Empires fall slowly…
A friend pointed out the other day: people sometimes compare the U.S. empire to Rome’s decline—but forget that it took 800 years to fall.
Fresh audio
Just posted the audio files for my April 16 show here. Guests are progressive educator Deborah Meier, who talks about the horrors of Bush’s No Child Left Behind, which Obama is likely to retain largely intact, and Adolph Reed, one of the wisest commentators in the U.S., talking about genetics and political leanings, and politics without politics.
By the way, I often post the MP3’s to the server before I update the webpage. Podcast subscribers can get those directly without delay. Podcast info for the hi-fi (64kbps) version here; lo-fi (16kbps) here. The show’s iTunes page is here.
Radio commentary, April 9, 2009
Not a whole lot of economic news to talk about, partly because that’s just the way things are breaking, and partly because I’m recording this early in the week so I can go away for a longish holiday weekend. So I can’t talk about, for example, the latest weekly jobless claims numbers. Alas. But I can do that next week.
Leading index points mildly, tentatively up
But I can talk about some longer-term issues. First, the weekly leading index from the Economic Cycles Research Institute, one of my current obsessions, since it has a very good record in calling turns in the U.S. economy three to six months ahead. There are a few ways to look at the index. One is its absolute level, which has been rising since it made its low for this downturn in early March. Yeah, three consecutive weekly rises, which is what we’ve had, ain’t much, but it’s something to grab onto, since it would be really nice to start thinking about an end to this wretched recession. But even if that’s what it’s saying, which is a big if, things shouldn’t start picking up, or perhaps more precisely won’t stop sliding, until summer or fall.
I said there’s more than one way to look at this index. Aside from its absolute level, you can also look at its percentage change over various periods of time. One way I do that is to see what’s happened over the last six months. That six-month rate of change hit –19% last December, the most negative it’s been in its 42-year history. That’s been creeping higher over the last few months, however; it’s now up to –15%. That’s still awful, but in the past, upturns of that sort have rather reliably presaged the end of recessions. But even if that’s happening this time, and I wouldn’t bet the farm on it (not that I have a farm), any recovery is likely to be very weak, especially in the job market. So hold the champagne, or budget equivalent, for now.
1931 redux?
Some analysts are saying that these signs of recovery are rather similar to a false dawn spied in 1931, as the Great Depression was unfolding. Back then, the unemployment rate as around 11–12%, about three points higher than now—in other words, somewhat higher, but not massively so. After that false dawn dissipated, the unemployment rate more than doubled over the next couple of years, peaking at over 25% when Roosevelt took office in March 1933.
Depression analogies
So how valid are these Depression analogies? In a piece posted on the VoxEU website, the distinguished economic historian Barry Eichengreen, who teaches at Berkeley, and Kevin O’Rourke, econ professor at Trinity College, Dublin, present some scary graphs showing that world industrial output, international trade volumes, and stock markets are looking at least as bad as they did at a comparable interval into the 1929–32 collapse, maybe worse even.
What’s different, though, is the policy response. Central banks have cut interest rates massively, and inflated the money supply massively—not just our Federal Reserve, but its major counterparts around the world. Back in the bad old days, they did little of the sort, so busy were they defending the doomed (and dooming) gold standard. And today governments are spending far more aggressively now than they did in the early 1930s. In fact, at a comparable point in the early 1930s, most governments were running only small deficits; now, most are running giant ones.
Eichengreen and O’Rourke conclude with the $64 trillion question: “The question now is whether that policy response will work. For the answer, stay tuned for our next column.” I can’t wait.
End of the finance premium?
Finally, a recent paper by the economists Thomas Philippon and Ariell Reshef, of NYU and the University of Virginia respectively, looks at the earnings of workers in the financial sector over the last century. They find that from around 1910 through 1934, financial workers earned 60% or more than workers in other sectors of the economy. That huge premium disappeared over the next several decades, to the point where finance types took home little more than the average worker from the 1950s through the early 1980s. Starting then, however, history reversed itself, and the finance premium grew and grew to the point that in recent years, finance workers have earned over 70% more than the average worker. (Need I point out that averages are very misleading in this case because the high-paid toilers in finance are really really high paid. Secretaries and clerks pull down the average considerably.) Philippon and Ariell find that the major reason for this pattern over time is regulation. Fiannce was barely regulated in the early 20th century. Starting in 1934, though, it was tightly regulated. Those regulations started coming undone in the early 1980s, a trend that continued until, oh, the day before yesterday. If, however, we are now about to see a re-regulation of finance, then those high salaries are going to start coming down. That will have a massive effect on New York City, it goes without saying—just as the financial boom had a massive effect.
