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Austeri-FAIL

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I have never accepted the idea that economic austerity could be at all useful in resolving our unending economic crisis.  I posted my rant about this subject on December 19, 2011:

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  . . .

It has finally become apparent to most rational thinkers that economic austerity is of no use to any national economy’s attempts to recover from a severe recession.  There have been loads of great essays published on the subject this week and I would like to direct you to a few of them.

Henry Blodget of The Business Insider wrote a great piece which included this explanation:

This morning brings news that Europe may finally be beginning to soften on the “austerity” philosophy that has brought it nothing but misery over the past several years.

The “austerity” idea, you’ll remember, was that the huge debt and deficit problem had ushered in a “crisis of confidence” and that, once business-people saw that governments were serious about debt reduction, they’d get confident and start spending again.

That hasn’t worked.

Instead, spending cuts have led to cuts in GDP which has led to greater deficits and the need for more spending cuts.  And so on.

On April 23, Nicholas Kulich wrote an article for The New York Times which began with the ugly truth that austerity has turned out to be a fiasco:

With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.

“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain.  “Does this mean that Merkel has lost completely?  No.  But it does mean that the very nature of the debate about the euro-zone crisis is changing.”

A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.

Joe Weisenthal of The Business Insider provided us with this handy round-up of essays proclaiming the demise of economic austerity.  Here is his own nail in the coffin:

As we wrote this morning, the bad news for Angela Merkel is that the jig is up: There’s almost nobody left who is willing to go along with the German idea that the sole solution forEurope is spending discipline and “reform,” whatever that means.

One of the best essays on this subject was written by Hale Stewart for The Big Picture.  The title of the piece was “People Are Finally Figuring Out: Austerity is Stupid”.

Those in denial about the demise of economic austerity have found it necessary to ignore the increasing refutations of the policy from conservative economists, which began appearing early this year.  The most highly-publicized of these came from Harvard economic historian Niall Ferguson.  Mike Shedlock (a/k/a Mish) criticized the policy on a number of occasions, such as his posting of January 11, 2012:

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

One would think that a consensus of reasonable people, speaking out against this ill-conceived policy, should be enough to convince The Powers That Be to pull the plug on it.  In a perfect world   .  .  .



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.


 

The Monster Is Eating Itself

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Back on February 10, 2009 – before President Obama had completed his first month in office – two students at the Yale Law School, Jeffrey Tebbs and Ady Barkan, wrote an article which began with the point that the financial crisis was caused by the recklessness and greed of Wall Street executives.  Tebbs and Barkan proposed a “windfall bonus tax” on those corporate welfare queens of Wall Street, at the very moment when budget-restrained states began instituting their own economic austerity measures so that The Monster could be fed:

Last week, Connecticut Gov. M. Jodi Rell proposed a state budget that slashes crucial public services, including deep cuts to health care for kids and pregnant women, higher education and consumer protection.  She says that the cuts are necessary to close our state’s budget shortfall, but she’s apparently unwilling to increase taxes on Connecticut’s millionaires.

That is to say, while your hard-earned tax dollars are funding Christmas bonuses for Wall Street’s jet-set, Connecticut’s government will be cutting the programs and services that are crucial to your health and safety and to the vitality of our communities.

Since that time, “reverse Robin Hood” economic policies, such as the measures proposed by Governor Rell, have become painfully widespread.  As an aside:  Despite the fact that Governor Rell announced on November 9, 2009 that she would not seek re-election, the conservative Cato Institute determined that Rell was the only Republican Governor worthy of a failing grade on the Institute’s 2010 Fiscal Policy Report Card.

The entity I refer to as “The Monster” has been on a feeding frenzy since the financial crisis began.  Other commentators have their own names for this beast.  Michael Collins of The Economic Populist calls it “The Money Party”:

The Money Party is a very small group of enterprises and individuals who control almost all of the money and power in the United States.  They use their money and power to make more money and gain more power.  It’s not about Republicans versus Democrats.  The Money Party is an equal opportunity employer.  It has no permanent friends or enemies, just permanent interests.  Democrats are as welcome as Republicans to this party.  It’s all good when you’re on the take and the take is legal.  Economic Populist

*   *   *

The party is also short on compassion or even the most elementary forms of common decency.  It’s OK to see millions of people evicted, jobless, without health care, etc., as long as short term profits are maintained for those CEO bonuses and other enrichment for a tiny minority.  It’s perfectly acceptable for this to go on despite available solutions.  If you don’t look, it’s not there should be their motto.

Beyond that, The Monster’s insensitivity has increased to the point where it has actually become too numb to realize that the tender morsel it is feasting on happens to be its own foot.  Until last year, The Monster had nearly everyone convinced that America would enjoy a “jobless recovery”, despite the fact that the American economy is 70 percent consumer-driven.  Well, the “jobless recovery” never happened and the new “magic formula” for economic growth is deficit reduction.  As I discussed in my last posting, Bill Gross of PIMCO recently highlighted the flaws in that rationale:

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.

Simon Johnson, who formerly served as Chief Economist at the International Monetary Fund, conducted a serious analysis of whether such “fiscal contraction” could actually achieve the intended goal of expanding the economy.  The fact that the process has such an oxymoronic name as “expansionary fiscal contraction” should serve as a tip-off that it won’t work:

The general presumption is that fiscal contraction – cutting spending and/or raising taxes – will immediately slow the economy relative to the growth path it would have had otherwise.

*   *   *

There are four conditions under which fiscal contractions can be expansionary.  But none of these conditions are likely to apply in the United States today.

