On the other hand … or is it Hoof?Posted: October 29, 2009
In what is undoubtedly good news, the US Bureau of Economic Analysis (Dept. of Commerce) has announced that REAL GDP grew by approximately 3.5% in the third quarter of 2009. That is up from the second quarter growth of .7%. It appears that the economy may be rebounding from the so-called “Great Recession”. However, as with everything, the devil is in the details and the details show that this occurred because of government support. This will be good news for those folks that supported the Stimulus Plan. Details underlying the growth still show that the private sector, however, has yet to pick up slack. This means the growth has not worked its way through the economy in a way that makes it firmly sustainable. The increase in Consumer spending seem rooted firmly in the cash-for-clunkers program as well as the tax credits to first time home buyers. These programs have ended so now we have to look for sustainable consumer spending in areas not financially supported by government programs.
Policy makers will now focus on whether the recovery, supported by federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs. The record $1.4 trillion budget deficit limits President Barack Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.
“A lot of this is thanks to government support,” Kathleen Stephansen, chief economist at Aladdin Capital Holdings LLC in Stamford, Connecticut, said in an interview on Bloomberg Television. “The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government.”
There has yet to be any signs that improvements will be permanent. The Labor Market, traditionally sticky, has yet to turn around in a fundamentally good way.
A report from the Labor Department showed 530,000 workers filed claims for jobless benefits last week, more than anticipated and signaling the job market is slow to heal even as growth picks up.
There is an extremely good piece over at Naked Capitalism that explains the situation right now called “The choice is between increasing or decreasing aggregate demand” written by Edward Harrison of Credit Writedowns.
(It’s a bit wonky so be forwarned.)
As I see it, the issue we are debating has to do with how the government responds when large debts in the private sector constrain demand for credit in the face of a severe economic shock and fall in aggregate demand. In short, if private sector debt levels are so high that a recession precipitates private sector credit revulsion, how should government respond?
This is a good question as it gets to the heart of what to do next if you’re the government and it reflects reality on the ground which are the constraints facing the economy due to continuing credit market problems. The one thing that the discussion fails to address is the fact that quantitative easing by the Fed is not feeding into the credit markets as much as it appears to be feeding a bubble on Wall Street eagerly supported by the Great Vampire Squid and other enemies spawning in the unfathomable deep. The article focuses on the paradox of thrift and the question “Do we really want the private sector to save at the moment?”
The deal is, we’ve plenty of money circulating through the financial markets at the moment because of actions by the FOMC and of course, the Treasury. The problem is where it’s going. Easy money is financing merger activities and arbitrage rather than underlying investment that promotes long run economic growth. This is the same bubble-producing activity that brings us to no good ends. We really don’t need savings as much to fund business as much as we need business to feel like it can make commitments to job-producing, goods and servicing producing capital investments funded by the financial sector that should be forced to stop its casino banking activities. If anything, we need savers to step up and buy government debt, sort’ve an any bonds today movement to stop our reliance on foreign sources and free ourselves of obligations to human rights violators like the Chinese and Saudis.
This comes back to the policies of Geithner and the necessary Fed butt kicking that should go along with the cheap tax payer funds. Let’s just look at the most recent example where the Funds are coming but I doubt they’ll be accompanied with an agreement with teeth. We’re basically nationalizing another finance sector behemoth GMAC. Here’s the news from the FT of England. (Funny how I always have to go abroad to get the bottom line on these big taxpayer-funded wall street welfare deals, isn’t it?)
GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.
The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.
Companies receiving huge injections like this should be prepared for more than just a government partner and taxpayer funds. Funds should come with HUGE strings attached and not just restraints on executive pay. We should not be financing M&A activity or arbitrage profits. We need these funds to go where they will create long term REAL value. Geithner keeps giving these guys they keys to our cars without any parental instructions. We already know they’ve crashed the car a few times. Why aren’t we providing the guidance and ground rules to prevent another disaster? We are we perpetuating the conditions that led to failure the first time out?
Oh, and this is an even more interesting question … now that we’re heavily subsidizing parts of our economy will our trading partners and debt holders continue to smile and hold the bag? Another eye opener from the FT.
China is preparing to launch a trade investigation into whether US carmakers are being unfairly subsidised by the US government, according to people familiar with the matter.
The move comes at a time of heightened trade tensions between the two countries after the US imposed duties on Chinese tyres last month. Many warned this would prompt Beijing to retaliate.
Few vehicles are actually exported from the US to China, but the move would have symbolic power by turning the tables on Washington.
US labour groups have long accused Beijing of unfairly subsidising its exporters. However, through a “countervailing duties” investigation, China would assess whether the US was open to the same charge. The investigation could lead to import duties.
Every one seems to recognize that the Treasury is setting up a system of monopolies that are not healthy for the long term prospects of our economy. Without the systemic changes I harp on continually, we’re bound to get some improvement in the big names, while the underlying fundamentals will belie real change. Is this the game plan? Make the big picture look good while setting up the same house of cards while no one is looking? Economic policy as slight of hand?
Here’s where the smart people are seeing the need to change the system that’s currently under construction by the Treasury Department and the administration economic wonks.
Key officials and lawmakers are reaching a “growing consensus” on the need for a strong mechanism that would allow the government to dismantle troubled financial giants, the chairwoman of the Federal Deposit Insurance Corporation said on Monday.
Sheila C. Bair said administration officials, top bank regulators and lawmakers all agreed that so-called resolution authority needed to be a priority so financial firms do not take on excessive risk, thinking the government will save them, Reuters reported.
“We need to end ‘too big to fail,’ ” Ms. Bair said in remarks to the American Bankers Association annual convention.
The Obama administration plans to send new language to lawmakers shortly on resolution authority, which is seen as a potential deterrent to banks growing too big and complex.
So, the law is in the works, but will it be the usual symbolic effort with no real teeth to it?
The new draft bill is expected to take a tougher stance toward troubled financial firms than the administration’s original plan, and may remove some language that would allow for temporary bailouts.
The strategy would make it easier for the government to oust managers, wipe out shareholders and restructure the firm’s outstanding loans, an administration official said.
Ms. Bair also said she wanted bank regulators to have input in the proposed Consumer Financial Protection Agency, which would have broad power to protect consumers from risky financial products like high-interest mortgages and credit cards with excessive fees.
“I’m hoping that bank regulators can have some say in those rules,” Ms. Bair said.
The C.F.P.A., as proposed, would have the power to write and enforce rules for both banks and nonbanks that provide financial services. It would strip the current bank regulators of their consumer protection roles, which Ms. Bair has opposed.
We need to watch this proposal carefully and ensure that when the sausage gets made, it’s the pigs that go into the ingredients and not the taxpayers and consumers.