Is this ANY way to run an Economy?Posted: April 4, 2009 Filed under: Equity Markets, Global Financial Crisis | Tags: bailout, DeLong, Depression, Financial Crisis, Krugman, Obama/Geithner Bailout Plan, recession, Stiglitz, Summers Hedge Fund Salary, unemployment 4 Comments
The US economy is in a fragile state right now which begs the question: Why do our policy makers seem oblivious to lessons from the great meltdowns of the past? Adam Posner of the Daily Beast asks the question out right: Does Obama Have a Plan B? Posner asserts that the administration appears to be hellbent on recreating the Japanese Lost Decade. This is something that I’ve been harping on for months as has Paul Krugman and Joseph Stiglitz–two big brained economists with Nobel prizes.
So it is with some irony if not humility that we should approach Treasury Secretary Geithner’s Public Private Investment Plan presented on March 23. A number of major American banks have lost huge amounts of money, and clearly have insufficient capital if they are not literally insolvent. Why else would they be pushing so hard to change the accounting rules to avoid showing what they really have on their books instead of raising private capital? Why else is the U.S. government taking so long to perform “stress tests” and trying to get expectations of overpayment for some of the bad assets on the banks’ books before the test results are out? In short, the U.S. government is looking to shovel capital into the banks without sufficient conditions, hiding rather than confronting the actual situation.
That is just like the Japanese government in their lost decade, or the U.S. officials during the 1980s before they really tackled the savings-and-loan crisis. In those cases, the delay simply made the problem worse over time and in the end the government had to put more money into the troubled banks directly, taking over or shutting down the weakest of them. Whatever the political culture, it would seem we have not learned from experience. Or perhaps we cannot act on our learning. The universal barrier would appear to be the political difficulty of recapitalizing banks. That seems obvious, but the constraint it puts on good policy is enormous.
That is why the Geithner plan is so complex and jury-rigged, to avoid the need for public requests for more money for banks. Unfortunately, it is unlikely to succeed absent additional public money and more-intrusive government action. The plan will buy some time and certainly some appreciation in bank share prices. Current shareholders will be getting a new lease on life with subsidies from taxpayers. For that reason alone, the plan certainly will cost the taxpayer more in the end than a more direct recapitalization with public control would have.
Stiglitz continued his criticism of the Obama/Geithner bail out plan in this NY Times op ed piece called Obama’s Erstz Capitalism.
THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.
Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.
Meanwhile, over in the real economy, Paul Krugman suggests we Party Like it’s 1931.
I’m detecting a trend in commentary that I find slightly ominous. Some of the economic news lately has been slightly better than expected, which was bound to happen at some point (on average, after all, half the news should be better than expected). Mostly this is in the form of things getting worse more slowly, but it wouldn’t be surprising if we see, say, an uptick in industrial production in a few months, as the inventory cycle runs its course.
If so, that doesn’t mean the worst is over. There was a pause in the plunge in early 1931, and many people started to breathe easier. They were wrong.
So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.
Krugman wrote that be fore the job markets coughed up some devastating news. The unemployment statistics have just hit levels that will surely drive home the misery to main street. We now have 8.5% unemployment. This is a rate that we have not seen since 1983 which was during the worst of the Reagan/Volker recession. This recession is looking to be the worst we’ve seen since the Great Depression. It’s entering its 17th month which officially makes it the longest one since the Great Depression.
Unemployment zoomed to 8.5 percent last month, the highest in a quarter-century, as employers axed 663,000 more workers and pushed the nation’s jobless ranks past 13 million. The hard times were only expected to get harder — a painful 10 percent jobless rate before long.
The current rate would be even higher — 15.6 percent — if it included laid-off workers who have given up looking for new jobs or have had to settle for part-time work because they can’t do any better. That’s the highest on record for that number in records that go back to 1994.
U.C. Berkley Economist Brad DeLong is calling for another stimulus package.
Somebody needs to remind Wall Street that if folks don’t have jobs they don’t buy things. If they don’t buy things, Quarterly Earnings reports for nearly all businesses will be quite bleak. Right now, Wall Street appears to be happy drunk on FASB’s loosening of the mark-to-market rules and the call by the G20 summit to tighten regulation and standardize some of the more opaque markets. Don’t look for this rally to last too long because the fundamentals of the economy are waffling but haven’t turned around. This is those damnable second and third derivatives in the series. We may have stopped falling off the cliff, but that doesn’t mean we hit bottom yet. It only means the decline isn’t as step as it was a few months ago. Just saw this go up at Market Watch: U.S. Stock rally faces test next week as Earnings Kick off. It echos my concerns. Yesterday, I thought my signature bear thought at market close. That would be: “What are these guys smoking?” When I catch myself thinking that, I always get out and go to cash.
Another set of people related to Washington DC and Wall Street also appear to be in La La Land. That would be the folks at now taxpayer owned Fannie Mae and Freddie Mac who are planning the same kind of retention bonuses that were so popular at AIG.
According to a report today in The Wall Street Journal [subscription required], Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) — those twin titans of mortgage mayhem — are planning to dish out $210 million worth of retention bonuses over the next 18 months. James Lockhart, director of the Federal Housing Finance Agency, explained that $51 million in payouts were distributed in late 2008, with the rest of the bonuses to be disbursed through 2009 and into early 2010.
The news is already raising politicians’ ire, since Fannie and Freddie are staying afloat only through the grace of government bailouts. The two lenders reported combined losses of roughly $108 billion in 2008, says the Journal, yet 80% of Freddie’s employees and 61% of Fannie’s payroll will score retention bonuses based on this bleak operating performance.
