.  And though the spending was poorly targeted it has been persistent enough that we are not repeating the mistakes of Japan – YET.  By my estimates the balance sheet recession is likely to persist well into 2013.

*   *   *

QE2 has truly been a “monetary non-event”.  As many of us predicted at its onset, this program has shown absolutely no impact on the US money supply (much to the dismay of the hyperinflationists).  And now its damaging psychological impact (via rampant speculation) has altered the options available to combat the continuing balance sheet recession.  While more stimulus is almost certainly off the table given the Fed’s misguided QE2 policy, it would be equally misguided to begin cutting the current budget deficit.  Sizable cuts before the end of the balance sheet recession will almost guarantee that the US economy suffers a Japan-like relapse.  It’s not too late to learn from the mistakes of Japan.

So where is the leader who is going to save us from a Japanese-style “lost decade” recession?  It was over two years ago when I posed this question:

Will the Obama administration’s “failure of nerve” – by avoiding bank nationalization – send us into a ten-year, “Japan-style” recession?  It’s beginning to look that way.

Two years down – eight years to go.


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The Wrong Playbook

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

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

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

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

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

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

Australian Employers Added 49,500 Workers in September

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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