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Unwanted Transparency

May 26th, 2011 Posted in Uncategorized
May, 26 2011
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Immediately after assuming office, President Obama promised to provide a greater degree of transparency from his administration:

Transparency and the rule of law will be the touchstones of this presidency.

Did you really believe that?  Do you remember Jane Mayer – author of that great book, The Dark Side, which exposed the controversial “enhanced interrogation techniques”?  Well, she just wrote an article for The New Yorker, discussing the Obama administration’s use of the Espionage Act of 1917 to press criminal charges in five alleged instances of national security leaks.  At the outset of the article, Ms. Mayer made this observation:

Gabriel Schoenfeld, a conservative political scientist at the Hudson Institute, who, in his book “Necessary Secrets” (2010), argues for more stringent protection of classified information, says, “Ironically, Obama has presided over the most draconian crackdown on leaks in our history – even more so than Nixon.”

Meanwhile, another sort of unwanted transparency is catching up with the Obama administration:  transparent motives.  Many commentators are finally facing-up to the reality that Obama never gave a damn about the unemployment crisis.  I have repeatedly emphasized that President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – 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.

A recent interview with economist Tim Duy focused on the inadequacy of the Economic Recovery and Reinvestment Act of 2009:

What went wrong with stimulus?  Why does unemployment remain so high?

I don’t think anything “went wrong” with the stimulus, other than it simply wasn’t enough to fill the depth of the economic hole caused by the recession.  There was simply a lack of political willpower to fully acknowledge the depth of the problem and bring to bear the appropriate resources.  The result is an economy that is not bouncing back quickly enough to close the output gap and create sufficient job growth to drive the unemployment rate down lower at a faster pace.

Is the economy not weak enough to justify more stimulus?  Or do policy makers think that deficit spending is not able to generate more jobs?

Yes, the economy is weak enough to justify additional stimulus, and the persistently low rates of government debt should prove that current fears of deficit spending are unjustified.  Some policymakers appear to believe that a commitment to fiscal austerity will in fact generate more job growth, but this is nonsensical –  austerity would only aggravate the existing challenges (as it has in Greece).  There is currently no constraint that prevents more fiscal stimulus from being effective in promoting additional economic growth.  Longer run, yes, the US federal budget does need to be addressed, but letting growth stagnate now will only intensify that challenge in the future. Policymakers, however, appear enamoured with the idea that these challenges need to be addressed now, and this attitude poses another risk to the recovery.

I want to focus on what Professor Duy described as a “lack of willpower”.  That lack of willpower was rooted in a lack of authenticity.  President Obama was never concerned about what most of us would consider “economic recovery” – reducing unemployment to just below five percent.  Obama’s goal was to do just enough to avoid another Great Depression.  Once that goal was accomplished, it was time to move on to other things.  My cynicism on this subject was validated in a recent essay by Mark Provost for Truthout, entitled, “Why the Rich Love High Unemployment”.  In fact, Provost’s article was met with such widespread enthusiasm that it was republished in its entirety on the following websites:  Naked Capitalism, Angry Bear and The Economic Populist.  Here are some key points from the piece:

Obama’s advisers often congratulate themselves for avoiding another Great Depression – an assertion not amenable to serious analysis or debate.  A better way to evaluate their claims is to compare the US economy to other rich countries over the last few years.

On the basis of sustaining economic growth, the United States is doing better than nearly all advanced economies.

*   *   *

But when it comes to jobs, US policymakers fall short of their rosy self-evaluations.

*   *   *

The gap between economic growth and job creation reflects three separate but mutually reinforcing factors:  US corporate governance, Obama’s economic policies and the deregulation of US labor markets.

*   *   *

Obama’s lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan.  The stimulus provided relief, but it was too small and did not focus on job creation.

The administration’s problem is not a question of economics, but a matter of values and priorities.

Mark Provost’s essay featured this infamous quote from a Washington Post article written by Steven Rattner (Obama’s “car czar” during 2009 – whose task force was overseen by “Turbo” Tim Geithner and Larry Summers):

Perversely, the nagging high jobless rate reflects two of the most promising attributes of the American economy:  its flexibility and its productivity.  Eliminating jobs – with all the wrenching human costs – raises productivity and, thereby, competitiveness (the president’s new favorite word).  In the long run, increasing productivity is the only route to superior competitiveness.

