James K. Galbraith and the Sorceror’s Stone
Posted: April 24, 2009 Filed under: Global Financial Crisis, Uncategorized | Tags: James K Galbraith Comments Off on James K. Galbraith and the Sorceror’s Stone
Forecasts of economic activity are always a mixture of alchemy and bias. You always have to check the assumptions before you evaluate the output. Assumptions can turn a model up side down or inside out. Economist James K. Galbraith gave a speech this month at the Minsky Conference. His speech included terse evaluations of some of the biggest baseline forecasting models including one used by the Congressional Budget office. He found some of the rationale “purely mystical”. He’s currently questioning what some folks see as a future “Obamaboom” that assumes a really quick turnaround in the economy followed by manic expansion. (This scenario is actually coming out of bank economists and you know how well they’ve been assessing things recently.)
Galbraith looks at this giddy scenario skeptically, and rightly so. I want to discuss his caveats. He has reservations about this overly optimistic scenario similar to mine. Yesterday, during discussion of my post, I was asked about the L shaped recovery scenario. This is something I find likel, although I’m not using sophisticated models to wank out numbers. I mentioned that I thought it likely because of some structural changes going on in the underlying economy. Laurie asked me if I could elucidate further. I did a little of that yesterday. I’ll continue it today.
Basically, I see the households and their relationship to debt and their assets undergoing some fundamental changes. House values are way down and unlikely to escalate to bubble levels again which is going to deprive households of their big cash cow. Also, I don’t really see the credit markets churning out the kinds of expedient loans they did in the past. If anything, I see banks becoming overly prudent in their underwriting practices–a sort’ve over reaction to the subprime toxins. Because household spending represents about 67% of our overall economy’s spending, any significant drawback of consumer spending, or the relationship between what they spend, save, pay in taxes and buy in imports is going to have a significant impact on the multiplier process.
I just see a new American thrift paradigm. I don’t think that households will be enabled by banks any more. I think their wealth (primarily houses and retirement savings) will not recover to levels that will make the feel secure about their futures. I think the uncertainty of the job market will make them spooked for some time. All of this means, to me, a very long drawn out slow, scuttling along the bottom, L shaped recovery.
W(h)ither Geithner and his TALF
Posted: April 23, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy, Uncategorized | Tags: banks, Elizabeth Warren, TALF, TARP, Timothy Geithner Comments Off on W(h)ither Geithner and his TALF
Neil Irwin of WAPO reported today that the TALF is not having the results trumpeted by the Obama administration. This is leading, again, to speculation about the relevancy of most of these plans and, of course, job security of Treasury Secretary Timothy Geithner.
In its first two months, the government’s signature initiative to support consumer lending has fallen well short of expectations, deploying only a fraction of the amount officials had hoped to extend to stimulate auto loans, student loans and credit card lending.
The slow rollout of the program has frustrated staff at government agencies working on the effort and diminished hopes that they could engineer a rapid return to healthy lending levels, according to interviews with government and industry sources. The initiative also serves as a window into the complexities of designing a giant rescue of the financial system.
The TALF is the private-public partnership that couples the funds of private investors, like hedge funds, and the FED. The hedge funds invest small amounts that are matched by much larger amounts that would presumably come from the Treasury and Tax Payers if they wind up being nonprofitable. The combined funds will supposedly purchase non-toxic, virgin, high rated rated securities to fund everything from student loans and car loans to inventory and capital loans for business. As of yet, they really have failed to do so.
Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion. But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion.
Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. Separately, the brokerage houses that are crucial intermediaries are being exceptionally cautious in the contracts they draw up with participants in the program, in part out of wariness that any mistakes could draw the ire of Congress or the media.
In congressional testimony on Tuesday, Treasury Secretary Timothy F. Geithner said that overall progress is “pretty good” for a program in its early days. Still, he acknowledged that participation was “lower than expected” because of “concern about the conditions that come with the assistance in the program . . . and uncertainty about whether they may change in the future.”
Meanwhile, on the bank front, stupid accounting tricks abound! Which begs the question is any one stupid enough to believe the numbers? Every large financial institution appears to be jumping on the band wagon of conveniently forgetting the month of December. What does this say about the state of public accounting today and Wall Street’s gulliblity?
And the rich just keep getting richer …
Posted: April 20, 2009 Filed under: U.S. Economy, Uncategorized | Tags: Ginie Index, Income Inequality 3 Comments
This graph from the Congressional Budget Center for Budget and Policy Priorities shows the most recent date on U.S. Income Inequality. This includes new data from 2006. This is pretty astounding. It shows just exactly how much of the country’s income has gone to the richest and poorest Americans and of course the middle classes.
