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.
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.
Plenty of bullshit here!
The Financial Times has a piece today about the Swedish bank bailout. Here’s a nice quote. You couldn’t imagine a sharper contrast with the American approach:
Arne Berggren, the finance ministry official responsible for bank restructuring, is blunt about the approach he took. It was clear from the outset that the government would act as a commercial investor, demanding equity stakes in return for capital. “We were a no-bullshit investor – we were very brutal,” he says. The authorities also insisted on control. “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 [remaining private] shareholders.”
Not here. The Obama administration is clearly a pro-bullshit investor. Dither about the AIG bonuses, then moan and posture, then give the company another $29.835 billion – offsetting the bonuses, sorta, in what looks like a rounding error – but still not exercising any serious government control despite owning 80% of the institution.
Those AIG bonuses: how to break the contracts
So Obama tells Geithner to do something, anything, to make sure the gov can get back the AIG bonuses. Who knows if this is real or a pose? I’m now leaning towards the latter, especially after getting this from a friend who works at a hedge fund:
In the financial industry, reneging on contracts is, not quite SOP, but certainly not rare. From the company’s perspective, two things can happen. One, the employee eats the default. Free money. Two, he (more rarely, her) has a lawyer call you. At that point, you have the option of saying, oh yeh, my mistake, here’s the money. If you don’t, the employee may or may not sue you. If he does (and it is a tremendously risky proposition for him), you can always cave in right there, and you end up no worse than before.
Also, there is always the option of firing the guy for cause, which almost always negates the guaranteed payout. If you rummage through his emails, chances are you will find something that you can show the judge. Maybe he went shopping during company hours, sent an off-color joke, whatever.
I really don’t know whether they are bullshitting or just plain weak. My bet is the former.
Yeah, the sums involved are small change in the context of this enormous bailout, but still, what a symbol this is. Bonuses to retain a gang that drove the company into the ditch, and threaten to take the rest of us with them? Acting powerless despite an 80% ownership stake? Reluctant to stomp on toes and twist arms to remain “market friendly”? The excuses just aren’t credible anymore.
Radio commentary, March 12, 2009
More of the same, more or less. The economy continues to stink, and not just in the U.S. German industrial production is in a freefall. In fact, the European economy looks to be declining faster than ours. Yet most European governments are showing little interest in bigger stimulus programs, despite U.S. pressure to step up.
U.S. imperial power
We’ll see how long that resistance continues. Chrystia Freeland had an interesting piece (“Salvation, like the sin, will emerge from the US”) in the Financial Times on Thursday arguing that even though this economic crisis originated in the U.S., and looks like it might end up with Asia gaining relative to the U.S., at least in economic terms, there’s unlikely to be any serious challenge to American political leadership—or imperial power, if you prefer the older language, which I do—in the coming years. The European Union has no political coherence, and has been engaging in some pretty heavy infighting about how to handle this economic crisis, and whether to bail out the Eastern portion of the continent, whose economies are in miserable shape. Meanwhile, the U.S. is under energetic new leadership—not what I’d like to see, of course, but there’s no denying the force of Barack Obama’s intelligence and political skill. And despite being the origin of the global crisis, and despite the need to borrow trillions of dollars to bail out the financial sector and stimulate the economy, there’s no sign of global investors shunning U.S. Treasury bonds. That could all change, but obituaries for American political dominance are looking premature.
Corruptions of empire
That’s not to say that the Obama team is firing on all cylinders. In fact, they’re having a hard time even finding enough people to work for them. The Washington Post reported earlier this week that one reason the Treasury can’t find good candidates is that no financial types want to sell their assets at current depressed prices. Now I’m not so sure that the best place to look for good people to save and then renovate the financial system is on Wall Street. But the contrast with the New Deal era is pretty remarkable. Then, the Roosevelt administration was chock full of talented people willing to work for next to nothing. Not now.