Evidently Fannie and Freddie management are guessing that the pitchforks and torch stock at local hardware stores are depleted and not likely to be restocked due to the bad economy. Meanwhile, the congress itself doesn’t appear to be too worried about the tea parties or the pitchforks having passed a chokingly high $3.55 trillion budget. If only all of this would stimulate the economy, we could soothe Dr. DeLong’s concerns.
Voting along party lines Congress approved its $3.55 trillion budget for the fiscal year 2010. The House of Representatives voted 233 to 199 in favor and the Senate voted 55-43 in favor with two Democrats, Senators Ben Nelson and Evan Bayh voting against.it.
On Education, funding would be increased for early learning and college tuition.
It is expected that the deficit will run $1.8 trillion in 2009 and drop to $1.4 trillion in 2010. Obama has been criticized for raising the deficit to $9.3 trillion over 10 years. Lawmakers aware of this dropped a signature tax break and approved only vague language on health care reform.
There are still details to be worked out but the House measure included a provision that would fast track Obama’s legislation on health care reform. The key battle will be over health care when budget negotiators try to write their compromise. Obama wants to control health care costs and insure millions of Americans now without coverage.
So far, there is no firm commitment to the middle class tax cuts. Will there be a fight over these granting these tax cuts vs. putting the health plan on the fast track? Only the members of the committees will know for awhile. We’ll just have to stay tuned.
Another big topic that has financial economists chatting is the sudden cuts in credit lines for responsible borrowers. If you’ve read me at all, you know that I think the next bubble to pop will be the credit card industry. The WSJ has a great little article up on how this is impacting businesses. After all, Americans have had a love/hate affair with their plastic since the 1970s. Check out Credit Woes Hit Home. The article uses the word Credit Card Crunch. My bank sent me news earlier this month that it was not going to toy with my credit line, but that it was doubling my interest rate because of “economic situations”. It also gave me the option of closing my account to keep my current low rate or just suck it up and see it all go to 18%. Is that a Hobson’s choice or what?
Even as wobbly banks tighten up on consumer credit cards, they are also cracking down on small-business owners by slashing their credit lines, closing accounts and raising interest rates. A recent Federal Reserve survey found that about two-thirds of banks’ loan officers reported that they tightened terms for business loans in recent months. Meanwhile the National Small Business Association, a trade group, said 69% of 250 surveyed small-business members faced worse terms on their cards, such as higher interest rates, in the second half of last year.
Banks have reason to get tough. In a bad economy, small businesses are usually among the first victims. Credit-card issuers have seen a surge in charge-offs, or debts no longer expected to be paid, over the past year as small businesses fail.
Most of my friends that own small businesses rely heavily on lines of credits in the form of plastic since getting actual lines of credit tends to be something granted to only bigger, more established companies. If this is the trend, look for an increase in the bankruptcy rate of small businesses.
Oh, just in case you thought that Summers was NOT a big Wall Street insider, let me point you to this WSJ header: HEDGE FUND PAID SUMMERS $5.2 Million in Past Year.
WASHINGTON — Top White House economic adviser Lawrence Summers received about $5.2 million over the past year in compensation from hedge fund D.E. Shaw, and also received hundreds of thousands of dollars in speaking fees from major financial institutions.
A financial disclosure form released by the White House Friday afternoon shows that Mr. Summers made frequent appearances before Wall Street firms including J.P. Morgan, Citigroup, Goldman Sachs and Lehman Brothers. He also received significant income from Harvard University and from investments, the form shows.
In total, Mr. Summers made a total of about 40 speaking appearances to financial sector firms and other places, with fees totaling about $2.77 million. Fees ranged from $10,000 for a Yale University speech to $135,000 for an appearance paid for by Goldman Sachs & Co.
The disclosure — in a financial report that is required for federal office holders — comes as Mr. Summers is involved in shaping the Obama administration’s policy decisions on the financial meltdown as well as the broader recession. Among the many decisions the economic team has wrestled with has been whether to step up regulation of hedge funds, one of the most contentious subjects during a summit of world leaders this week. European nations pushed for tougher rules, while the Obama administration preferred a less stringent approach.
WOW, that makes me feel a LOT better.
UPDATE: Greenwald connects the dots on the Summer’s pay to play here: SALON
and Moyers connects the dots to FRAUD HERE:
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Larry Summers, Tim Geithner and Wall Street’s ownership of government The individuals Obama chose to be his top economics officials embody exactly the corruption he repeatedly vowed to end. Glenn Greenwald [2009-04-04]
this is what I watched last night on pbs and GG has this on salon today. It is what we have been saying all along
whoops guess I should have gone down a bit you knew this
Yup. I saw the Summers thing this morning and went ballistic. If this isn’t influence peddling, I don’t know what is.
And you’re right we’ve really been out there on this one for some time. I don’t think many folks want to admit they bought a pig in a poke.
The celebratory atmostphere is offensive, considering we’ve only reached the level in the market where we were at the Inauguration, which was a 40% drop. Couple that with about 2 million more people unemployed since the beginning of the year.
There’s a real push to say “we’re 50% down, we must be at the bottom.” This could potentially go to 90%. Some of the stuff is starting again. With lower interest rates, the banks are trying to squeeze some more refinancing and home equity lines out of people. This administration and the people who cheerlead it are going to make a lot of poor people poorer thinking they can ride out a recession until the end of the year that probably won’t conclude until the next decade.
Sorry… forgot to say great post – can’t wait to read your next one!