Let’s assume that all U.S. incomes had all increased at the same rate as the lowest quintile.
lowest fifth: $1,639
second fifth: $3,000 to $33,000
middle fifth: $5,000 to $48,000
fourth fifth : $6,000 to $62,000
fifth fifth: $11,000 to $110,000
top fifth: $37,000 to $374,000
Now let’s see what it would look like if we’d all experienced the same increase as the top 1%.
lowest fifth: $38,000 increase to $53,000
2nd fifth: $77,000 increase to $107,156
3rd fifth: $110,000 increase to $152,000
4th fifth: $144,000 increase to $200,00
5th fifth: $253,000 increase to $352,000
Top fifth: $862,000 increase to 1.2m total
This basically makes the income inequality in this country the widest on record. The Center’s release also included this:
Taken together with prior research, the new data suggest greater income concentration at the top than at any time since 1929
If you want to check out how our US income inequality compares to the rest of the world, check out the GINI Index here in the CIA World Fact Book. The GINI index is a measure of income/wealth distribution. The lower the coefficient, the more equal the wealth distribution. So zero would mean perfect equality where everyone has the exact same income. One means there is perfect inequality or one person has all the income and the rest of the folks have none.
In 2007, the US had a GINI coefficient of 45. Denmark had a 24 in 2005. UK had 34 in 2005. Needless to say, we are up there with most of the world’s tin pot dictatorships on income equality. Uganda and Venezuela have ratings similar to ours.
In view of these numbers, I would say the populist rage overtaking the country isn’t about taxes. It may not even be about government spending. It is probably about the fact that most Americans are losing ground. This in itself wouldn’t be a problem, but not only are the majority of us losing ground, a select few are gaining hugely. It is also undeniable that this gain has come the political class who becomes wealthy themselves enabling policy that widens the inequality gap.
Bernanke Rules
Posted: April 18, 2009 Filed under: Global Financial Crisis, U.S. Economy, Uncategorized | Tags: bernanke, Credit Default swaps, Credit Derivatives, Fannie Mae, FED, Freddie Mac, Regulations, Subprime mortgages Comments Off on Bernanke Rules
Is The Fed under Chairman Ben Bernanke finally beginning to adopt the tougher lending regulations and rules that would’ve prevented much of the havoc of the last two years? In a speech on April 17, Bernanke stated that damage done to the economy was not likely to be undone any time soon. This gives more credence to the idea that we may see an L-shaped recovery. In other words, be prepared to scuttle across the bottom for a very long time. But did the speech deliver the assurances we need that necessary steps and regulations w lending practices and financial innovations are in the works? I don’t think so.
Here’s some interesting analysis by Craig Torres at Bloomberg.com.
Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause “long-lasting” damage to home prices, household wealth and borrowers’ good credit score.
“One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be,” the Fed chairman said today in a speech at the central bank’s community affairs conference in Washington. “The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting.”
The U.S. central bank has cut the benchmark lending rate to as low as zero and taken unprecedented steps to stem the credit crisis through direct support of consumer finance and mortgage lending. The Fed plans to purchase as much as $1.25 trillion in agency mortgage-backed securities this year to support the housing market and is providing financing for securities backed by loans to consumers and small businesses.
Bernanke and the Federal Reserve Board approved rules last July to toughen restrictions on mortgages, banning high-cost loans to borrowers with no verified income or assets and curbing penalties for repaying a loan early. The action came after members of Congress and other regulators urged the Fed to use its authority to prevent abusive lending.
This suggests Bernanke does not see home values going back up any time soon. It also suggests that the lending markets are not likely to return to their heyday. Does this mean, however, that we’re finally going to see the regulation and enforcement of prudent underwriting standards and no more hide the trash in a bundle and pass it to the next sucker?
What a World …
Posted: April 16, 2009 Filed under: Uncategorized | Tags: Bush Administration and Torture, Obama administration and Torture, Torture 4 CommentsA year seems like such a short time for some many things to go upside down. Here it is. I’m just going to let this go where it may so you can see it. This is KO. ( Yes, I know, I can’t believe I’m posting him but listen to it.) This is KO saying he can’t believe POTUS basically punted on the torture thing. I have that same sick feeling I had when Ford pardoned Nixon and I was just a teenager back then. So, watch it and discuss, while I go grab a lot of booze to grok the idea of moral relativism in the 21st century as compared to the 20th century. Bottoms up my friends!
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