Of course, you’ll have to wait longer than the next column to see what that might look like.
Radio commentary, April 4, 2009
more signs of stabilization…
Again, more signs that the rate of decline is slowing, though hardly yet turning around. On Thursday morning, we learned that new orders for manufactured goods rose almost 2% in February, the first increase in six months. Orders for what are known as nondefense capital goods ex-aircraft, meaning the sort of gadgetry that is at the core of business investment, and a key to long-term economic growth, rose by over 7%, a very strong performance. Obviously one month’s positive numbers can easily turn into next month’s negative numbers, but this is encouraging news. For now.
New car sales even bounced a bit in March, thanks to big incentives—and they remain at very low levels. Still, this is a surprise. Yes, we need an economy that’s not so dependent on the sales of new earth-destroying machines, but until we get there, this is what people’s livelihoods depend on.
…but not in the job market
In less good news, first-time claims for unemployment insurance rose by 12,000 last week, and the average for the last four weeks rose by about half that much. About 650,000 people a week are losing their jobs and signing up for unemployment insurance checks. The number of people continuing to draw benefits also rose last week to 5.7 million, nearly twice as much as a year ago. As a percentage of the population, both these measures are still below the highs of the mid-1970s and early 1980s, but they’re still quite high, and likely to go higher.
Friday morning brought the release of the monthly employment report for March. Few signs of stabilization here—in fact, it was another stinker.
Last month, 663,000 jobs disappeared. Almost half that loss was in goods production, construction and manufacturing. But private services also got hammered, with almost every sector showing serious losses. Even government, usually a reliable if modest gainer, lost jobs last month, mostly because of declines in local government employment. Since the economy peaked in December 2007, we’ve lost over 5 million jobs, with more losses almost certainly on the way.
Those figures came from the Bureau of Labor Statistics’ survey of about 300,000 employers. Their simultaneous survey of about 60,000 households showed that the unemployment rate jumped 0.4 point to 8.5%, the highest since 1983. Though not at a post-Depression record yet—that would be 1982’s 10.8%—it’s still very high by post-World War II standards. And the share of the adult population working, the so-called employment/population ratio, fell by 0.4 point to 59.9%, the lowest it’s been since 1985. Since its cyclical peak, set in December 2006 (a full year before the business cycle peak), the employment/pop ratio is off 3.5 points, the worst decline over any similar period since the series began in 1948. The ratio’s rise was very weak during the expansion, and its steep decline over the last 27 months suggests that what used to be called The Great American Jobs Machine is now seriously broken.
The forward-looking measures in this report—like temp employment, which was down hard, and the length of the workweek, which fell to a record low, suggest more of the same to come. In somewhat more comforting news, the Economic Cycles Research Institute’s weekly leading index, which forecasts turns in the economy three to six months out, picked up a bit last week, its fourth consecutive rise. That suggests that maybe the abstraction known as The Economy is stabilizing. But the job market, which is what matters to most people, has yet to get the news.
Summers, well-paid tool of Wall Street
And an update on the rogue’s gallery of malefactors in high places. A former quantitiative analyst employed by the Harvard University endowment says she was fired for questioning the university’s investment strategies. Iris Mack, only the second African-American woman to get a PhD in applied math from Harvard, says she was scandalized by the reckless use of derivatives that the endowment’s traders didn’t understand. According to her account, published in the university newspaper, The Harvard Crimson, her colleagues didn’t get basic financial math. She wrote the university’s then-president, Larry Summers, to complain—and she was fired for making what were called “baseless allegations.” Funnily enough, her employer before Harvard was Enron, so the woman obviously knows fuzzy math from the inside! When Summers was president of Harvard, he pressed the university to borrow heavily to take aggressive investment positions that have since turned very sour, forcing the university to borrow to meet basic operating expenses. Need I point out that Summers is now running the economy?