No doubt there are many reasons for this. Of course, the crisis was much greater then this it is now—about three times greater, you might say. But also, the intellectual and political environment in the decades leading up to the 1930s depression was a lot livelier than the past couple of decades have been here. Our present ruling elite looks mentally incompetent and morally corrupt, driven almost entirely by the accumulation of money. Sure, it’s been that way for a long time. But it seems more that way than it was in the past.
Geithner wrecked Indonesia
Along those lines: I’ve been pretty critical of Treasury Secretary Tim Geithner ever since he was nominated for the position. His closeness to Wall Street during the bubble, while he was president of the Federal Reserve Bank of New York, cast his qualifications for the job into doubt from the beginning. His invovlement in the disastrous AIG bailout and the disastrous decision to let Lehman Brothers go under reinforced those doubts. And now we have fresh reason to think that he might be exactly the wrong guy for the job.
In a speech in Sydney last week, reported in the Sydney Morning Herald, former Australian finance minister and prime minister Paul Keating blamed Geithner for engineering “the biggest fall in GDP in the 20th century.” Geithner’s unlucky victim was Indonesia, during the Asian crisis of 1997–98. Then he was the official in the U.S. Treasury responsible for drawing up the IMF adjustment program for that country. According to Keating’s analysis, he misread the problem as a current account issue and not a capital account one. That is, Geithner diagnosed the region’s problem as being similar to Latin America’s in the 1980s and Mexico’s in 1994: large government and current account deficits that could be cured, though quite painfully for the local economies, through conventional austerity measures, along with an IMF loan to tide the unlucky recipient country over.
(Keating, though rude of speech, isn’t all that unorthodox a guy economically speaking, so he’s a lot more friendly to the IMF than I’d be. But let’s leave that aside and savor his critique of the man a friend likes to call Timmee!!)
But, as Keating points out, Indonesia’s public finances were in fine shape. The problem was a great inflow of hot money from abroad that had quickly turned tail and left. The result was an asset bubble followed by a rapid asset deflation. Geithner’s prescription, a standard austerity program (higher interest rates along with budget cuts) was exactly wrong: it crashed Indonesia’s economy, and destroyed the IMF’s credibility in Asia. That wreckage encouraged China to “self-insure” its economy against disaster by building up huge foreign currency reserves—huge wads of dollars they could draw on in a crisis rather than being forced to approach the IMF. That hoard is a crucial part of the massive imbalances plaguing the world financial system today. Among other things, it helped fund the U.S. credit bubble, and the rest is a very unpleasant history.
Cap ‘n’ trade: who pays?
In other news, the Congressional Budget Office is out with a new analysis of the distributional effects of a cap-and-trade scheme for carbon emissions. Under cap and trade systems of the sort the Obama administration is proposing, the government auctions off the right to emit carbon into the atmosphere. To continue pumping greenhouse gases, utilities, factories, refineries, and the like would have to buy up sufficient permits from the gov. Over time, the allowable amounts would dimish, forcing a decline in the level of carbon emissions. That’s the cap part. Polluters who got their emissions down below their allowed levels could then sell their surplus rights to dirtier entities. That’s the trade part. The EU is already doing something like this. It’s a favorite approach of market-loving types.
There are problems with these schemes. A very significant one is that prices of carbon rights tend to be very volatile, booming in good times and crashing in bad ones, making it very difficult for companies to plan over the long term. A much neater approach would be to tax carbon at a rate that rises over time.
In any case, the point of either a carbon tax or a cap and trade system is to raise the price of carbon-based fuels over time, forcing conservation and substitution. There’s no easy way around that. Fossil fuels are too cheap to be compatible with life on earth, and that has to change. That’s where the CBO’s distributional analysis comes in. The poorer you are, the larger a percentage of your budget goes to energy. For example, the poorest fifth of U.S. households spends 21% of their income on gas and utilities; those in the middle fifth, about half as much, 9%; and the richest, half as much again, just 4%. Obviously, any serious price increase would hit the poorest the hardest.
So any scheme to raise the price of fuel has to address that—has to, unless it’s designed by very cruel people. The best way to do this would be through tax rebates, structured so that the poorer you are, the bigger your rebate. We shall see if Congress and the administration do anything like that, or if they take the cruel approach.
