We need a New Brain Trust
Posted: August 13, 2009 Filed under: Global Financial Crisis, president teleprompter jesus, Surreality, Team Obama, The Great Recession, U.S. Economy | Tags: Angela Merkel, Christine Lagarde, Eurozone, French Economy, German economy, Nicolas Sarkozy Comments Off on We need a New Brain TrustWhile the U.S. economy sputters, France and Germany appear to have exited their recessions and returned to modest growth during the spring. There’s been a distinctly different approach to macroeconomic policy taken by Chancellor Angela Merkel and President Nicolas Sarkozy and their respective finance ministers that deserve elucidation.
The French and German economies both grew by 0.3% between April and June, bringing to an end year-long recessions in Europe’s largest economies.
Stronger exports and consumer spending, as well as government stimulus packages, contributed to the growth.
Germany is a manufacturer and exporter. Yes, that’s right. Germany has trade unions, good vacation packages, 
excellent schools, universal health care, lots of solar power and tough environmental regulations and they still have a manufacturing economy and they export. Their form of government is basically a type of democratic socialism. All the things we are taught to view with suspicion. Still, Germany manages to manufacture things and export to China the country to whom the U.S. has practically sold their collective soul so we can massively import junk on a rapidly decreasing credit line.
The latest figures showed German exports had grown at their fastest pace for nearly three years at 7%, with particularly strong growth in demand from rapidly-growing economies such as China.
The country’s Federal Statistics Office said that household and government expenditure had also boosted growth.
It added that imports had declined “far more sharply than exports, which had a positive effect on GDP growth”.
“These [GDP] figures should encourage us,” said Germany’s Economy Minister Karl-Theodor zu Guttenberg. “They show that the strongest decline in economic performance likely lies behind us.”
It’s the same story with France. Household consumption and export markets are improving. I don’t know if you’ve ever listened to Finance Minister Christine Lagarde but she’s undoubtedly one of the best in the world. Compare her to our Secretary of Treasury Timothy Geithner and you’ll see who comes up quite short. First, she’s a noted anti trust lawyer as compared to a noted monopoly enabler.
Ms Lagarde said that consumer spending and strong exports had helped to pull France out of recession.
“What we see is that consumption is holding up,” she said.
Official figures showed that household consumption rose by 0.4% in the second quarter.
She said government incentive schemes for trading in old cars, together with falling prices, were helping consumers.
Foreign trade contributed 0.9% to the GDP figure – a “very strong impact”, said Ms Lagarde.
We are daily fed this propaganda that other countries come up short when compared to the United States and our economic machine. We are told that countries with high union participation, with universal health care, with high standards for the work environment and tough regulations for business and standards for the environment come up short when compared to the U.S. These countries both undertook solid fiscal stimulus. Here is some information on the French package passed in February. The Obama stimulus package passed during February also.
France’s economic stimulus package encompasses a three-pronged plan: €11 billion ($14.5 billion) each to go to direct state investment and to inject capital into private-sector enterprises, plus €4 billion ($5.24 billion) for state-run companies to be applied toward improvements for the national postal service, energy supplies and the rail network. Of that amount, some €1.3 billion ($1.7 billion) is to go into refurbishment of higher educational institutions, prisons, monuments and court.
Here’s some information on the German package also passed in February.
Germany has approved a 50bn euro ($63bn, £44bn) stimulus plan aimed at boosting Europe’s largest economy.
The plan was approved by the upper house of parliament, which represents Germany’s 16 state governments.
It includes infrastructure investments, tax relief, reductions in health care contributions and money for families with children.
The package follows an earlier 23 bn-euro plan that was criticised for being too cautious.
It’s just a little bit of Policy Fail Repeating
Posted: August 6, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, president teleprompter jesus, Team Obama, The Bonus Class, The DNC, The Great Recession, The Media SUCKS, U.S. Economy | Tags: bad bank, Fannie Mae, Freddie Mac, homeownership, James B. Lockhart, mortgage origination, secondary market for mortgages, Treasury Secretary Timothy F. Geithner Comments Off on It’s just a little bit of Policy Fail Repeating
When you let lobbyists make public policy, failure is an acceptable outcome. That’s because the point of the policy isn’t the public and isn’t necessarily doing what will work. The point of the policy is to enrich and perpetuate the entrenched interests. Every other possible goal becomes expendable including those that have to do with protecting the public purse and welfare.