[On Friday afternoon, the Obama administration disclosed that Summers was paid over $5 million last year by D.E. Shaw, the hedge fund where he worked after leaving Harvard. That, plus hundreds of thousands in speaking fees from other Wall Street firm. Any wonder that his administration is going so easy on Wall Street?]
intellectual vacuum
Finally, in other news, one Edward Hadas, writing on the financial news site BreakingViews.com, complains about the lack of a serious left opposition. His opening words, inspired by the anti-G20 demos in London: “A great age of protest should be dawning. The global mismanagement of the financial system has led to a deep recession. Intellectual paralysis has gripped the authorities and their policy response has been risky. After such failure, the political leaders gathered in London for the G20 conference deserve a serious challenge. Sadly, all they are getting are the senseless slogans of a hippie festival.”
Sad to say, he’s right. The old Seattle strategy of street parties and puppets and all that seemed right for the late stages of the 1990s boom, but in the middle of this bust, they seem silly and irrelevant. This isn’t what the scared masses want. As Hadas says, the world needs “a new intellectual framework,” not a street party. He concludes: “Sadly, the more intellectually sophisticated Left seems to be hardly more capable of helping out. Any protester who can articulate a coherent alternative to the establishment’s tattered notions really could change the world.” It’s true, and I’m hanging my head in shame that I haven’t done more to articulate that alternative. I’ll try harder in the future.
One down, dozens to go
So Obama fired Rick Wagoner at CEO of GM. No doubt he deserved it, but why do all the idiot bankers that Pres. Yeswecan met with on Friday get to keep their jobs? Oh yeah, I know. Only automakers get put through the wringer for a little federal spare change. Bankers get blank checks, no questions asked. And only autoworkers get their contracts ripped up. Ripping up bankers’ contracts would be governing by anger, and we don’t want to do that!
Radio commentary, March 26, 2009
Housing market stabilizing?
In the economic news, more signs of the stabilization I’ve been talking about for the last few weeks, especially in the housing market, following last week’s pickup in housing starts (the term of art for when builders begin constructing new houses). Sales of existing houses, which are the lion’s share of the market, rose by 5% in February, the strongest monthly gain in almost six years. The rate of decline in prices also slowed. But the way that’s phrased is a reminder that the market remains very depressed. Prices are still weak, and January’s performance was revised downward (I should point out that revisions to back numbers are frequent in almost all economic data) to make it the worst performance on record. And despite the strength of the pickup in February sales in percentage terms, the pace of sales remains very close to all time lows. But, as they say, flat is the new up.
Sales of new houses in February also showed a strong pickup, following a string of steep declines. Despite that uptick, the sales pace remains quite low. And the overhang of unsold houses, both existing and new, remains at very high levels. And the price of new houses continues to fall. Still, this latest batch of housing data does suggest that the deep plunge has slowed to a slow crawl, or may even be turning around. Of course, it’s still way too soon to make all that much of this. But since housing is often the first sector to bottom out in a recession, this is encouraging.
Job market getting slightly less stinkier?
As a reminder, though, not to get too carried away with jubliation, first-time claims for unemployment insurance, filed by people who’ve just lost their jobs, rose by 8,000 last week. Since this number bounces around a lot, it’s sound practice to look at a running average of the last four weeks data. That measure fell slightly last week, after rising steadily for two months, so that’s a little encouraging. But it remains very high. And the count of people receiving benefits, which is a function not only of how quickly jobs are lost, but also how quickly the unemployed find new jobs (or run out their benefits), continues to rise. So, as I’ve been saying for a while, the job market still stinks, but it’s not getting radically stinkier from week to week. Isn’t that comforting?
Old Europe complains
Meanwhile, across the Atlantic, the prime minister of the Czech Republic, Mirek Topolanek denounced the U.S. penchant for big-spending stimulus and bailout packages as “the road to hell.” This is pretty funny, since his government just fell, mainly because his electorate isn’t happy with the way he’s handled the way the economic crisis has hit his country. But when under attack at home, it always pays to go on the offensive abroad.
