Greenshoots or False Spring?

Miss Strawberry with the Winners of the Strawberry Bakeoff

Miss Strawberry with the Winners of the Strawberry Bakeoff

I woke up this morning to a chill in the air.  When I came back home from university today it was a chilly 60 in the house. There’s a frost warning for the North Shore and I had to put the heater back on and pull at the flannels.  I walked the dog in a fleece jacket and had to put socks on.  This weekend was just warm, sunny, and great and the Strawberry Festival was in  full swing?  WTF happened here in Southeastern Louisiana?   One day I’m basking in the first hint of a warm sun enjoying fresh strawberry shortcake and the next I’m hoping that the magnolia blossoms are safe.  Yes, there’s  a Strawberry Queen, a Strawberry Ball, and Strawberry Royalty.  If you gotta work somewhere, it might as well be the Strawberry Capitol of the Word.

So, having been raised in the Great Flyover and spent most of my childhood watching my Dad’s business sell F-150s to the local farmers, I know a lot about a false spring.  That’s when Mother Nature messes with you by giving you just enough spring to think the worst of winter is over and then hits you with the cold blast of reality.  Thankfully, my cold blast didn’t include the blizzard that hit the heartland, but it is a cold blast.  That’s why I’m having so much fun with the economic word-de-jour.  That would be Ben Bernanke’s “green shoots”.   An Ivy-leaguer from South Carolina should know about about false springs.  Bloomberg picks at the analogy too in Bernanke ‘Green Shoots’ May Signal False Spring Amid Job Losses.

April 6 (Bloomberg) — It will be months before it’s clear whether what Federal Reserve Chairman Ben S. Bernanke calls the U.S. economy’s “green shoots” represent the early onset of recovery, or a false spring.

The Labor Department’s April 3 report that the economy shed an additional 663,000 jobs last month, while the unemployment rate rose to 8.5 percent, will be followed by months more of bad-news headlines, economists say. The recession, now in its 17th month, has already cost 5.1 million Americans their jobs, the worst drop in the postwar era; unemployment may hit 9.4 percent this year, according to the median estimate in a Bloomberg News survey, and may top out above 10 percent in 2010.

The risk is that the jobs picture turns even more bleak than forecast or the drumbeat of bad news still to come causes consumers, whose spending has firmed up in recent months, to hunker down again.

“If something happens to spook consumers and they crawl back into their tortoise shells, that would be terrible news,” says Alan Blinder, former Fed vice chairman and now an economics professor at Princeton University.

Consumer spending, which accounts for more than 70 percent of the economy, rose 0.2 percent in February after climbing 1 percent in January, breaking a six-month string of declines.

Read the rest of this entry »

Is this ANY way to run an Economy?

bank-holidayThe 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.

Read the rest of this entry »

13. The next industry (not including finance and auto) to beg for and get a bail out will be:

the porn industry.

I have to say that your resident dakini did NOT see that one coming when she did the Dakini Office Pool.  Okay, they haven’t GOTTEN it yet so it technically doesn’t count, but it’s still good for a laugh.

January 7, 2009
Posted: 05:27 PM ET
Larry Flynt is asking for a bailout.
Larry Flynt is asking for a bailout.

WASHINGTON (CNN) — Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.

“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Is it the most serious thing in the world? Is it going to make the lives of Americans better if it happens? It is not for them to determine.”

Francis said in a statement that “the US government should actively support the adult industry’s survival and growth, just as it feels the need to support any other industry cherished by the American people.”

“We should be delivering [the request] by the end of today to our congressmen and [Secretary of the Treasury Henry] Paulson asking for this $5 billion dollar bailout,” he told CNN Wednesday.

Slowing the Downward Slide

I’d like to focus on some potential policies that could see us through this difficult economy.  It should be apparent that we’re in for a period of time where uncertainty will cause a lot of stress in the financial markets.  The uncertainty has bled into the ‘real’ economy where we’re seeing increasingly higher levels of unemployment and distress in industries outside the banking world.  If you haven’t noticed, the Fed has been actively working on this for some time.  It’s major tools indirectly impact the real economy by influencing the credit markets and the availability of loans.  It’s pretty straight forward actually, in a normal economy, low interest rates would cause banks to lend to more businesses and households and this would stimulate the economy out of a recession.  The problem right now is that losses from loans are creating such problems for bank profitability, banks are holding the money.  We have extremely low interest rates right now.  This is a situation that we saw in Japan during the 1990s.  It took a decade for the Japanese economy to snap out of it.  The Fed’s rate to banks is 1% right now.  It is cheap for them, and now many other financial institutions to borrow from the Fed.  There is still some constipation, if you will, in the banking system.  What is worse, some of the money sent to these banks that has gone to healthy banks is going into buying other banks.  None of this will help stimulate the economy.  So how do we avoid Japan’s stagnant decade?