*   *   *

That kind of efficiency is perhaps our most precious economic asset.  However tempting it may be, we need to resist tinkering with the labor market.  Policy proposals aimed too directly at raising employment may well collaterally end up dragging on productivity. And weak productivity would exacerbate the downward pressure on wages that caused the last decade to be the first in our history in which wages (after adjustment for inflation) declined.

In other words, productivity is more important than those pesky “wrenching human costs”.  Too bad there just isn’t some kind of spray or ointment for those things!  This attitude exemplified what Chris Hedges discussed in his book, Death of the Liberal Class.  In a recent article for Truthdig, Chris Hedges emphasized how the liberal class “abandoned the human values that should have remained at the core of its activism”:

The liberal class, despite becoming an object of widespread public scorn, prefers the choreographed charade.  It will decry the wars in Iraq and Afghanistan or call for universal health care, but continue to defend and support a Democratic Party that has no intention of disrupting the corporate machine.  As long as the charade is played, the liberal class can hold itself up as the conscience of the nation without having to act.  It can maintain its privileged economic status.  It can continue to live in an imaginary world where democratic reform and responsible government exist.  It can pretend it has a voice and influence in the corridors of power.  But the uselessness and irrelevancy of the liberal class are not lost on the tens of millions of Americans who suffer the indignities of the corporate state.  And this is why liberals are rightly despised by the working class and the poor.

To repeat an important statement from Mark Provost’s essay:

The administration’s problem is not a question of economics, but a matter of values and priorities.

The unemployment crisis is destined to continue for several years – thanks to the administration’s abandonment of those human values discussed by Chris Hedges.


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Why Au-scare-ity Still Has Traction

May 16th, 2011 Posted in Uncategorized
May, 16 2011
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Many economists have been watching Britain’s experiment with austerity for quite a while.  Britain has been following a course of using cuts in government programs along with mass layoffs of public sector workers in attempt to stimulate economic growth.  Back in February, economist Dean Baker made this observation:

Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom.  The reason was the new coalition government’s commitment to prosperity through austerity.  As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That’s bad news for the citizens of the United Kingdom.  They will be forced to suffer through years of unnecessarily high unemployment.  They will also have to endure cutbacks in support for important public services like healthcare and education.

But the pain for the people in England could provide a useful example for the United States.

*   *   *

Prior to this episode, there was already a solid economic case that large public deficits were necessary to support the economy in the period following the collapse of an asset bubble. The point is simply that the private sector is not prepared to make up the demand gap, at least in the short term.  Both short-term and long-term interest rates are pretty much as low as they can be.

*   *   *

From this side of the pond, though, the goal is simply to encourage people to pay attention.  The UK might be home to 60 million people, but from the standpoint of US economic policy, it is simply exhibit A:  it is the country that did what our deficit hawks want to do in the US.

The takeaway lesson should be “austerity does not work; don’t go there.”  Unfortunately, in the land of faith-based economics, evidence does not count for much.  The UK may pursue a disastrous austerity path and those of us in the United States may still have to follow the same road anyhow.

After discussing the above-quoted commentary by Dean Baker, economist Mark Thoma added this:

Yes — it’s not about evidence, it’s about finding an excuse to implement an ideology.  The recession got in the way of those efforts until the idea that austerity is stimulative came along. Thus, “austerity is stimulative” is being used very much like “tax cuts increase revenues.”  It’s a means of claiming that ideological goals are good for the economy so that supporters in Congress and elsewhere have a means of rationalizing the policies they want to put in place.  It’s the idea that matters, and contrary evidence is brushed aside.

There seems to be an effort in many quarters to deny that the financial crisis ever happened.  Although it will eventually become absolutely imperative to get deficits under control, most sober economists emphasize that attempting to do so before the economy begins to recover and before the unemployment crisis is even addressed – would destroy any chance of economic recovery.  Barack Obama’s opponents know that the easiest route toward subverting the success of his re-election campaign involves undermining any efforts toward improving the economy to any degree by November of 2012.  Beyond that, the fast-track implementation of a British-style austerity program could guarantee a double-dip recession, which could prove disastrous to Obama’s re-election hopes.  As a result, the pressure is on to initiate some significant austerity measures as quickly as possible.  The propaganda employed to expedite this effort involves scaring the sheeple into believing that the horrifying budget deficit is about to bite them in the ass right now.  There is a rapidly increasing drumbeat to crank-up the scare factor.

