Radio commentary, November 20, 2008
Audio: November 20, 2008
Bad news coming from both the financial sphere and the real economy. Treasury Secretary Henry “Hank” Paulson’s decision, announced last week, to abandon the purchase of bad bank assets entirely has sent the credit markets into a tizzy. You may recall that when Paulson first unleashed his proposal in September—the one that would have given him sole discretion to spend $700 billion without even the possibility of Congressional or judicial review—that’s all he wanted to do. A number of critics, including me, pointed out that historical reviews of past financial crises found such asset purchase programs to work not so well; much better was to inject fresh capital into troubled banks.
Congress heard these critiques and wrote the bailout legislation so broadly that it would permit such equity injections. Paulson apparently saw the light himself and did nothing but equity injections—though of a particularly indulgent kind, that gave the government no voice at all in running the institutions it was saving, or even getting a good accounting of where the cash was going. And then, last week he said no asset purchases at all.
Which was quite mystifying. Despite the poor historical record of asset purchases, this time it might have been different, because one of the things that’s crippling the credit markets is that no one really knows how much their partly toxic, partly sound mortgage assets are worth. There’s no market in them at all right now. Had the government bought some, it might have put a floor under prices, and given some guidance about how much they were worth. (Emphasis on mighta, coulda.) Now Paulson won’t be doing that. But his surprise decision, his second 180 in as many months, made it seem like the whole megabillion bailout operation was being done on the fly. It does not inspire confidence, from any perspective, and the credit markets, which had given signs of thawing in recent weeks, went back into deep freeze. No credit markets, no economy.
It’s looking like Paulson’s giving his Wall Street friends a lot of money with no strings attached and no strategy either. Let’s hope the new gang can run a proper bailout, and with more consideration for people in or near foreclosure than Brother Hank is showing.
Speaking of the new gang, how about that Attorney General choice, Eric Holder? A man who defended Chiquita Banana against charges that it was subsidizing death squads in Colombia, and ended up getting them off with just a slap on the wrist.
And now to the real economy. The latest batch of news has been pretty terrible. On Wednesday, the Census Bureau reported that housing starts and permits to build new houses both hit all-time lows. And that’s not in percentage terms, or relative to the size of the economy—it’s in absolute numbers. Numbers that go back almost 50 years, when the U.S. population was about 40% lower than it is now. In other words, the housing market hasn’t been this weak since the 1930s. But still, prices would have to fall another 15% to reach their long-term average ratio to household incomes. Another fall of that magnitude—prices are already down around 20%—would put even more homeowners underwater, owing more on their mortgage than the house is worth, and prompt more defaults and foreclosures. It’s a damn mess.
And the job market is looks to be weakening as well. On Thursday morning, the Labor Department announced that first-time claims for unemployment insurance rose by 27,000 last week to 542,000. While not the highest on record, either in numerical terms or especially as a percentage of the labor force, it’s rising sharply—up 22% since September. This almost certainly means that November’s employment report, to be released on the first Friday of December, will look horrible. For the first half of this year, job losses looked mainly to be a function of a hiring strike by employers—layoffs and firings were relatively modest by the standards of earlier recessions. That’s changed now, and job losses are rising sharply.
Earlier in the week, we learned that prices at both the producer and consumer level fell in October. These declines were driven mainly by falls in energy and other commodity prices. But they did raise the specter of deflation, a generalized fall in prices that is seen only in very tough times, like the U.S. in the 1930s or Japan in the 1990s. My guess is that we’re more likely to see something like Japan in the 1990s here—a long period of high unemployment and economic stagnation without a generalized collapse. The government is spending too much money for a true collapse to take hold. But things are already nasty, and getting nastier.
If there’s a silver lining in all this, it’s that the culture at least might get a little more interesting. John Maynard Keynes once wrote that “by far the greater proportion of the world’s greatest writers and artists have flour- ished in the atmosphere of buoyancy, exhilaration and the freedom from economic cares felt by the governing class, which is engendered by profit inflations.” Evidently the cultural elasticity of profit isn’t what it used to be. Shakespeare died rich, said Keynes, the beneficiary of one of the great bull markets of all time, the greatest the world had seen before the American 1920s. The American 1980s and 1990s were a massive bull move; we got reality TV.
But, as the stock market pundit Robert Prechter likes to point out, bear markets and recessions bring out what he calls nihilistic music—like two of my favorite pop genres, punk and rap. He contrasts this with the upbeat music characteristic of bull markets. As he pointed out, attendance at the Loveparade festival, a kind of outdoor techno rave party held in Berlin, rose from its beginnings in 1989 through the 1990s, peaking in 1999 and 2000 with the economic cycle. But with the recession of 2001, attendance fell, and the festival wasn’t even held for a few years afterwards. Prechter’s theory is that all the good feelings celebrated by the Loveparade were byproducts of a buoyant economic mood; when things turned dark, love moved indoors.
Now this may all be a bit too mechanical, an odd bit of economic determinism applied to pop culture. But there was a great cultural ferment in New York from the mid-1970s though the early 1980s. As Wall Street became more dominant in the city, following the takeoff of the great bull market in August 1982, the environment became lot more difficult for the creative underclass. And while the streets might get dirtier, the subways more crowded, and jobs hard to come by, maybe there will be some fresh and compelling art and music produced.