Wednesday, June 30, 2010

Some Views on the Economy

In This Edition:

- A quiet crisis whispers of impending poverty

- The Private Sector Fallacy (Baseline Scenario)

- Krugman: The Third Depression

I am but one fallible soul in a universe of human emotion and thought (more like like a turbulent sea), so tonight I would like to bring to you once again, the thoughts of other souls, who might, and quite likely do, have a better understanding of our situation, in this case, the economic situation. They may, or may not be extreme, cheery, beyond the pale, and etc., but they are worth reading. In any event, they raise good questions and food for thought.

This first was referred from a fellow I used to read back in the 1990’s, who also happens to be on Jay Hansen’s “America 2.0” mailing list, to which I subscribe. He simply suggested that readers check out “The Automatic Earth” web page and so I did.

Here is what I found:

The Automatic Earth
A quiet crisis whispers of impending poverty

Ilargi: President Obama said during the G-20 meeting in Toronto, where he was told to take a hike by European leaders, that both he and British prime minister David Cameron

"... are aiming at the same direction, which is long-term sustainable growth that puts people to work..."

Somewhat curious, since his Vice President, Joe Biden, said a few days ago that

"...there's no possibility to restore 8 million jobs lost in the Great Recession."

Looks a lot as if the nonsense now starts to contradict itself. Perhaps we shouldn't expect anything else.

Biden then added that there is

" way to regenerate $3 trillion that was lost. Not misplaced, lost."

Don’t know what the Pennsylvania Avenue spin team thinks of Biden's remarks, but they do sound just about right to me, and a lot less hollow than Obama's empty fluff. Biden made me think of Springsteen's My Hometown (see video below), which has this verse:

Now main street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain’t coming back
To your hometown, your hometown, your hometown

My Hometown--Bruce Springsteen

That sounds to me like a remarkably accurate portrait of much of America in a few years time. And Britain. And the rest of Europe.

The talk in the press has shifted towards debt, debt and more debt. And austerity. Whether Obama and the rest of the Keynes religion like it or not.

Ambrose Evans-Pritchard writes about an RBS note to its clients that warns of money printing by Bernanke. He says:

"America is one twist shy of a debt-deflation trap."

Ambrose is right there. But he's dead wrong in his subsequent remarks:

"There is no doubt that the Fed has the tools to stop this".

Oh, believe me, Ambrose, there's plenty doubt.

"Sufficient injections of money will ultimately always reverse a deflation," said Bernanke.

Bernanke may say what he wants, but that doesn't make him right. We are in the beginning phase of a debt deflation. And if you want to talk about ultimately, then I’ll give you this one: ultimately debt cannot be repaid with more debt. Haven't the past two years of failing policies taught these people anything? The Fed balance sheet stands at record highs, and bloating it even more will solve the problems? What is it with these folks? It's not as if Ambrose doesn't have the data:

"The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era."

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7% in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40% in a month."

No, the debt deflation must and will run its course, and Bernanke is devastatingly powerless to do anything about it. Not that he will ever admit it, even if he knew. But it's like having your local weatherman believe he controls the climate.

$2,5 trillion hasn't done the trick, and neither will $5 trillion. Money velocity is way down and so is M3 broad money supply. How would Bernanke turn that around? The money simply isn't going anywhere. Except into a deep dark void. It's disappearing faster than Bernanke can print.

Once the deflation has run its ugly course, and it will be horrendous, printing presses may cause inflation, and given the level of ass-clowniness among economists it's highly likely that they’ll pick such a course. They've never seen a crisis they couldn't make worse. But I’ll bet you ten to one that by then Bernanke won't be in office anymore.

I’m going to post an article I happenstanced upon today sort of like an extra intro. I don't often do that, but this piece by Texan journalist Richard Parker struck a special chord. And since it brought Joe Bageant to mind, and Joe just posted a new piece, I’ll close today’s TAE with that.

But first, for those of you who haven't seen it yet, once more the wonderful video from CaptainSheeple, "A Tribute to the Automatic Earth".

[The video depends on images from the great Depression—I would Have preferred images from present day life, the homeless and etc.]

Richard Parker: Recession as big as Texas pummels rural parts of America
Wimberley, Texas: The grass in the pasture stands tall. Throughout the spring, bluebonnets, Indian paint brushes and black-eyed Susans waved from the roadside. The Blanco River runs clear and full now, and the tourists return to the town square. A wet winter and cold spring have broken the grip of a two-year drought in Texas. But this plenty camouflages a drought of another sort: the economic one. Texas was slow to be swept up by the Great Recession. But now its pain has come home to big cities and small towns, as the lagging effects of the recession batter the ranchers, storekeepers and families who all withstood — until now.

While Washington's fury is directed toward the Gulf oil pill, it has largely lost sight of the recession. Yet Congress continues to weigh financial reform, and it would do well to remember the human cost of the Great Recession, triggered by the titans of Wall Street but borne heavily by everyday people. Since the crisis began and through the first quarter of this year, more than $2 trillion in mutual funds have been wiped out, 4.5 million homes have gone into foreclosure and 6.8 million jobs have been lost. With its art, eclectic character and natural beauty ours is one of the best little towns in the nation to visit; it says so right in the pages of The New York Times and Travel Holiday Magazine.