Of course, the existence of this situation is the result of Obama’s own blunder.  Although he did manage to defeat Osama bin Laden, President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – by sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.  In April of 2009, Obama chose to parrot the discredited “money multiplier” myth, fed to him by Larry Summers and “Turbo” Tim Geithner, in order to justify continuous corporate welfare for the megabanks.  If Obama had followed the right course, by pushing a stronger, more infrastructure-based stimulus program through the Democrat-controlled Senate and House, we would be enjoying a more healthy economy right now.  A significant number of the nearly fifteen million people currently unemployed could have found jobs from which they would now be paying income taxes, which reduce the deficit.  But that didn’t happen.  President Obama has no one else to blame for that error.  His opponents are now attempting to “snowball” that mistake into a disaster that could make him a one-term President.

Former Labor Secretary Robert Reich saw this coming back in March:

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

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

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

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

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

Professor Simon Johnson, former Chief Economist of the International Monetary Fund, recently brought the focus of the current economic debate back to where it belongs:

In the nation’s latest fiscal mood swing, the mainstream consensus has swung from “we must extend the Bush tax cuts” (in December 2010) towards “we must immediately cut the budget deficit.”  The prevailing assumption, increasingly heard from both left and right, is that we already have far too much government debt – and any further significant increase will likely ruin us all.

This way of framing the debate is misleading – and very much at odds with US fiscal history.  It masks the deeper and important issues here, which are much more about distribution, in particular how much are relatively wealthy Americans willing to transfer to relatively poor Americans?

*   *   *

The real budget debate is not about a few billion here or there – for example in the context of when the government’s “debt ceiling” will be raised.  And it is not particularly about the last decade’s jump in government debt level – although this has grabbed the headlines, this is something that we can grow out of (unless the political elite decides to keep cutting taxes).

The real issue is how much relatively rich people are willing to pay and on what basis in the form of transfers to relatively poor people – and how rising healthcare costs should affect those transfers.

As the Tea Partiers flock to movie theaters to watch Atlas Shrugged, perhaps it’s time for a porno send-up, based on a steamy encounter between Ayn Rand and Gordon Gekko called, Greed Feels Good.


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Leadership Void

April 11th, 2011 Posted in Uncategorized
Apr, 11 2011
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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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Troublesome Creatures

February 24th, 2011 Posted in Uncategorized
Feb, 24 2011
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A recent piece by Glynnis MacNicol of The Business Insider website led me to the conclusion that Shepard Smith deserves an award.  You might recognize Shep Smith as The Normal Guy at Fox News.  In case you haven’t heard about it yet, a controversy has erupted over a 20-minute crank telephone call made to Wisconsin Governor Scott Walker by a man who identified himself as David Koch, one of two billionaire brothers, famous for bankrolling Republican politicians.  The caller was actually blogger Ian Murphy, who goes by the name, Buffalo Beast.  In a televised discussion with Juan Williams concerning the controversy surrounding Wisconsin Governor Walker, Shep Smith focused on the ugly truth that the Koch brothers are out to “bust labor”.  Here are Smith’s remarks as they appeared at The Wire blog:

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

*   *   *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Screw The People And Save The Banks

November 29th, 2010 Posted in Uncategorized
Nov, 29 2010
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The economic crisis in Ireland (and the rest of Europe) has resulted in a morass of published commentaries, some of which make sense and most of which don’t.  Sometimes it appears as though the writer hasn’t really formed an opinion on the issue, even though the tone of the article seems to be expressing one.  The problem experienced in Ireland is the same as it is everywhere else:  During tough economic times, governments always choose to bail out the banks regardless of the expense and suffering to be endured by the citizens.  The Pragmatic Capitalist recently upbraided the writer of one of the more poorly-thought-out essays dealing with the Irish predicament:

Sheila Bair, the head of the FDIC, has remained one of the more levelheaded and helpful leaders during the financial crisis.  But in an op-ed in the Washington Post this morning she took a decisive turn for the worse when she waded into waters that were certain to drown her.  Bair is now echoing the cries that have been heard across Ireland for the last 2 years – cries of fiscal austerity.  Of course, the USA is nothing like Ireland and has an entirely different monetary system, but Bair ignores all of this (in fact proves she is entirely ignorant of this).  What’s sad is that Bair clearly understands that this crisis is still largely hurting Main Street America   .   .   .