If you know me, you know I do not favor bailing out the automobile industry.  We have a system to help corporations rearrange their obligations and make themselves more able to carry on in the future.  It is called bankruptcy.  We’ve watched the airline industry go into the bankruptcy process and come out as healthier companies.  Usually, all contracts between debtors and the companies are either renegotiated or foregiven.  The stockholders lose their stake.  The Unions will have to scale back on their contracts.  This will all happen in a very structured manner and all will have to sacrifice for the companies to survive.  I’m afraid that if we do not force them into this circumstance that we will find that we lend them money, only to have them pay creditors at the same losing level with the same bad managers.  The folks we could spend the money on would be the folks that do lose their jobs.  We can provide them with extended unemployment insurance and with job retraining.  We’ve seen the Treasury’s deal with bank result in outcomes we did not want:  no credit going to main street, bonuses and dividends still in tact, and buy-outs.  We do not need to repeat this mistake.

Do we need another stimulus package or do we need tax cuts?  If so, who should be the focus? Short term tax stimulus is probably in order.  However, if we spend all of this money, we will grow the deficit.  Growing the deficit is not a bad thing during recessions, however, we already are running a huge deficit and it’s getting bigger because of two wars and the Bush tax cuts. If we continually push 10 year bonds out to the market, there will be a point where the big money (mostly soveign wealth funds) will begin to balk.  Rates could go up which means that we could spend a huge amount of money just servicing the debt.  Any stimulus should be short-lived and should focus on the middle and working class.  Tax increases, even on the wealthy and on corporations, should be avoided for several years.  The adminstration will have to scale back on its offerings of new benefits and programs.  I don’t think we’ll see work on the health care system right now because other things will take priority.

There are two areas where new spending should be encouraged.   These are energy independence and infrastructure rebuilding.  This does not mean building new bridges to nowhere, but fixing our aging infrastructure.  This expenditures will create future economic growth and can provide jobs during the recession.  Grants to states for specific purposes can be used so that states with the biggest problems can get the highest priority.  There are challenges to this, however. The biggest problem with major programs like this is getting them to move out of congress and committees.  This can take so much time that the projects may never have an impact. Since the Democrats have strong majorities in both houses, they should be able to usher through these types of programs.  These need to be expedited.  The one big thing I worry about here is that they will not focus on what is best, but will focus on enriching groups that supported election winners. Projects providing jobs that focus on building our future potential would be a lot better use of funds than just giving folks extended unemployment benefits.   Hillary Clinton’s green jobs program and McCain’s cap and trade system to reduce green house gases are both good programs.  Jobs could include retrofitting existing houses to be more energy efficient.  The focus needs to be on the underlying capital that leads to future growth so that even if some of them are slow to develop, there will be economic development.

The focus during the rest of this year and into the next will undoubtedly be dealing with the ongoing slow-200px-whiteandkeynesdown in the economy.  We will soon see if we will get real change or just a bigger deficit with spending that accomplishes little.  I’m worried about the quality of the spending, because as I said, most of our debt is financed by the international community.  There are many other places to park their wealth.  If they pull it, U.S. citizens will not be able to come up with the difference without getting use to much higher taxes.

The Mini Ice Age AND the Dust Bowl?

I thought I’d try to give you some information on the mixed signals coming from the markets.  First, we have the credit markets where people borrow and lend things like commercial paper, loans, and bonds.  All of the money thrown into this market by the world’s governments appear to be having some impact.

How do we know this?  As reported by The Economist, we see signs that banks are lending to each other and that interbank lending rates are behaving more normally.

An important indicator of its health is the price that banks say they expect to pay to borrow money for three months, which is usually expressed as the London Interbank Offered Rate (LIBOR), or its European equivalent, EURIBOR. These have been ticking down slowly, often by only fractions of a percentage point a day. Yet on Tuesday October 21st the rate for borrowing euros passed an important milestone, falling to 4.96%, a level last seen before Lehman Brothers collapsed in mid-September. The LIBOR spread over three-month American Treasury bills has also narrowed sharply. The recent improvements were partly stirred by the latest lavish intervention from the Federal Reserve. It made available $540 billion to buy assets from money-market funds, to encourage them to start buying commercial paper issued by banks and companies again.

A few words of explanation here.  First, the Libor Spread over three-month Treasury bills is called the Ted Spread.  Since the three month treasury bills are considered extremely safe, this spread is considered a measure of risk as perceived by the market.  The bigger it is, the more likely banks are to see risk or some kind of uncertainty in the market.  When you have a so called flight to quality, folks and institutions buy a lot of three month treasury bills and drive the yields down.  This makes the spread widen.  The Libor and the Eurobor are like the Fed Funds rate.  These rates are established by the market for lending between banks.  Banks that require more liquidity to cover things like withdrawals, loan losses, or reserve requirements for a very short period of time will borrow from other banks rather than go to the FED or their central bank.  It is a market that shows how needy banks are for cash.  Like all things related to supply and demand, when supply is short and demand is high, the loan rate goes up. 

When the banks book the loans, and report the loans to their regulator, the regulator sees this market established rate and based on if it wants banks lending or holding on to money, will set its own rate.  This is called the Discount Rate in the U.S.  It is the loans you get from the Fed which is the lender of last resort.  Remember, as of this spring, all financial institutions (FI), not just member banks, can access the discount window.  Also, when borrowing at the discount window, the FI is required to put up some collateral.  Many things are now being accepted as collateral–including toxic assets.