When I hear critiques like Topolanek’s—and you can hear them from our own right wing, as well, including more than a few conservative Democrats—I always wonder what they’d do. Just let the economy go down the drain, with no effort made to counteract the implosion? But he’s got a lot of allies across Europe, even if they’re not given to such blunt language. European governments and central banks have been quite slow to pump up the stimulus engine, leaving much of that work to the U.S. In their defense, it is true that their so-called automatic stabilizers—spending on income support and other social measures that rise as unemployment rises—are a lot more powerful than ours. Just half of our unemployed, for example, are drawing unemployment insurance checks. And once those are gone, it’s either the VISA card or the sidewalk. No so in Europe, where the dole checks are always in the mail. Still, the reputation that the Old World has among many on the American left isn’t entirely earned. The European elite is very much into tight money and tight budgets, and hate the sort of stimulus we’re doing here. Give the EU’s size, a somewhat larger share of the world economy than the U.S.’s, that slowness to stimulate could have unpleasant global effects.
Stimulus withdrawal & austerity
But we stimulators also have a problem. It looks very much like the Obama administration would like to withdraw the stimulus sooner rather than later. If so, what then? Turning back to the 1930s, we find that FDR, who was always uncomfortable with all the deficit spending that the Depression forced him into, was lured by the 1933-36 expansion into thinking that the slump was over, so he contrived a balanced budget for 1937. Unhappily, the economy, already weakening some in early 1937, took this turn back to fiscal orthodoxy very badly. The unemployment rate, which peaked at 25% when Roosevelt took office in 1933, had come down to around 11% by mid-1937. But it shot back up to 20% a year later. This raises an important question or two. Will one round of stimulus be enough? And can we wean ourselves from it? Or are our problems much more deep-seated than that?
I’ve been coming around to the idea that in their heart of hearts, Obama & Co. are planning an eventual austerity program. That is, the only way to pay for all this stimulus, if you don’t want to tax the rich heavily (and it’s looking like neither Obama nor the Congressional Dems want to do that), then there’s only one other way to fund all these trillions of stimuli and bailout: cutting social spending to the bone. More broadly, it would be economically rational, in the harsh orthodox sense, to prolong and even deepen the sharp contraction in consumption that this recession has brought with it. Less consumption means fewer imports, which means less money we need to borrow abroad. This is precisely the structural adjustment strategy that the U.S., via the IMF, has imposed on scores of countries around the world over the last 25 years. Could it be that a candidate elected on high progressive hopes would turn into the agent of a home-grown structural adjustment program? He’d be the ideal agent for such a thing, in fact, because it would disarm the natural opposition to such a strategy. Were I given to cliches, I might say that this could turn into Obama’s Nixon in China moment.
Timmy meets the Establishment
Treasury Secretary Tim Geithner appeared this morning at the Council on Foreign Relations. The main meeting room, named after private equity kingpin and entitlement scourge Pete Peterson, was jam-packed with members, so we media hacks had to watch the proceedings on a video screen set up in the David Rockefeller Room.
Geithner’s remarks (as prepared, here; as delivered, here) mostly achieved the anodyne level customary to the genre. He’s glib in a way, but doesn’t give the impression of having a powerful or capacious mind. Though he’s 47, he still gives the impression of being a kid playing at being a grownup—or so it seemed on the closed-circuit TV.
A couple of highlights stand out amidst the boilerplate.
Pete the austere
There was much joshing about Pete Peterson and his eponymous room. Geithner: “Nice to see Pete Peterson. I hope he’s being sufficiently generous to the Council. You know, this room looks a little crowded, Pete. I think you might want to build up, maybe.” Later, Roger Altman, the former Clinton Treasury official and now head of his own private equity firm, continued teasing Peterson about the Council’s need for his money—which Geithner seconded, by recalling his own experience as president of the New York Fed when Peterson was its chair: “brutal on…basic things. A real challenge.”
But, things took a more serious turn re: Peterson when Geithner said “Of course, we are all fiscal hawks now because of Pete Peterson. There are no doves left on the fiscal side.” There are two ways to read this remark. One would be to see it as a distracting pledge of fealty to fiscal orthodoxy as Geithner’s government was about to embark on the biggest deficit spending program since the end of World War II: that is, “we’re doing this because we have to, not because we want to, so keep buying our bonds.” The other would be as a confirmation of the argument I made in yesterday’s post: that once this bout of spending is done, Obama et al will impose a serious structural adjustment program on the U.S., cutting social spending to the bone.