To the extent that the Irish situation bears any resemblance to what we are experiencing (or may soon experience) in the United States, economist John Hussman has written the best essay on this issue.  Hussman began with this point, made by another economist:

“If you have bad banks then you very urgently want to clean up your banks because bad banks go only one way:  they get worse. In the end every bank is a fiscal problem.  When you have bad banks, it is in a political environment where it is totally understood that the government is going to bail them out in the end.  And that’s why they are so bad, and that’s why they get worse.  So cleaning up the banks is an essential counterpart of any attempt to have a well functioning economy.  It is a counterpart of any attempt to have a dull, uninteresting macroeconomy.  And there is no excuse to do it slowly because it is very expensive to postpone the cleanup.  There is no technical issue in doing the cleanup.  It’s mostly to decide to start to grow up and stop the mess.”

MIT Economist Rudiger Dornbusch, November 1998

The TARP bailout was not the only time when our government chose a temporary fix (as in cure or heroin injection) at great taxpayer expense.  I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  John Hussman discussed the consequences:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The present situation

Europe will clearly be in the spotlight early this week, as a run on Irish banks coupled with large fiscal deficits has created a solvency crisis for the Irish government itself and has been (temporarily) concluded with a bailout agreement.  Ireland’s difficulties are the result of a post-Lehman guarantee that the Irish government gave to its banking system in 2008.  The resulting strains will now result in a bailout, in return for Ireland’s agreement to slash welfare payments and other forms of spending to recipients that are evidently less valuable to society than bankers.

*   *   *

Over the short run, Ireland will promise “austerity” measures like Greece did – large cuts in government spending aimed at reducing the deficit.  Unfortunately, imposing austerity on a weak economy typically results in further economic weakness and a shortfall on the revenue side, meaning that Ireland will most probably face additional problems shortly anyway.

The “austerity” approach is more frequently being used as a dividing line to distinguish “liberal” economists from “conservative” economists.  The irony here is that many so-called liberal politicians are as deeply in the pocket of the banking lobby as their conservative counterparts.  Economist Dean Baker recently wrote an article for The Guardian, urging Ireland to follow the example of Argentina and simply default on its debt:

The failure of the ECB or IMF to take steps to rein in the bubble before the crisis has not made these international financial institutions shy about using a heavy hand in imposing conditions now.  The plan is to impose stiff austerity, requiring much of Ireland’s workforce to suffer unemployment for years to come as a result of the failure of their bankers and the ECB.

While it is often claimed that these institutions are not political, only the braindead could still believe this.  The decision to make Ireland’s workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country’s bankers is entirely a political one.  There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

Bloomberg News columnist, Matthew Lynn wrote a great article for the Pittsburgh Tribune-Review, setting out five reasons why Ireland should refuse a bailout from the European Union and the International Monetary Fund to opt for default as the logical approach.

Pay close attention to how your favorite politicians weigh-in on the Irish situation.  It should give you a fairly good tip as to what actions those pols can be expected to take when the Wall Street bankers dash back to Capitol Hill for TARP 2 The Sequel.


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The End

July 29th, 2010 Posted in Uncategorized
Jul, 29 2010
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July 29, 2010

The long-awaited economic recovery seems to be coming to a premature end.  For over a year, many pundits have been anticipating a “jobless recovery”.  In other words:  don’t be concerned about the fact that so many people can’t find jobs – the economy will recover anyway.  These hopes have been buoyed by the widespread corporate tactic of cost-cutting (usually by mass layoffs) to gin-up the bottom line in time for earnings reports.  This helps inflate stock prices and produce the illusion that the broader economy is experiencing a sustained recovery.  The “jobless recovery” advocates ignore the extent to which the American economy is consumer-driven.  If those consumers don’t have jobs, they aren’t going to be spending money.

Although many observers seem to take comfort in the assumption that the jobless rate is below ten percent, many are beginning to question the validity of the statistics to that effect provided by the Department of Labor.  AOL’s Daily Finance website provided this commentary on the June, 2010 unemployment survey conducted by Raghavan Mayur, president of TechnoMetrica Market Intelligence:

The June poll turned up 27.8% of households with at least one member who’s unemployed and looking for a job, while the latest poll conducted in the second week of July showed 28.6% in that situation.  That translates to an unemployment rate of over 22%, says Mayur, who has started questioning the accuracy of the Labor Department’s jobless numbers.

