Radio commentary, April 16, 2009
Some trouble lately for the “green shoots of recovery” thesis. Early in the week, we learned that retail sales fell by an unexpectedly large 1.1% in March, or 0.9% if you leave out autos. Sales had been up modestly in recent months, after plunging sharply late last year—in fact, while Wall Street loves to look at monthly changes, the year-to-year declines were about the steepest on record. So this big decline punched a hole in hopes that the economy might be bottoming out. But since it’s virtually certain that the American economy has entered a new phase, one less dependent on consumption, we’re not likely to see strong growth in retail sales any time in the forseeable future.
Also, March saw a steep fall in industrial industrial production, pretty much matching February’s decline. And more bad news from the housing market, as housing starts fell unexpectedly in March. Most of the decline, though, was in apartment buildings; groundbreaking on single-family houses was flat for the month. But the news hasn’t been all disappointing. The National Association of Homebuilders’ index, a composite measure of sales, traffic, and sentiment, rose strongly last month, though it’s still at very low levels. And first-time claims for unemployment insurance, that sensitive and timely indicator of the state of the job market, fell by 53,000 last week, a pretty encouraging decline, though it might have been dragged down some by the Good Friday holiday. They’re supposed to adjust for that sort of thing, but adjustments are never perfect.
In any case, even if the economy is sort of stabilizing, which I think it is, it’s not turning around any time soon. So we’re likely to see a mix of good and bad news in the coming weeks. Stay tuned.
the stench of bailout
Meanwhile, the financial bailout continues to smell really bad. Early in the week, Neil Barofsky, the Treasury’s bailout auditor—nicknamed the Tarp cop—said that banks may have cooked their books to qualify for federal assistance. They were supposed to show that while they were sick they weren’t mortally so; some banks are likely to have fudged the books to make themselves look healthier than they were.
And now, with JP Morgan and Goldman Sachs reporting strong results for the first quarter, you have to wonder if some of the better-off banks are exaggerating their health so they can get out of the Tarp scheme so they can start paying their top execs more. The government is supposed to release details of its stress tests on the biggest banks in the coming days; we’ll see if these results are detailed and credible. I suspect that the banks may now be sweeping their troubles under the rug out of self-interest, which could cause problems in the future, especially if the signs of stabilization are a false dawn. We’ll see.
government of Goldman Sachs, by Goldman Sachs…
And, oh, Goldman Sachs. On Friday, April 10, The Washington Examiner, a gossipy news website of right-wing leanings, ran a piece by Timothy Carney reporting that Edward Liddy, the government-appointed head of the government-owned AIG, owns over $3 million in stock in Goldman Sachs. AIG, whose severe troubles threatened the stability of the global financial system, or what stability remains of it, has taken over $170 billion in federal aid so far. Some $13 billion of that has gone to, you guess it, Goldman Sachs. And guess whose board Liddy served on until he was appointed to run AIG? Goldman Sachs, of course. And who appointed Liddy? Former Treasury Secretary Henry “Hank” Paulson, whose previous job was co-chair of Goldman Sachs.
Whom did Paulson appoint to run the financial bailout? Neel Kashkari, a former investment banker at, um, Goldman Sachs. Kashkari, nicknamed Cash-n-Carry by some, was an aerospace engineer whose specialty at Goldman was raising funds and arranging mergers for high-tech firms; his previous job was with TRW, where heworked, among other things, on space telescopes. In other words, his main qualification for running the $700 billion program seems to have been his previous employment at Goldman Sachs.
But, as they say on TV, that’s not all. Paulson has predecessors. Bill Clinton’s Treasury Secretary, Robert Rubin, is a former Goldman co-chair. Bush’s chief of staff and his director of the Commodity Futures Trading Commission were both Goldman alums. And, back in January, Treasury Secretary Tim Geithner appointed as his chief of staff a former lobbyist for Goldman—the very same day he issued rules restricting the role of lobbyists at the Treasury. Geithner, the former president of the Federal Reserve Bank of New York, is very close to one of his predecessors at the New York Fed, Gerald Corrigan, who is now employed by…Goldman.
Is there a pattern here?
Now, to be fair, if only for a moment. All the government connections aren’t Goldman’s fault; they’re very smart and self-interested, and if the opportunity of “public service” comes along, why shouldn’t they take it? The problem is with the officials making the appointments. And to extend the moment of fairness: one of the major reasons for AIG’s crisis was that it insured a boatload of exotic investment products that were supposed to be solid but went very sour. So bailing out AIG meant that government had to make good on the promises that the firm itself couldn’t keep. That’s the reason for the big payments to Goldman, among others.
End of moment of fairness.
Goldman itself didn’t fully trust AIG, so it bought other forms of insurance as a backstop, meaning that Goldman’s actual exposure to an AIG collapse was slim to none. But it got the full $13 billion anyway. Don’t private insurers try to find any excuse not to pay off a claim? Liddy certainly did when he ran Allstate, which he did between 1995 and 2006. Most notoriously, Liddy and Allstate got famous around New Orleans for evading payments to their customers whose houses and cars were wrecked by Hurricane Katrina. And these were people with no other options. They were in no position to say, “Hey, I don’t trust Allstate, so I better hedge myself.”
But there is hope. Obama is reportedly thinking of replacing Neel Cash-n-Carry as head of the bailout with a new guy. He’s from Merrill Lynch. That’s diversity, Obama-style.