LBO News from Doug Henwood

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.

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?

Radio commentary, November 6, 2008

Audio: November 6, 2008

In economic news, there’s now little doubt that the U.S. recession that began early this year in fairly mild form is now taking a turn for the worse, and possibly a sharp one. I frequently cite the surveys published by the Institute for Supply Management, the trade association for corporate purchasing managers—the people who buy stuff for their employers. That puts them in close touch with the state of business, and these days, the state of business is not good. The ISM manufacturing survey came in at its lowest level since the deep recession of the early 1980s, when the phrase “Rust Belt” entered the American language. Manufacturing has been in a structural decline for at least the last 10 years, but the slide has accelerated, and the disappearance of the domestic auto industry, which could take up to 3 million jobs with it, is not impossible to imagine. The ISM service sector survey, which only goes back to 1987, is at levels last seen in September 2001, in the midst of the post-9/11 recession, and likely to get worse.

First-time claims for unemployment insurance, a very timely and sensitive indicator of the state of the job market, declined modestly last week, which is reassuring, but they remain at high levels associated with continued job losses. We’ll get the October employment report tomorrow morning, and I’m expecting job losses of 200,000 or more and an uptick in the unemployment rate.

And the weekly leading index produced by the Economic Cycles Research Insititute, or ECRI, which is designed to forecast movements in the U.S. economy six to nine months ahead, is falling rapidly. ECRI’s director, Lakshman Achuthan (who was on this show back in 2004), told me that he’s expecting a recession as severe as that of the mid-1970s or early 1980s. That suggests that the unemployment rate will rise to 8% or more from its current level of 6.1%. 2009 is almost certain to be a terrible year, economically speaking—and not just for the U.S. Most of the world looks to be slipping into recession.

And here’s an update on the October employment report prepared for the KPFA audience. Like I said last month about September’s report, about the only good thing you can say about it is that it could have been worse. Private sector employment is now down to where it was more than two years ago – and the share of the adult population working is the lowest it’s been since 1993. That means that the entire job boom of the second half of the late 1990s has essentially been reversed thanks to two recessions and an anemic expansion. These are signs of serious structural problems, beyond a mere business cycle or two.

Nearly a quarter-million jobs were lost in October. As if that weren’t bad enough, but routine revisions to the previous two months showed an additional 179,000 job losses. Total employment is now down 1.2 million from last December’s peak. Losses were widely distributed through industrial sectors; construction and manufacturing were hit the hardest, but so were retail trade and temp employment. Even the irrepressible health care sector added just 23,000 jobs, well below its recent averages. Losses in private services over the last year now match the worst of the 1982 recession and exceed the worst of 1975. Once upon a time, the service sector wasn’t very cyclical; manufacturing took most of the hit. Now services are taking a hit along with manufacturing. Average hourly earnings were up just a few pennies, and are lagging inflation by more than a percentage point.

The unemployment rate rose 0.4 point to 6.5%, the highest since 1994. That’s a very sharp rise, near the top of the list for the last five decades. Almost all of the rise in unemployment was the result of permanent job losses (as opposed to temporary layoffs). And the ranks of those working part-time for economic reasons—meaning they wanted full-time work but could only find part-time—rose by more than half a million in October—or 2.2 million over the last year. The broadest measure of the unemployment rate, the so-called U-6 rate (which accounts for unwilling part-timers and people who’ve dropped out of the labor force because they think the search is hopeless) rose 0.8 point to 11.8%, matching the highest level since the series began in 1994. It’s up more than three points over the last year.

The urgent question on every mind now is how much more and for how long? In percentage terms, we’re now approaching the job losses in the 1990-1 and 2001 recessions – another month or two at current rates and we’re there. But matching the 1973-5 recession would take another million job losses; matching 1981-2, 3 million. Both those downturns were 16 months long; this one’s probably 10 months old, give or take a couple of months. So my best guess is that we’re halfway through this (if we’re lucky) – though given the massive amounts of stimulus coming from Washington, with more certainly on the way, maybe we’ll be lucky.

 

But, ah, but, there’s a lot of hope around, isn’t there? I’ll admit that I got a thrill when Barack Obama was pronounced the winner on Tuesday night. It’s a great relief to see the Republicans take a big hit, and not to have to endure a McCain–Palin administration, which would have been a depressingly stupid and violent thing. It’s also lots of fun to see all the McCain people leaking nasty stuff about Palin to the press. She thought Africa was a country! She doesn’t know what countries make up NAFTA! She spent even more than $150,000 on clothes—and not just for her, but for her husband and kids as well! Fox News, of all things, promises an “avalanche” of further revelations, and I can’t wait. I do hope the McCain people acknowledge that their man chose her, though.

Back to hope. We’re now hearing that Barack Obama is busily trying to rachet down expectations. We can expect, any week now, the equivalent of the Jimmy Carter in a cardigan speech, or going back a few years earlier than that, Gov Hugh Carey’s “The days of wine and roses are over” speech. But given who Obama is, you have to guess it’ll be more rhetorically skilled than either.