*   *   *

In fact, Austan Goolsbee, who is now part of the White House Council of Economic Advisers, wrote in a 2003 New York Times piece titled “The Unemployment Myth,” that the government had “cooked the books” by not correctly counting all the people it should, thereby keeping the unemployment rate artificially low.  At the time, Goolsbee was a professor at the University of Chicago.  When asked whether Goolsbee still believes the government undercounts unemployment, a White House spokeswoman said Goolsbee wasn’t available to comment.

Such undercounting of unemployment can be an enormously dangerous exercise today.  It could lead  some lawmakers to underestimate the gravity of the labor market’s problems and base their policymaking on a far-less-grim picture than actually exists.  Economically, and socially, that would make a bad situation much worse for America.

“The implications of such undercounting is that policymakers aren’t going to be thinking as big as they should be,” says Ginsburg, also a professor emeritus of economics at Brooklyn College.  “It also means that [consumer] demand is not going to be there, because the income from people who are employed isn’t going to be there.”

Frank Aquila of Sullivan & Cromwell recently wrote an article for Bloomberg BusinessWeek, discussing the possibility that we could be headed into the second leg of a “double-dip” recession:

The sputtering economy and talk of a possible second recession have certainly rattled an already fragile American consumer.  Consumer confidence is now at its lowest level in a year, and consumer spending tumbled in May and June.  Since consumer spending accounts for more than two-thirds of  U.S. economic growth, a nervous consumer is not a good omen for a robust recovery.

Job creation is a key factor in increasing consumer confidence.  While economists estimate that we need economic growth of 4 percent or more to stimulate significant job creation, the economy has grown at only about 2 percent to 3 percent, with a slowdown expected in the second half.

*   *   *

With governments struggling under the weight of ballooning budget deficits and businesses waiting for the return of sustained growth, it is the American consumer who will have to lift the global economy out of the mire.  Given the recent news and current consumer sentiment, that appears to be an unlikely prospect in the near term.

The same government that found it necessary to provide corporate welfare to those “too big to fail” financial institutions has now become infested with creatures described by Barry Ritholtz as “deficit chicken hawks”.  The deficit chicken hawks are now preaching the gospel of “austerity” as an excuse for roadblocking any further efforts to use any form of stimulus to end the economic crisis.  One of the gurus of the deficit chicken hawks is economic historian Niall Ferguson.  Because Ferguson is just an economic historian, a real economist – Brad DeLong — had no trouble exposing the hypocrisy exhibited by the Iraq war cheerleader, while revisiting an article Ferguson had written for The New York Times, back in 2003.  Matthew Yglesias had even more fun compiling and publishing a Ferguson (2003) vs. Ferguson (2010) debate.

At The Daily Beast, Sir Harry Evans emphasized how the sudden emphasis on “austerity” is worse than hypocrisy:

As for the banks, one of the obscenities of our time is that so many in the financial community who owe their survival to the massive taxpayer bailouts, not only rewarded themselves with absurd bonuses, but now have the gall to sport the plumage of deficit hawks.  The unemployed?  Let them eat cake, the day after tomorrow.

Gerald Celente, publisher of The Trends Journal, wrote a great essay for The Daily Reckoning website entitled, “Let Them Eat Losses”.  He pointed out how the kleptocracy violated and destroyed the “very essence of functioning capitalism”.  Worse yet, our government betrayed us by forcing the taxpayers “to finance the failed financiers”:

No individual, business, institution, nation or empire is too-big-to-fail.  Had true capitalism been allowed to function unimpeded, the bloated, over-extended, inefficient and gluttonous firms and industries would have failed.  There would have been hardships and losses but, finally rid of its financial tapeworms, the purged system could be restored to health.

No “ism” or “ology” — regardless of purity of intent or moral foundation — is immune to corruption and abuse.  While capitalism itself is being blamed for the excesses that brought on financial chaos, prior to the most recent gambling binge, in tandem with the blanket dismantling of safeguards and the overt takeover of Washington by Wall Street, capitalism was responsible for creating one of the world’s most successful and universally admired societies.

As I discussed on July 8, because President Obama lacked the political courage to advance an effective economic stimulus package last year, the effects of his “semi-stimulus” have now abated and we are headed into another recession.  Reuters reported on July 27 that Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor’s S&P/Case-Shiller Index, gave us this unsettling macroeconomic prognostication:

“For me a double-dip is another recession before we’ve healed from this recession … The probability of that kind of double-dip is more than 50 percent,” Shiller said.

“I actually expect it.”

During the last few months of 2009, did you ever think that someday you would be looking back at that time as “the good old days”?