If this rate and the spread are ‘ticking down’ that means more and more demand is driving the rates down.  The only reason that banks would increase their demand for these funds would be to lend at higher rates.  This lets us know that the credit markets are slowly unthawing.  We can see this further, as The Economist reports, in the market for interbank lending.  Loans are being made between banks.

American banks including JPMorgan Chase and Citigroup have, in the past week, made loans to European counterparts for up to three months. And HSBC, Europe’s biggest bank, says it is providing billions in three- and six-month funding to banks.

This is a very good sign for the credit markets.

So, why are the equity markets still volatile and the major indexes falling?  Equity Markets respond to more ‘REAL’ phenomenon because the earnings of companies are based on projects that either yield income or losses.  The stock markets which sell pieces of companies and their future earnings are reacting to economic news.  The economic news is looking pretty dismal right now. 

Last week, the UK announced that it was in a recession.  Most economists (including me) think we have entered a recession now in the U.S.  This is spilling over to the global economies that rely on exports (like China, India, and any of the oil-exporting countries) because if they’re not selling to their customers, their companies are not making any income.  No income on projects means stock values fall.

The global credit crunch is quickly turning into an economic crisis.  At least, that’s what the markets feel.  Stock markets all over the world and markets for foreign currency are sinking.  The pound is doing miserably.  The Eurodollar is one of the better-off currencies.  The dollar is showing some recovery which is a bit odd given we’re considered the source of all this mess.  However, we are the world’s currency and considered a safe-haven, so it might just be that old fashioned flight to quality again.  I have to say, it’s very hard to tell at this point.  It looks like the world still likes us to me.  But this is just my analysis.

So the fundamentals here in the U.S. economy are pointing to a recession that will look more like the one in the 1980s than the last two short downturns experienced in the 1991 and 2001.  This from today’s New York Times:

When October’s job losses are announced on Nov. 7, three days after the presidential election, many economists expect the number to exceed 200,000. The current unemployment rate of 6.1 percent is likely to rise, perhaps significantly.

“My view is that it will be near 8 or 8.5 percent by the end of next year,” said Nigel Gault, chief domestic economist at Global Insight, offering a forecast others share. That would be the highest unemployment rate since the deep recession of the early 1980s.

Companies are laying off workers to cut production as consumers, struggling with their own finances, scale back spending. Employers had tried for months to cut expenses through hiring freezes and by cutting back hours. That has turned out not to be enough, and with earnings down sharply in the third quarter, corporate America has turned to layoffs.



This and the fall in housing prices as well as bank failures have lead people to wonder about another Great Depression.  For the answer to this, I point you to an Economic View that also came from the New York Times by well-respected Economist Gregory Mankiw.  He points out to some very important reasons why this may be a bad recession but is unlikely to become another Great Depression.  Here’s perhaps his most cogent argument on why this is unlikely to happen.

Probably the most important source of recovery after 1933 was monetary expansion, eased by President Franklin D. Roosevelt’s decision to abandon the gold standard and devalue the dollar. From 1933 to 1937, the money supply rose, stopping the deflation. Production in the economy grew about 10 percent a year, three times its normal rate.

We are no longer constrained by a fixed money supply and we have a Fed that knows a lot more about what causes crises.  (Mankiw is a fairly conservative economist so this is a telling comment.) Widespread deflation (decreases in prices) were a problem during the depression years.  The only major deflation we’ve had to date is in house prices.  We’re now experiencing decreases in oil prices but unlikely to see declines in other items, like food and clothing.   Oil prices were considered way higher than the fundamentals would suggest so this decrease is likely to help the economy.  It is possible that air fares could come down, for one.

Also, I’ll point to the information reviewed in The Economist,  loans were nearly impossible to get during the Great Depression.  The world’s Central Banks are taking huge steps to ensure this doesn’t happen, and it appears their steps are working.  Oddly enough, sales of existing homes went positive last month.  It’s hardly a trend, but it does show a possible break in the downturn.

So what exactly do we see here?  There are plenty of signs that we’re in for a fairly sustained recession through next year.  Again, hold on to your job if you have one.  Markets are trying to find their bottom.  The Dow Jones is hovering around 8200 which is considered a threshhold level.  There is some volatility but nowhere near the volatility we saw during the Great Depression.  Credit Markets are thawing which means monetary policy may have a chance at jump starting the real economy again.  The mini-rally in the dollar shows that the world still has a lot of faith in the fundamentals of the U.S. economy.  We’re still considered that quality that attracts money.  Don’t pull money out of anything long term.  You’ll probably be selling it at a low.  Try not to look at your 401k statements for awhile.  Look for bargains if you do have money– vacations, cars, houses, and anything else that you’ve intended to buy but only if you know your job is safe and you have a nice emergency fund.  If you don’t have an emergency fund ( about six months worth of income in a bank account), start one today.