But for those of us who live here, a quiet crisis whispers of impending poverty. A merchant confides he can't take another year like the last two. A Mexican stonemason tells me that a single project tided his family through winter. A Realtor relays that all over town, people who never took a mortgage they couldn't afford are looking to give up, sell out and move on. The alternative is tallied and cataloged at the stately 102-year old, brick-and-limestone county courthouse over in San Marcos. Jack Hays, for whom this county was named, was a living legend for his exploits as a Texas Ranger, namely for fighting the Comanche.

Today, people are losing their homes not to raiding parties but to banks. There were 157 up for auction in April alone. For 15 withering months there have been 100 or more, according to the San Marcos Daily Record. It cites George Roddy, whose company dutifully counts all of them: "This foreclosure storm is far from over." The list carries the names of familiar ranches, springs and creeks. Yet the tale of Hays County is, sadly, more emblematic than unique in the vast landscape that stretches westward beyond the Hudson and the Potomac. Up in Austin, $6.5 billion in real estate value has been wiped out as if by a tornado. The resultant cuts in money for teachers, cops and services in the city are likely just around the corner.

In Austin and elsewhere, the conservative cultural boosterism of Texas initially downplayed the recession. Heir to George W. Bush's original political office and many of his finest traditions, Republican Gov. Rick Perry quipped of the recession in 2009, "We're in one?" It was his so-far-overlooked Katrina moment as time proved that bravado as prematurely false as that of his predecessor. "Texas has been hit much harder by the 2008-09 recession than previous ones," according to the Federal Reserve Bank of Dallas. Starting with a 6.1 percent unemployment rate at the beginning of the crisis, the job market fell throughout last year to end 2009 at an 8.2 percent unemployment rate. This year, manufacturing orders picked up, but the job creation rate stood stubbornly at zero in the first quarter.

Today in Texas, one in five people struggle to feed themselves and one in five children live in poverty, according to the Center for Public Policy Priorities in Austin, founded by Benedictine nuns. Perhaps Perry's economic prowess will trail him out of the state like a coyote when he seeks the presidency. However, this is not a Texas story but an American one, told in fiscal crises that stretch from California to Illinois, from Alabama to New York. It is in Washington where the Great Recession will be justly dealt with — or not. Realistically, after all, Congress and the regulators have assiduously polished their reputations as hand-maidens of the banks at least since the repeal of Glass-Steagall in 1999.

It doesn't take an expert to understand that much of the legislation in Congress is mere cover for the politicians and the big banks. It isn't designed to redress the latest crisis or stop the next one. It puts matters in the hands of regulators who consistently failed, to, well, regulate. Regardless of party, the politicians will let the big banks go on gambling with other people's money. The only real solution is to reinstate Glass-Steagall and break up the big banks. Only one senator, Democrat Ted Kaufman of Delaware, railed for that and against something dressed up in the Orwellian costume of "reform."

Back here in Texas, when European settlers first came to the Hill Country they pushed ever deeper, establishing ranches, farms and homesteads because those early wet years made the land lush, green and inviting. When the Comanche came they scared some settlers. But when the droughts came, revealing a harsh, arid landscape clinging to hard-scrabble rock, it forced the hands of far more. I have taken what I have left and squirreled it away in a small Hill Country bank. But I, too, have to face the inevitable: I ask my 16-year old, Olivia, what she thinks about selling our little place high in the oaks and cedars over the Blanco. She looks at her sister, Isabel, and reflects, then replies: "We've made a lot of good memories here." I nod. So we have. So I will wait until, or unless, this drought forces my hand, too.

More at The Automatic Earth

And then there’s this bit from The Baseline Scenario, Simon Johnson’s and James Kwak’s informative web blog. The main point is this:

Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.”

The Private Sector Fallacy
Posted: 30 Jun 2010
By James Kwak

Felix Salmon highlights an important point to bear in mind when it comes to banks and short sales. Actually, it’s an important to bear in mind when you’re thinking about any big private sector company, be in Citigroup or British Petroleum. Yes, companies do things in their own self-interest that hurt other people and may not be net benefits to society. But they also do things that are not in their own self-interest all the time, because companies just aren’t all that efficient.

Felix’s post is largely about two factors. One is that big company executives are prone to exactly the same sort of cognitive fallacies as ordinary people, and hence make stupid decisions routinely. The second is that the incentives of individual people who make decisions (or provide information to people who make decisions) are only tangentially related to the interests of the company as a whole, and certainly not when you think of those interests over the long term.

A third factor is simply that companies are big, dumb, poorly designed institutions. There’s lots of talk about how individual human beings do not resemble the rational actors of textbook economic theory. The same is at least as true of big companies, of which I have seen many, from various perspectives.

Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.

For another view, as far as any hint of reining in spending goes, there is this, from Paul Krugman, liberal economist, who writes for the New York Times (anyway you look at it, the common people, are in deep do-do):

June 27, 2010

The Third Depression

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

My view is that the Federal government needs some leeway and flexibility in spending during tough economic times, if they can prevent run-away inflation. They should, however, spend the money on the human needs of the general population, not on Wall Street. Local governments can't print money, and therefore need to cut budgets, to the extent that the Federal Government won't bail them out.

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