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Demolition Derby

June 24th, 2010 Posted in Uncategorized
Jun, 24 2010
Comments Off on Demolition Derby

June 24, 2010

They’re at the starting line, getting ready to trash the economy and turn our “great recession” into a full-on Great Depression II (to steal an expression from Paul Farrell).  Barry Ritholtz calls them the “deficit chicken hawks”.  The Reformed Broker recently wrote a clever piece which incorporated a moniker coined by Mark Thoma, the “Austerians”,  in reference to that same (deficit chicken hawk) group.   The Reformed Broker described them this way:

.  .  .  this gang has found a sudden (upcoming election-related) pang of concern over deficits and our ability to finance them.  Critics say the Austerians’ premature tightness will send the economy off a cliff, a la the 1930’s.

Count me among those who believe that the Austerians are about to send the economy off a cliff – or as I see it:  into a Demolition Derby.  The first smash-up in this derby was to sabotage any potential recovery in the job market.  Economist Scott Brown made this observation at the Seeking Alpha website:

One issue in deficit spending is deciding how much is enough to carry us through.  Removing fiscal stimulus too soon risks derailing the recovery.  Anti-deficit sentiment has already hampered a push for further stimulus to support job growth.  Across the Atlantic, austerity moves threaten to dampen European economic growth in 2011.  Long term, deficit reduction is important, but short term, it’s just foolish.

The second event in the Demolition Derby is to deny the extension of unemployment benefits.  Because the unemployed don’t have any money to bribe legislators, they make a great target.  David Herszenhorn of The New York Times discussed the despair expressed by Senator Patty Murray of Washington after the Senate’s failure to pass legislation extending unemployment compensation:

“This is a critical piece of legislation for thousands of families in our country, who want to know whether their United States Senate and Congress is on their side or is going to turn their back on them, right at a critical time when our economy is just starting to get around the corner,” Mrs. Murray said.

The deficit chicken hawk group isn’t just from the Republican side of the aisle.  You can count Democrat Ben Nelson of Nebraska and Joe “The Tool” Lieberman among their ranks.

David Leonhardt of The New York Times lamented Fed chairman Ben Bernanke’s preference for maintaining “the markets’ confidence in Washington” at the expense of the unemployed:

Look around at the American economy today.  Unemployment is 9.7 percent.  Inflation in recent months has been zero.  States are cutting their budgets.  Congress is balking at spending the money to prevent state layoffs.  The Fed is standing pat, too.  Bond investors, fickle as they may be, show no signs of panicking.

Which seems to be the greater risk:  too much action or too little?

The Demolition Derby is not limited to exacerbating the unemployment crisis.  It involves sabotaging the economic recovery as well.  In my last posting, I discussed a recent report by Comstock Partners, highlighting ten reasons why the so-called economic rebound from the financial crisis has been quite weak.  The report’s conclusion emphasized the necessity of additional fiscal stimulus:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed.  And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy.  In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

In a recent essay, John Mauldin provided a detailed explanation of how premature deficit reduction efforts  can impair economic recovery:

In the US, we must start to get our fiscal house in order.  But if we cut the deficit by 2% of GDP a year, that is going to be a drag on growth in what I think is going to be a slow growth environment to begin with.  If you raise taxes by 1% combined with 1% cuts (of GDP) that will have a minimum effect of reducing GDP by around 2% initially.  And when you combine those cuts at the national level with tax increases and spending cuts of more than 1% of GDP at state and local levels you have even further drags on growth.

Those who accept Robert Prechter’s Elliott Wave Theory for analyzing stock market charts to make predictions of long-term financial trends, already see it coming:  a cataclysmic crash.   As Peter Brimelow recently discussed at MarketWatch, Prechter expects to see the Dow Jones Industrial Average to drop below 1,000:

The clearest statement comes from the Elliott Wave Theorist, discussing a numerological technical theory with which it supplements the Wave Theory’s complex patterns:  “The only way for the developing configuration to satisfy a perfect set of Fibonacci time relationships is for the stock market to fall over the next six years and bottom in 2016.”

*   *   *

There will be a short-term rally at some point, thinks Prechter, but it will be a trap:  “The 7.25-year and 20-year cycles are both scheduled to top in 2012, suggesting that 2012 will mark the last vestiges of self-destructive hope.  Then the final years of decline will usher in capitulation and finally despair.”

So it is written.  The Demolition Derby shall end in disaster.





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