Imagine my lack of surprise when I saw that the creation of a “bad bank” policy is back in today’s WaPo headlines. Go take a look at “U.S. Considers Remaking Mortgage Giants:’Bad Bank’ Would Wipe the Slate Clean for Fannie Mae, Freddie Mac by Taking Their Toxic Loans” and weep. This administration will reward bad players as long as there is a political reason for them to exist. So, instead of real reform of Fannie and Freddie, they’re proposing a solution that sweeps past mistakes under the rug and allows these failed institutions to operate in the same irresponsible way that brought them their current fate. There is no such thing as the discipline of the market or the bankruptcy court when you’re big enough to hire K Street impresarios to keep your show running and the federal government enables you.
The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said.
The bad debts the firms own would be placed in new government-backed financial institutions — so-called bad banks — that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.
The moves would represent one of the most dramatic reorderings of the badly shattered housing finance system since District-based Fannie Mae was created by Congress to support mortgage lending during the Great Depression. Both Fannie Mae and Freddie Mac, based in McLean, have government charters to buy home loans from banks, which they then repackage and sell to investors. The banks can then use the proceeds to offer more loans to home buyers.
The leviathans became emblematic of the financial crisis when they were effectively nationalized in September amid a market meltdown that revealed much of their holdings to be troubled. The government has since pledged more than $1.5 trillion, including $85 billion in direct aid, to keep the mortgage market working through Fannie Mae and Freddie Mac.
The proposal, which is preliminary and one of several under discussion, is scheduled to be taken up by the White House’s National Economic Council on Thursday.
What about the Japanese lost decade and all the papers and studies written about the bad bank policy did these folks miss? Well, of course, you do know that the head of the “White House’s National Economic Council ” is La-La Summers, right? Mister, I got mine from Wall Street? Let’s look at the other players who buy into this. I’ll just highlight them so you can see that it’s basically the same players that had some kind of supporting role in the original failure. Why does Washington D.C. continue to reward the very same people and players? It has too be some thing pathological.
Keyboard Cat plays off Okun’s Law
Posted: July 23, 2009 Filed under: Team Obama, The Great Recession, U.S. Economy | Tags: GDP growth, Okun's law, unemployment Comments Off on Keyboard Cat plays off Okun’s Law
I’ve been teaching Okun’s Law in my principles level Macroeconomics courses since 1980. It’s been the policy rule of thumb since the Kennedy years on how much GDP needs to change to get a movement in the unemployment rate. Here’s the Wiki explanation which is as good as any.
In economics, Okun’s law is an empirically observed relationship relating unemployment to losses in a country’s production. The “gap version” states that for every 1% increase in the unemployment rate, a country’s GDP will be an additional roughly 2% lower than its potential GDP. The “difference version” describes the relationship between quarterly changes in unemployment and quarterly changes in real GDP. The accuracy of the law has been disputed. The name refers economist Arthur Okun who proposed the relationship in 1962 (Prachowny 1993).
I’ve mentioned recently that we’re seeing some fundamental changes in that relationship. This WSJ article talks more about how we’re breaking away from the historical pattern studied by Okun back in the 1960s. This has incredible ramifications for fiscal policy makers. Again, I think the Obama economic advisers appear to be ignoring some really important changes in the fundamentals. We’re much more oriented towards imports, service jobs, and capital than we were back in the Camelot days.
MacroEconomic Malpractice
Posted: July 20, 2009 Filed under: Global Financial Crisis, Team Obama, The Great Recession, U.S. Economy, Voter Ignorance | Tags: Banking, Economic Forecasts, Keynesian Economics, Larry (LaLaLand) Summers, Mergers and acquisitions, Monopoloy, Supply Side Economics Comments Off on MacroEconomic MalpracticeIf the U.S. economy was a patient, I’m sure we all would be talking medical malpractice by now. After having 8 years of nothing to lecture on during the Clinton years other than, yes Keynesian economics works, we are now on our 9th year of wtf? (Feel sorry for my poor undergrads.) We’re still dealing with the spinning of the complete failure of Voodoo Economics, Trickle-down economics, Reaganomics or Supply Side economics from the free spending, tax dollar giveaway as success story with no real point other than supporting faith based economic hypotheses and the rights of the ultrarich to stay that way in to something it was not. I simply cannot believe that any REAL democratic administration with some roots in the Clinton years could possibly be choosing to continue the failed policies of the right.