Americans can’t stop believing
And, finally, the results of some polling and focus group research commissioned by the Economic Mobility Project of the Pew Charitable Trusts. Faith in American specialness looks unshaken. Despite the current crisis, almost one in five Americans—79% to be precise—believes that it’s still possible to get ahead in this economy. Nearly three-quarters—72%—think they’ll be better off in ten years. African Americans are actually more optimistic than Hispanics, who are in turn more optimistic than whites. How about that? And almost two in three—62%—think their kids will be better off than they are. By a 50 point margin—71 to 51—Americans think that personal attributes, like hard work, are more important to mobility than external conditions, like the state of the economy. And only very small minorities, in the 15% range, believe that race and gender have significant impacts on mobility. By a 10-point margin, 46 to 36, Americans think that government hurts mobility more than it helps. And by a 50-point margin, 71 to 21, Americans think it’s more important to give people opportunity than to reduce inequality.
Many of these beliefs are at odds with the facts. In fact, some of the polling reveals that: when asked specific questions, like how easy it will be for their kids to achieve the “American dream,” or how hard it is to start poor and end rich, the answers are more in line with reality. (Thanks to SA for pointing this out.) Only about one in three Americans does better than his or her parents. And race and gender are extremely important influences on outcomes. But these headline results reveal bedrock beliefs that do a lot to influence how people think and vote, regardless of what they know in the backs of their minds. Mere factual refutation won’t do much to change them.
The anguish of the right-wing intellectual
A few postscripts to yesterday’s post about the intellectual devolution on the right. I should have noted that several conservative intellectuals have expressed some anguish about the situation. For example, David Frum (is he an intellectual? for these purposes, I suppose so) filed a cri de coeur (“Why Rush is Wrong“) with Newsweek, of all places, expressing worry that the rise of Rush Limbaugh to the de facto leadership of the Republican party is bad news for conservatism at a time when conservatives need a thoughtful reinvention rather than just heating up the old stuff they first cooked up in the 1970s. Many other conservatives are embarrassed by the rise of Joe the Plumber and Sarah Palin, not to mention McCain’s proudly stupid campaign—as they should be.
Well yes, but…. The anguish on the right reminded me of something that Slavoj Zizek said in Laibach: A Film from Slovenia. In the 1980s, Laibach loved to dress up in fascist and Stalinist garb, much to the annoyance of Slovenian nationalists who were pushing for independence from Yugoslavia. Zizek, who appears as a talking head throughout the film, commented that the annoyance came from Laibach’s exposure of the “hidden underside” of Slovenian nationalism. To the outside world, Slovenian nationalists wanted to appear modern and civilized, but hidden underneath was a strutting authoritarianism that was revealed by Laibach’s uniforms, goosesteps, and martial anthems.
So you have to wonder if the anguish among intellectuals on the right is anguish at the exposure of their hidden underside. At the popular level, the American right has long been associated with a paranoid, xenophobic, and anti-intellectual stance. (Yeah, I know it’s fashionable to hate Richard Hofstadter, but he nailed this and many other things.) When William Buckley founded National Review in 1955, he wanted to differentiate himself from all that. He was looking for something more serious and cosmopolitan, opposed to both social democracy and Babbitry (seen as deeply linked). An aristocratic contempt for democracy was always part of the Buckleyesque mix; I certainly remember it from my days in Yale’s Party of the Right (POR). The POR’s hero is Charles I, who said in his execution speech, in a passage happily quoted by Party chairmen in their toasting rituals, that government is no business of the people, because “a subject and a sovereign are clean different things.”
But Buckley himself was a fan of Joe McCarthy, hardly the kind of guy you can imagine sitting down at his harpsichord to play a Bach invention, or appreciating someone who did. The early NR was populated by segregationists like James Kilpatrick. Buckley himself had great sympathy for the South’s struggle to preserve Jim Crow. A memoir by a former NR intern, published in Spy magazine back in its glory days, recalled lots of crude racist jokes around the office in the late 1980s. But all that was disguised behind Buckley’s odd accent and arched eyebrow.