Textual departures
There were some intriguing departures from Geithner’s prepared text. Towards the beginning, he improvised this: “President Zedillo [of Mexico] had this great line in his country’s moment of financial peril [during its 1994 crisis], when he said, you know, markets overreact, so policy has to overreact.” He later underscored that point, saying that the lesson of other countries is that you have to “keep at it long enough that you’re really firmly on the other side,” and “[not] to put the brakes on too early…. [W]e’re not going to do that.” Leaving aside whether one can really tell in the heat of the moment that you are “on the other side,” it sounds like Geithner is telling the markets and the public that all this tsurris could go on a lot longer than anyone expects.
The other interesting departure from the script was the omission of a discussion of AIG, which contained the passage: “[A]top its insurance companies is an almost entirely unregulated business unit that took extraordinary risks to generate extraordinary profits.” Perhaps Geithner deemed that too friendly to the day before yesterday’s dark mood of angry populism, beyond which we have now moved into the bright land of the forward-looking and constructive.
Flies in the ointment
Some analysts have wondered whether banks will be reluctant to sell their toxic assets to the outside speculators funded by Geithner’s bailout scheme. If the prices that the markets “discover” are below the value the banks are currently carrying them at on their books, that would lead to fresh writedowns and a desperate need for fresh capital—meaning from the Treasury. And with Treasury capital comes political attention and, gasp, possible compensation limits.
Altman asked Geithner about this, and Geithner wasn’t worried. He seems to think that the major problem is uncertainty, not brokeness. So the banks are actually being forced to hold more capital than they’d like, and once the program is underway, the “uncertainty premium” will disappear. Let’s hope so. Because if it really is a matter of brokeness, we’re talking some major additional capital infusions—from the Treasury, of course. (Try getting that through Congress!) Once the uncertainty premium is gone, then banks will have no problem raising fresh capital from private sources.
Geithner didn’t explain why the banks would need to raise fresh capital if they’re now holding excess capital, except maybe because of the possibility of a “deeper recession.” But if we’re in for one of those, then how much more capital will they need? Geithner didn’t explain that either.
Dollar indiscretions
Finally, there were some questions about the dollar, and Geithner’s answers reinforced the impression that he’s in over his head.
A few days ago, Zhou Xiaochuan, governor of the Chinese central bank, declared that it was time for the world to move on from using the dollar as its reserve currency. Zhou’s concerns are obvious: the U.S. financial system is a mess, its international accounts are also a mess, and it’s early in a major federal borrowing binge. (Of course he didn’t put it that harshly in his statement.) Such a country isn’t the obvious candidate to be the issuer of the world’s central currency.
Yet the U.S. derives enormous advantage from that role—most relevant to the present moment, a freedom to borrow with (so far) no practical limit, since countries keep most of their reserves in dollar-denominated assets. Zhao suggested that some synthetic unit, like the IMF’s special drawing rights (SDRs), which are comprised of a basket of the world’s major currencies (the dollar, the euro, the yen, and the pound), replace the dollar in this privileged role. Such a move would reduce, materially and symbolically, U.S. imperial power (though of course you can’t put it that way in polite company), so no U.S. official would embrace it—though it makes good sense for China to put the idea forward.
Asked by an audience member what he thought of Zhou’s idea (at these events, the press doesn’t ask questions—only members of the CFR do), Geithner’s first response was that he hadn’t read the governor’s proposal, though he quickly laid on the praise for Zhou as “a very thoughtful, very careful, distinguished central banker.” Then, Geithner added that the U.S. is “open to [the] suggestion” of expanding the SDR’s role. Currency traders immediately interpreted that as a weak defense of the dollar’s role, and sold the currency.
Geither should have anticipated that. But he also should have read Zhou’s proposal, since it came from a top official in a country that holds about a trillion dollars worth of the paper that Geithner is responsible for. (It’s only 1,513 words, including title and byline—and comprehensible, according to Microsoft Word, to anyone reading at the 12th grade level or better.) Maybe that was a conscious dis rather than a careless confession of indefensible ignorance—but in either case, Geithner really needs to find a new line of work.