So, since I’ve been on a populist rant over Wall Street Bonuses, let me just fuel the fire some more with this little piece in the Washington Post website today with the unsurprising title “Bailout Overseer Says Banks Misused TARP Funds”. No kidding cupcake. Why do you suppose the same risk happy folks that got their bonuses last year are getting big ones this year? We might as well funded a national road trip to Vegas.
Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government’s financial rescue program.
The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.
So, we’re basically funding a real time game of monopoly. Okay, Republicans, let me just explain this to you ONE more time. MONOPOLY is the antithesis of market capitalism. It isn’t Socialism. Socialism is NOT an economic concept any more than GOD is a Buddhist one. It’s the difference between, I buy houses in Houston and I buy All the houses in Houston. We actually prove markets are efficiently working by comparing competitive markets to centrally planned ones and find the same result when they are. However, that’s IFF (if and only if) things in both circumstances are perfect (which they NEVER are). We live in a land of frictions and 30 years of research shows that we’ve just about got as much chance of having the Pure Capitalist dream as we do the Pure Marxist dream. Zip, Zilch, nada, no way! Our lives our lived in imperfect markets where government sometimes steps in to make things worse, and some times steps in to make things better. We’re basically in the search for the middle path.
Right now, we’re funding and sustaining a financial market structure that perpetuates extraordinary profits for the capital owners, less products available to the market, and higher prices for every one. It is also well-researched that bigger institutions do not bring efficiencies of scale to the market so how is this a good thing? Just pick up any basic microeconomics book and study market structures. The bottom line is a welfare loss for the market as resources will be inefficiently used, quantities will be reduced, prices will be higher, and the demand side of the market will experience a loss of welfare. (Sorry, I keep having to remind myself I have the summer away from theory, but I’m an old dog and that’s a new trick for me.) The empirics on this have supported these theories for hundreds of years!
An Economic Exercise in Wishful Thinking
Posted: July 1, 2009 Filed under: Global Financial Crisis, Team Obama, The Great Recession, U.S. Economy, Uncategorized Comments Off on An Economic Exercise in Wishful Thinking
Warning: Do NOT use before making economic policy.
In today’s NY Times, David Leonhardt is very clear about the role of hope and wishful thinking among the Obama economics team. They got the unemployment numbers very, very wrong and as a result, we got a stimulus package that was underdesigned and oversold. If you read me or for that matter, Paul Krugman or Joseph Stiglitz, you were warned about the likely result. While this m.o. among Obama and his minions comes as no surprise to folks here, we’re beginning to see the resulting shock and awe as every one else awakens to policy based on the empty rhetoric of hope and no real change. Precious time, political majorities and capital are being wasted on an enhanced status quo.
In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.
To make the case for a big stimulus package, they released their economic forecast for the next few years. Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year.
We now know that this forecast was terribly optimistic. The jobless rate has already reached 9.4 percent. On Thursday, the Labor Department will announce the latest number, for June, and forecasters are expecting it to rise further. In concrete terms, the difference between the situation that the Obama advisers predicted and the one that has come to pass is about 2.5 million jobs. It’s as if every worker in the city of Los Angeles received an unexpected layoff notice.
There are some fundamental things in the labor market that the Obama Team somehow overlooked. The first is the unwinding of the automobile network and all the supporting infrastructure around the supply and sales chain. The second is the impact on the states of low tax revenues and high unemployment insurance payouts. Some how, in focusing on the impact of the financial crisis, they appeared to haven forgotten some basic underlying macroeconomic dynamics. At least, that is my take. They may have kept their eye on the ball, but they failed to look around the bigger field of play.
Leonhardt points to two possible explanations as to why so many very bright people got it so wrong. He argues that because the stimulus package was designed poorly and hurried through with the rosy scenario coloring the numbers, that it is possible that the stimulus package has done nothing and that as a result, things are getting worse. That’s hypothesis number one. His second hypothesis is the more likely one in both his and my opinion. That is that the economy is deteriorating further and this is despite of the stimulus. Again, this would be due to a bad forecast and an even worse policy prescription. So he’s laid out the ground work for the big question while giving a slight nod to some potential for the stimulus plan.
The stimulus package does seem to have helped. But its impact has been minor — so fa
r — compared with the harshness of the Great Recession.
Unfortunately, the administration’s rose-colored forecast has muddied this picture. So if at some point this year or next the White House decides that the economy needs more stimulus, skeptics will surely brandish that old forecast.
Worst of all, the economy really may need more help.
Well, you know, on the one hand, on the other hand. However, whichever hand you choose, this is a policy failure we couldn’t afford.
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