Radio commentary, November 13, 2008
Audio: November 13, 2008
Further signs of economic weakening piled up over the last week, and not just in the U.S. Some 15 countries have reported declines in GDP in recent quarters—among them big ones like the U.S., Japan, Germany, the UK, Spain, Ireland, Italy, and France, and less big ones like Singapore and Latvia. More of this is likely to come.
China is a long way from joining the negative growth crowd, but its industrial production index declined between September and October, and its yearly growth rate has declined from close to 20% a year ago to 8% now. While most countries would envy an 8% growth rate—even back in the fat days of the 1950s and 1960s, growth in U.S. industrial production averaged around 5%—for China, such a dramatic slowdown harbors great risks. Slower growth could expose the rot hiding in Chinese banks—10% growth can make a lot of bad loans look not so bad—and could heighten political tensions in a country where mass protests have become routine, and where it would take all the fingers on scores of millions of hands to count the unemployed.
On Friday the 7th we learned that the U.S. lost a quarter of a million jobs in October, bringing the total loss since last December’s peak to 1.2 million. Losses in the early part of the year were mild by historical recession standards, but we’ve managed to get back up to those historical standards with the accelerated deterioration since the summer. The unemployment rate rose a sharp 0.4 point to 6.5%, the highest since 1993.
On Thursday morning, we learned that first-time claims for unemployment insurance, a very timely and sensitive indicator of the state of the job market, rose a strong 32,000 last week to 516,000. That rise brings this measure very close to the levels it reached in the 2001 recession, though it’s still well below levels seen in the deep recessions of the mid-1970s and early 1980s. I am expecting, though, that this recession will come to rival its more savage ancestors in the coming months. Ditto the unemployment rate, which is almost certain to approach 8% over the next few months, and could move towards 10% if the economy continues to deteriorate as suggested by the leading indexes.
On Wednesday, Treasury Secretary Henry “Hank” Paulson announced that he was completely abandoning his original strategy of the $700 billion financial bailout, buying up bad assets, mainly toxic mortgage securities, from banks, and moving instead towards direct capital injections. As I’ve been saying for weeks, based on the experience of other countries, this has proven to be a far more effective strategy for resolving a financial crisis than Paulson’s original strategy. The initial reviews from the financial markets were bad, as interest rates on short-term lending between banks ended a three-week decline and the stock market took a steep dive. Reviews from Congress were far more positive. I wouldn’t take the reactions of either very seriously, at least for now.
Why the about-face by Paulson? Market pundits said it made him look uncertain and confused, and policymaking look like a pure seat-of-the-pants operation. It could be that Obama & Co. told him to hang back because they wanted to run the bailout by their own lights. If equity injections are the wave of the future for the bailout program, then let’s hope that the new gang doesn’t follow Paulson’s lead and take nonvoting stock. If the gov is going to rescue this gang, it must do so on harsh terms and with a gun held to their heads. No dividends, no bonuses, no hoarding of cash.
I’ve certainly been plenty critical of Barack Obama, but it does look like his posse is thinking straight on these issues. We can see hints of that in the proposals for an auto-industry bailout they’ve been floating: strings tightely attached to make sure they use the cash to make clean, energy-efficient cars. His designated chief of staff, Rahm Emanuel—generally a market-loving hyperzionist creep—did say something interesting last weekend: “Never allow a crisis to go to waste. They are opportunities to do big things.” While that might sound like something Naomi Klein could use for the paperback edition of The Shock Doctrine, maybe not. The context in which Emanuel said that was the auto industry crisis, and it seems like he meant to force Detroit to invent some cars that won’t wreck the climate. That would be a good use of crisis. More on all this at the bottom of the hour, when we talk green jobs.
So is this what Change looks like? Barack Obama has selected Madeleine Albright, the former Secretary of State who said that 500,000 Iraqi children killed by sanctions was a price worth paying (not that she was paying it), to be one of his emissaries to this weekend’s economic summit. The other is former Republican Congressman Jim Leach, quite a sane person by the standards of his party, but still not the sort of guy you’d confuse with a new broom. Add to that familiar names like Rahm Emanuel, John Podesta, Larry Summers, Tom Daschle, and John Kerry…. On Wednesday, Obama’s transition team published the list of people who will be guiding the process. As Laura Meckler and Jonathan Weisman put it in the Wall Street Journal: “The group is filled with second-tier veterans of the Clinton administration and workers in the technology and financial sectors. It includes four former lobbyists, three top campaign fund-raisers and two former employees of troubled mortgage giant Fannie Mae, with some overlap among them. Four people in the group have ties to the consultant McKinsey & Co. and two have experience leading high-tech start-ups.” ABC’s Jake Tapper adds: “16 out of 19 of these folks worked in some capacity for the administration of President Clinton” Changiness, it’s everywhere.
As is some sort of Depression consciousness. The cover of the next Time will have BHO as FDR. And the Gourmet Garage, a small chain of moderately upscale food stores in New York, is calling its sale items “New Deals,” the signs decorated with a caricature profile of FDR with his cigarette holder. The official NBER-certified bottom of the 1929-33 contraction was March 1933, when FDR was inaugrated. Wonder if that cyclical magic will transfer to Obama come January 20?