Now there’s no doubt that the U.S. faces a sustained round of belt-tightening. For decades, especially the last 5-10 years, Americans have been living way beyond our means. Consumption hit a record share of over 70% of GDP, 4-5 points above its long-term average, and the savings rate hit 0%, about 8 points below its long-term average. We borrowed like mad. We’ve been importing far more than we’ve been exporting and borrowing the difference. This has to stop—that’s an economic necessity. Either we stop it or we’ll be cut off and plunge into deep crisis. But how it stops and who pays are deeply political questions. How will President Obama handle this? Will the rich pay, or will we hear that we can’t afford universal health care until some never-to-be-announced future date? We’ll see, but my guess is that center-left orthodoxy will have the upper hand, meaning that the rich will pay some, but not much. The rest of us will be called upon to “pitch in,” since “we’re all in this together.” If you’ve been raking it in for the last 10 years, please raise your hand.

People have been saying the most amazing things. A friend I like and respect said the other day that America appears to be moving towards social democracy. Really? How do you figure that? Because Obama carried Indiana? Because the name of Larry Summers, the man who once said that Africa is vastly underpolluted, is being floated as Treasury Secretary?

It’s going to be something else to watch all the liberal Obama enthusiasts squirm and rationalize in the coming weeks. It’s already started, with the appointment of Rahm Emanuel, the DLC loyalist and son of an Irgun terrorist, as chief of staff. Writing on The Nation’s website, the irrepressible optimist John Nichols said, before the appointment was confirmed, “Picking Emanuel would reassure Wall Street, but it won’t give much comfort to Main Street. It will also cause some head-scratching among Democrats who thought they were making a break not just with the Bush administration but with the compromises of the Clinton era.” Why did Nichols expect anything else? When did Obama ever appear to be otherwise? He was careful during the campaign never to sound like a liberal, much less a social democrat.

People all over the world are celebrating Obama’s victory. I do wonder what they expect. Just what will change, beyond style and tone, from the Bush years? Hasn’t Obama promised to expand our military and increase its presence in Afghanistan? What we can hope for is a return to a “normal” imperialism from a mad-dog variant. That’s all. It’s an improvement, but not a transformative one.

There’s a rich irony here. Bush’s arrogance and bellicosity actually undermined U.S. power abroad. Iraq revealed our military to be something of a paper tiger—it can kill and destroy in huge quantities, but it can’t win a guerrilla war. And that’s what the pundits call “hard power.” Bush did even more damage to our “soft power”—American cultural and political prestige, and all those other things that provoke voluntary consent to what is euphemistically called our “leadership.” Almost overnight, Obama has repaired that. People I know in England, Australia, and South Africa, all smart with good politics, have been caught up in the enthusiasm. An Australian I know, whom I tooked to be a pretty hard-bitten fellow, said “we’re all putty in your hands for the next few months.” Amazing. Who thought the process of imperial repair could be so simple?

Of course, it’s not going to be so simple. As Obama performs up to the demands of his office—meaning the appropriate practice of violence and austerity—there will be slow but sure disillusionment. That disillusionment, as I’ve said before (and Adolph Reed will say in a few minutes), can be rich soil for more radical organizing. But there will be lots of excuses made before we get there. Lots.

Radio commentary, October 30, 2008

Audio: October 30, 2008

We’re starting to see some more real world effects of the credit crisis, with an emphasis on starting. Thursday morning, the Bureau of Economic Analysis reported that GDP contracted by 0.3% in the third quarter (at an annualized rate, adjusted for inflation). That’s a mild contraction, but some of the components beneath that headline number were anything but mild. Personal consumption was down by over 3% (also at an annualized rate, adjusted for inflation, as are all these figures I’ll be citing). That was the first such decline since 1980, and I’m guessing that it won’t be the last, since I think the U.S. is in the middle of a structural shift towards less spending, less borrowing, and more saving—if there’s enough income growth to support it. Residential investment—the building of new housing and the renovation of existing stock—was down by 19%, a steep decline, though not as bad as some recent quarters. The major things keeping the headline number from being even more negative were exports and government spending, both up around 6%. The export number is lower than the second quarter, and with the rest of the world’s economies slowing down, they’re not likely to look very strong in coming quarters. The government number was stronger than in recent quarters, thanks in large part to military spending, which is a pretty debased use of public funds. More on debased uses of government funds in a bit.

In somewhat more reassuring news, we also learned on Thursday morning that first-time claims for unemployment insurance were unchanged last week. The reassuring part of the news is that they didn’t rise, meaning that the job market isn’t deteriorating at an accelerating pace. But it is deteriorating; jobless claims remain high—not at record levels, but still high. This portends continued job losses in the coming months. We’ll get the employment report for October next Friday; though I haven’t crunched the numbers yet, my guess is that we’ll see a quarter of a million jobs lost, and another uptick in the unemployment rate. I’d say it’s pretty close to certain that the jobless rate will move up towards 8%, which would be a rise of nearly 2 percentage points. It’s already up about 2 points from its cycle low, so we’re at best only halfway through the decline.