Altman, obviously dissatisfied with Geithner’s first attempt at an answer, closed the meeting by asking “one final question…on behalf of the market…. Do you see any change…in the basic role of the dollar as the world’s key reserve currency…?” With the question so bluntly prepared for him, Geithner finally came up with the right answer: “I do not.” The dollar promptly rallied, at least for the moment.
Maybe Geithner would like to see a decline in the dollar. It would make our exports cheaper and imports more expensive, which would help balance the trade accounts. If we just print the money, it would make it a lot easier to service the debts we owe the outside world, currently approaching $6 trillion, or 42% of GDP. (It was 15% of GDP at the end of 1999, almost two-thirds below the present level.) But it’s playing with fire for a country that needs to borrow as massively as this one to signal that it wouldn’t mind a little devaluation. A little devaluation could turn into a big one pretty quickly, and with that would come capital flight and a spike in interest rates. It’s ironic that Geithner talked this way on the same day that a British government bond auction failed—there weren’t enough buyers willing to take up the offering, which was for just £1.75 billion. That’s considerably less than the amount that the U.S. needs to borrow every day to fund its projected deficits over the coming year. He better hope the same doesn’t happen to him.
No worries, though. Altman concluded the proceedings by thanking Geithner, and assuring the audience that “we’re in good hands.” He didn’t disclose who “we” are, though.
Gaming Geithner
Michael Thomas points to a fascinating little primer from Breakingviews.com on how to game the Geithner plan: Gaming Geithner. A sub is required, but you can register for a free trial to read the piece. And this is only the work of a single day!
Back on February 13, I said that there was something oddly Hegelian about the Obama administration’s approach: “the hand which inflicts the wound is also the hand that heals it.” Not to question the majesty of Hegel, but a hand habituated to slicing motions probably isn’t one best suited to healing.
Leveraged speculators will save us!
And not just any band of leveraged speculators: handpicked members of the private equity elite operating with cheap government credit, and insured against losses!
Others have criticized the Geithner bank rescue plan’s economic aspects in detail; no need to repeat all that here. I’ll just say that it strikes me as a very bad idea to set the thing up so that the government takes the lion’s share of any losses and the private investors, the lion’s share of any gains (if any). And it strikes me as fantastic that the dominant problem with the credit system is some underpriced (or unpriced) “legacy” assets, and this program, by pricing them, will deliver us into some promised land. (Gotta love the use of the word “legacy”: it’s also how Ivy League admission officers refer to the dim offspring of alumni and major contributors.)
Surely pricing is part of the problem. But pricing the unpriced won’t do anything to address the underlying economic fact that too many people owe more money they can pay, and their lenders are hurting for it. Complex securities did add a few layers of complexity, complexifying the problem, but the fundamental issue will remain even if the mysterious toxic assets are priced. Toxins aren’t rendered any less toxic by naming them.
(By the way, the buzz is that some banks may participate in the bailout scheme, borrowing money from the gov to buy their own bad assets at ridiculously inflated prices. That renders them technically solvent, with Washington holding the bag. Nice.)
But let’s leave all that aside for the moment. Much of the debate is about whether the Geithner plan will “work.” But this use of “work” isn’t defined. Does it mean “keep the financial system from imploding, so that time will heal the wound”? Does it mean “take the junk off the banks’ books so they can quickly start lending again”? Or what, exactly?
It looks like the intention of the Geithner scheme is to try to restore the status quo ante bustum, with private equity and hedge fund guys running around remaking the economic landscape with big gobs of borrowed money. Is the ultimate point of this plan to bring back the world of 1999 or 2005, when easy credit fueled speculative bubbles and overconsumption? That doesn’t seem like a live option.
There’s a more sinister possibility: the bailout will be funded by an austerity program. That is, all the trillions being borrowed to spend on bailouts and stimuli will save the financial elite, but at the costs of a fiscal crippling, and instead of raising taxes on the very rich to pay down the debt, there will be deep cuts in civilian spending. With the economy remaining weak, employment would stagnate and real wages fall—a prospect that would, by restricting consumption and therefore imports, bring the U.S. international accounts close to balance. Then we wouldn’t be dependent on Chinese capital inflows anymore—and the overprivileged wouldn’t have to give up lunching on $400 stone crabs. Is that the hidden agenda? It is coherent, if cruel.