*   *   *

The available evidence, including international experience, suggests it is very unlikely that the United States could experience an “expansionary fiscal contraction” as a result of short-term cuts in discretionary domestic federal government spending.

Economist Stephanie Kelton explained that the best way to lower the federal budget deficit is to reduce unemployment:

The bottom line is this:  As long as unemployment remains high, the deficit will remain high.  So instead of continuing to put the deficit first, it’s time get to work on a plan to increase employment.

Here’s the formula:  Spending creates income.  Income creates sales.  Sales create jobs.

If you think you can cut the deficit without destroying jobs, dream on.

Dr. Kelton has identified the problem:  Deficit reduction schemes which disregard the impact on employment.  Nevertheless, The Monster is determined to press ahead with a “deficits first” agenda, regardless of the consequences.  The Monster will have its way because its army of lobbyists has President Obama under control.  As a result, we can expect increased unemployment, a diminished tax base, less consumer spending, less demand, decreased corporate income, lower GDP and more deficits.  The Monster’s gluttony has placed it on a course of self-destruction.  Perhaps that might be a good thing – if only it wouldn’t cause too much pain for the rest of us.



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Inviting More Trouble

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

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

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

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

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

*   *   *

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

*   *   *

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

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

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

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

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

*   *   *

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

*   *   *

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

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

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

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

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



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Obama On The Ropes

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You’ve been reading it everywhere and hearing it from scores of TV pundits:  The ongoing economic crisis could destroy President Obama’s hopes for a second term.  In a recent interview with Alexander Bolton of The Hill, former Democratic National Committee chairman, Howard Dean warned that the economy is so bad that even Sarah Palin could defeat Barack Obama in 2012.  Dean’s statement was unequivocal:  “I think she could win.”

I no longer feel guilty about writing so many “I told you so” pieces about Obama’s failure to heed sane economic advice since the beginning of his term in the White House.  A chorus of commentators has begun singing that same tune.  In July of 2009, I wrote a piece entitled, “The Second Stimulus”, wherein I predicted that our new President would realize that his economic stimulus program was inadequate because he followed the advice from the wrong people.  After quoting the criticisms of a few economists who warned (in January and February of 2009) that the proposed stimulus would be insufficient, I said this:

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.  He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time.  His penchant for compromise – simply for the sake of compromise itself – is bound to bite him in the ass on this issue, as it surely will on health care reform – should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.

Stephanie Kelton recently provided us with an interesting reminiscence of that fateful time, 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.

*   *   *

In July 2009, I wrote a post entitled, “Gift-Wrapping the White House for the GOP.” In it, I said:

“If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis.”

With the recent announcement of Austan Goolsbee’s planned departure from his brief stint as chairman of the Council of Economic Advisers, much has been written about Obama’s constant rejection of the “dissenting opinions” voiced by members of the President’s economics team, such as those expressed by Goolsbee and his predecessor, Christina Romer.  Obama chose, instead, to paint himself into a corner by following the misguided advice of Larry Summers and “Turbo” Tim Geithner.  Ezra Klein of The Washington Post recently published some excerpts from a speech (pdf) delivered by Professor Romer at Stanford University in May of 2011.  At one point, she provided a glimpse of the acrimony, which often arose at meetings of the President’s economics team:

Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery.  I remember that fall of 2009 as a very frustrating one.  It was very clear to me that the economy was still struggling, but the will to do more to help it had died.

There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit.  A number of us tried to make the case that more action was desperately needed and would be effective.  Normally, meetings with the President were very friendly and free-wheeling.  He likes to hear both sides of an issue argued passionately.  But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough.  As luck would have it, the next day, a reporter asked him if he ever lost his temper.  He replied, “Yes, I let my economics team have it just yesterday.”

By May of 2010, even Larry Summers was discussing the need for further economic stimulus measures, which I discussed in a piece entitled, “I Knew This Would Happen”.  Unfortunately, most of the remedies suggested at that time were never enacted – and those that were undertaken, fell short of the desired goal.  Nevertheless, Larry Summers is back at it again, proposing a new round of stimulus measures, likely due to concern that Obama’s adherence to Summers’ failed economic policies could lead to the President’s defeat in 2012.  Jeff Mason and Caren Bohan of Reuters reported that Summers has proposed a $200 billion payroll tax program and a $100 billion infrastructure spending program, which would take place over the next few years.  The Reuters piece also supported the contention that by 2010, Summers had turned away from the Dark Side and aligned himself with Romer in opposing Peter Orszag (who eventually took that controversial spin through the “revolving door” to join Citigroup):

During much of 2010, Obama’s economic advisers wrestled with a debate over whether to shift toward deficit reduction or pursue further fiscal stimulus.

Summers and former White House economist Christina Romer were in the camp arguing that the recession that followed the financial markets meltdown of 2008-2009 was a unique event that required aggressive stimulus to avoid a long period of stagnation similar to Japan’s “lost decade” of the 1990s.

Former White House budget director Peter Orszag was among those who cautioned against a further big stimulus, warning of the need to be mindful of ballooning budget deficits.

By the time voters head to the polls for the next Presidential election, we will be in Year Four of our own “lost decade”.  Accordingly, President Obama’s new “Jobs Czar” – General Electric CEO, Jeffrey Immelt – is busy discussing new plans, which will be destined to go up in smoke when Congressional Republicans exploit the opportunity to maintain the dismal status quo until the day arrives when disgruntled voters can elect President Palin.  Barack Obama is probably suffering from some awful nightmares about that possibility.



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