As I’ve been saying, all the government’s financial rescue operations will probably keep the worst at bay—like a rerun of the early 1930s—but can’t guarantee anything resembling prosperity. And as I’ve also been saying, we’re likely to see several years of a bad economy. I see no reason to change that prognosis. A bright sign is that we are seeing some unsticking of the credit markets. Those too aren’t likely to return to robust health for some time, but at least they’re showing signs of thawing out, as they must if we want to prevent that rerun of the 1930s.

Back to those debased uses of public funds I was talking about earlier. It’s looking like the financial sector is applying the billions it’s getting from the government towards its own preferred ends, and not aiding an economic revival. A report by the excellent Mary Williams Walsh in the Thursday New York Times questions what the hell AIG is doing with the $123 billion it’s gotten from the Federal Reserve; it appears to have burned through most of that cash, and no one knows why. AIG isn’t telling. What kind of nonsense is this? A company auditor has AWOL and is “in seclusion.” The company, long known for funny accounting, apparently hasn’t shaken the habit, and so far as we know, the Fed isn’t twisting its arms to make it change its ways.

And it also looks like many of the banks that have gotten equity infusions from the Treasury are using the money to continue paying dividends rather than rebuilding their balance sheets or making loans. That too is an outrage. A proper government equity infusion would require banks taking the cash to suspend dividends. And the equity should be of the voting kind, meaning that the feds should have a dominant voice in management. But Treasury Secretary Paulson has opted for nonvoting shares because he doesn’t want to step on management’s toes. If toes ever deserved to be stepped on—nay, run over with a steamroller—it’s those of Wall Street CEOs. Not only are these debased uses of public funds, they’re negating any of the good effects of a public bailout.

The IMF, which was off the scene for many years, is, like a vampire salivating at sunset, returning to action. It’s already developed a program for Iceland, which is being put through the austerity wringer; apparently being white and Nordic doesn’t earn you an exemption. It’s likely to lend some money to some countries that it deems virtuous on easy terms—among them Brazil but not Argentina. More on all this in the coming weeks.

Finally, let me repeat the conclusion of a talk I gave at the City University Grad Center, at a panel organized by David Harvey, on Wednesday night.

There’s a lot of talk about how this crisis marks the end of the neoliberal era, which it may be, and also portends the return of the state, which is a little more complicated.

Neoliberalism, a word that’s more popular in the outside world than in the U.S., took hold in the early 1980s. Its most prominent feature is an almost religious faith in the efficiency of unregulated markets. The ideal is—was?—to make the real world resemble the financial markets as much as possible, with continuous trading at constantly updated prices. To do that requires the commodification of everything, including water and air. Needless to say, much of that agenda was successfully accomplished. But this agenda wasn’t just the result of a bad mood the body politic woke up in back in 1979 or 1980. It was a response to some real problems—chronic inflation, and, from the elite’s point of view, a crisis of profitability and labor discipline. They want to turn all that around, and they mostly did.

It was accomplished with an often heavy hand of the state, however, a fact that contradicts neoliberalism’s self-identification as being all about getting the state out. It couldn’t have happened had the Federal Reserve under Paul Volcker not raised interest rates towards 20%, producing a savage recession that scared labor into submission and drove the world’s debtor countries into the arms of the IMF. It couldn’t have happened if the IMF, a body of states, hadn’t forcibly supervised the innumerable rounds of austerity, privatization, and market openings that were the “solution” to the debt crisis. It couldn’t have survived the repeated state bailouts that rescued the financial system whenever it hit a wall.

Now the financial system has hit a giant wall, and while the world’s states will probably succeed in preventing total disaster, there looks to be something historic about this wall, something end-of-the-lineish. Even very conventional people on Wall Street are talking about “the crisis of an economic paradigm,” in the words of ISI’s Andy LaPerriere. (ISI is the consulting firm run by Wall Street’s favorite economist, Ed Hyman; LaPerriere is in his Washington office.) To LaPerriere, this moment is very much like 1980, only instead of Reaganism, we’re seeing the dawn of a “new Democratic era.” These Democrats—who are basically what David Smick (who was on this show several weeks ago) calls “hedge fund Democrats”—don’t have anything matching the transformative agenda that Reagan (a real movement conservative) did.

But, and let me conclude on an uncharacteristically optimistic note, since there is no dominant narrative, and since the ruling class has too much egg on its face to talk clearly (or avoid being laughed at when they try), there’s a tremendous opening right now. With the public sector now so explicitly involved in an economic rescue, there’s room for the public to demand something in return. And while I don’t expect all that much from Obama, assuming he wins, and his fellow hedge fund Democrats on their own, the sense of possibility that he’s awakened is a very dangerous thing. Back in the Gorbachev days, the anticommunist right loved to quote Tocqueville saying that the riskiest time for a bad regime is when it starts to reform itself. That’s where our regime is right now, and it’s a good time for us, whoever we are exactly, to go out and make it riskier.

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