U.S. workers are certainly used to long-term declines in real wages: the average hourly wage, adjusted for inflation, is almost 10% lower than it was 36 years ago. But the blow of that fall was significantly softened by the availability of easy credit, which allowed people to maintain the semblance of a middle-class standard of living. What would wage cuts without easy credit look like? What kind of retooling would be necessary for an economy now dependent on high levels of consumption, and a society dependent for legitimation on the same? Hard to say, but we should start talking about it.
It would be a nice Nixon-in-China turn, for a Democratic president elected on high “progressive” hopes, to preside over something like an IMF structural adjustment program applied to the U.S. It could be portrayed as a necessary sacrifice for the common good. In fact, we can already see the outlines of a liberal apologia for austerity on the Nation’s website.
Radio commentary, March 19, 2009
Several new bits of economic news, most of them a little better than the recent run has been. First-time claims for unemployment insurance filed by people who’ve just lost their jobs fell by 12,000 last week. The four-week moving average, which smooths out this volatile series, rose slightly to make a new high for this recession. But it’s possible that the rate of deterioration is now slowing. In other words, the job market is terrible, but at least it’s not getting rapidly worse. At least over the last few weeks.
The big surprise of the week, however, was a rise in housing starts. Most of the rise came in multifamily dwellings; the rise in single-family starts was just a few thousand. More promising, applications for permits to build new houses rose, with permits to build single-family units leading the way. As I’ve been pointing out here for the last few months, permits tend to lead the way on housing, and housing tends to lead the way on the broad economy, so this is a sign that things might be turning. Or if not turning, at least stabilizing. For now.
But the Conference Board’s leading economic indicator, which leads developments in the broad economy by three to six months, fell in February, led down by falls in consumer attitudes and the stock market. The decline was fairly modest, however, less than half the rate we saw last October and November. Chalk this up as another possible sign of stabilization. Possible. For now.
I’ve been expecting that the economy would take a sharp fall and then stabilize at a crappy level for quite a while. There’s a chance that we’re in that transitional phase, from freefall to the routinization of crappy. But this crisis has surprised us by coming back for repeated visits, so the last thing to do right now would be to sound the all clear.
Couch-o-nomics
Here’s an insight into the capitalist mind, provided by Financial Times columnist Stefan Wagstyl (“Glint of hope in eastern Europe“). In a review of the state of the Eastern European economies, a state that is pretty terrible, Wagstyl points to several advantages these economies have over their Western counterparts. Employers in the East have been quick to cut wages and fire workers. This is what’s known as “flexibility.” And family ties are closer in the East than in the West, meaning that the unemployed have something to fall back on. Isn’t that comforting? You could get fired so quick you won’t know what hit you, or have your pay cut by a third—but at least you can crash on your uncle’s couch.
Screw the environment!
The economic crisis is looking like bad news for the environment. As the 1980s boom turned into the early 1990s bust, I recall that The Economist, the magazine that mysteriously calls itself a newspaper, editorialized that green consciousness always rises late in an economic expansion as a byproduct of guilt over material indulgence, and dissipates in the subsequent contraction, as attention turns instead to survival. I was skeptical of the thesis, but there may be something to it. Thursday morning, Gallup reported that for the first time in the 25 years they’ve been asking the question, more Americans want to give economic growth priority over protecting the environment.
The exact question: “With which one of these statements about the environment and the economy do you most agree—protection of the environment should be given priority, even at the risk of curbing economic growth or economic growth should be given priority, even if the environment suffers to some extent?” To guard against stacking the answers, the order of the two statements is reversed for half of the respondents; given a choice between two options, people tend to favor the first offered, and a scruplous pollster tries to compensate for that.
From 1985, when they first asked the question, through 2000, the environment was given priority by a wide margin, typically 30 to 50 percentage points. The environment’s advantage began narrowing with the recession of 2001 and the subsequent weak recovery, with the environment’s advantage almost disappearing in 2003. But as the expansion continued, the environment’s lead widened to 18 points in 2007. But that gap followed the economy down; now, economic growth has the advantage by 9 points. That’s a massive swing—about 60 percentage points from the environment’s widest lead to its current lag. Just a week ago, Gallup reported a record high 41% of Americans expressing the belief that fears of global warming are exaggerated. Since the economy is likely to stink for some time, this is extremely bad news for anyone who cares about transforming the human relationship with our natural environment.
Wretched excess
Wow, how about those AIG bonuses!?! Normally, I’d consider this a peripheral issue, since the sums involved are just 0.1% of the total that the company has gotten in bailout funds—a symbolic distraction from the real issues. I’m not going to say that this time. Because this symbol represents and crystallizes a couple of deeply real things: one, the chutzpah of Wall Street, which still wants to take all the money it can get without any other consideration, and the weakness and/or complicity of the Obama administration, which refuses to step on toes and twist arms. Their strategy continues Bush’s: write big checks but make no demands.
That’s a stark contrast with the Swedish strategy during their bank bailout of the early 1990s, a precedent that I’ve mentioned often here. An article on Sweden’s bailout in Wednesday’s Financial Times quoted the finance ministry official in charge of the bank restructuring as saying: “We were a no-bullshit investor – we were very brutal…. You take command. If you put in equity, you have to get into the management of the business, [otherwise] management is focused on saving the skins of the shareholders.” The Obama administration is clearly a pro-bullshit investor, refusing to take command. We now learn that the worthless Treasury Secretary, Tim Geithner, pressed Senator Chris Dodd to insert language into the stimulus legislation, which otherwise purported to be cracking down on Wall Street compensation, that specifically protected the AIG payments. You have to wonder how hard Dodd had to be pressed on this; over the years, he’s gotten over $280,000 in campaign contributions from AIG execs.
Despite the protestations to the contrary, it’s clear that the admin could have blocked the payments. A friend who works on Wall Street told me that it’s hardly unknown for firms to renege on bonus payments. They can just refuse, and wait for the employees to sue, which they often don’t, because it would cost a lot of money and trouble for an individual to go against a huge corporation (or, in this case, the U.S. government). Or they could have just fired the employees for cause—like doing a really bad job, which they did. Failing that, you can almost always find something to fire people for—just read their email, there’s almost always something smelly lurking there. The federal government owns 80% of AIG. It owns big chunks of big Wall Street names. Start acting like owners.
Speaking of AIG, the Wall Street Journal reported on Wednesday that some of the AIG bailout money is likely to go to hedge funds who speculated on a rise in mortgage defaults. The details are complex, but boil down to this. AIG sold insurance to investors in subprime mortgages that would pay off in case the underlying mortgages went into foreclosure. They did go into foreclosure, and AIG didn’t have the money to pay off. So the government is stepping up to the plate. Isn’t that lovely? Washington is supposedly trying to prevent foreclosures, and here it is making good on speculative positions that are profitable because foreclosures are on the rise. Ah, the contradictions.
And the latest news from the department of wretched excess: Citigroup is planning to spend $10 million on a new set of offices for its CEO, Vikram Pandit, and his lieutenants. Citi says this is all part of a cost-cutting strategy, which under different circumstances might be totally hilarious. I swear, it looks like these guys are trying to provoke a class war. Well, there’s been a class war from above on for the last 30 years—but I mean a real class war from below, one that might even disturb the sleep of the overprivileged. Maybe I’m being too romantic.
Steve Diamond’s blog
When I wrote the post just below, I didn’t know that Stephen Diamond has a blog. He does, and it’s here. It’s always good to have a sympathetic law prof who’s on top of the mysterious legalities.
The AIG bonuses: a law prof’s view
This was originally posted as a comment, but I thought it was worth bringing up to the body of this esteemed blog: Santa Clara University law prof Steve Diamond on how the AIG bonuses could have been blocked, if the Obama admin had really wanted to:
Thanks to Steve Diamond for pointing to this; glad he wasn’t inhibited by excessive modesty.
LBO News from Doug Henwood 
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Posted on April 17, 2009 by Doug Henwood
Radio commentary, April 16, 2009
Green shoots…shot?
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.
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