Now the hidden underside is front and center, and about all that remains. It’s hard to imagine Joe or Sarah quoting Burke or Kirk. It’s funny that Jonathan Krohn and Bill Bennett are best friends. Bennett loves to present himself as Mr High Culture, but he’s a yahoo from head to toe. No wonder the intellectual right is beside itself. It badly needs to work up some fresh camouflage.
The right’s intellectual devolution
I’ve been reading the accounts of the 14-year-old conservative Wunderkind, Jonathan Krohn, who wowed them at last week’s Conservative Political Action Conference in DC. Krohn’s speech, which consisted of little more than asserting that conservatism was a principle-based ideology that’s all about protecting The People, would have been unremarkable had it been delivered by someone over the age of 20. It really wasn’t all that remarkable even coming from a precocious teenager. But so desperate is the right for rising stars these days that they’re starry-eyed over this home-schooled phenom.
It all put me in mind of my own brief career as a movement conservative, long ago. (Details here and here.) I was converted from being a high school commie into a college freshman reactionary by reading Milton Friedman’s Capitalism and Freedom, William Buckley’s Up From Liberalism, and Friedrich Hayek’s The Road to Serfdom. These books were not free of right-wing crackpottery, but they were written at a fairly high level of seriousness. Kids these days come to conservatism by reading Bill Bennett and Ann Coulter or listening to Rush Limbaugh. (They also read an old-timer, the execrable Ayn Rand; we in the Party of the Right hated her as a vulgar authoritarian.) What an amazing intellectual devolution.
Not, of course, that the left is exactly kicking ass intellectually. But the right has gone totally braindead.
Radio commentary, March 7, 2009
[This is the KPFA version, which includes an analysis of the February employment report that came out the morning after the original WBAI show.]
I’ve been off the air at WBAI for three weeks, though doing shows for KPFA during that hiatus. I can now disclose to the New York audience that the economy hasn’t recovered since I was last here. In fact, it’s not even starting to find its footing. And when I say “the economy”—a phrase I sometimes recklessly use, as if getting and spending weren’t somehow embedded deeply in social life, but just some thing existing above and apart from human affairs—I don’t mean just the U.S. Most of the world economy is sinking rapidly, in many cases more rapidly than here.
But since I live in the U.S., I do pay closest attention to what goes on here, and what’s been going on here isn’t very good. Car sales are down more than 40% from a year ago to the lowest levels in modern history. That’s good news for the atmosphere, but not much else; until we make a transition to the post-carbon world, the huge portion of our economy, heavily concentrated in the midwest, that depends on making motor vehicles will be on the ropes. Housing, too, continues to sink, and gives no real sign of stabilizing.
The Institute for Supply Management‘s surveys of purchasing managers, the people who buy things for corporations, which I quote here frequently, look awful. The ISM’s manufacturing index was flat in February, but its employment component sank to an all-time low (and it’s a survey that goes back almost 60 years). Their service sector survey, which has only a twelve-year history, fell slightly for February. Cheeringly, if it’s not a meaningless blip, this survey’s employment component rose slightly, suggesting that maybe just about everyone who could be laid off already has been. Well, not really, but that’s what passes for cheer these days.
And on Thursday morning we learned that first-time claims for unemployment insurance (main page here), a very timely and sensitive indicator of the state of the job market, fell last week, though it remains at quite a high level. This thing does bounce around some from week to week, so it’s best to average the last four weeks results to get a better fix on what’s going on. That measure rose slightly from its previous reading.
prognosis
Putting all this together, it looks like the economy is still declining, though the rate of decline is no longer accelerating. Add to that some signs of stabilization in the Economic Cycles Research Institute’s leading index, which is designed to forecast turns in the U.S. economy three to six months ahead, and you’ve got some straws to grasp at.
My best guess is still that the recession won’t bottom out for another six to twelve months. The economy is going to get a lift from the stimulus package, whose scores of billions will start hitting the economy in a matter of weeks. But I suspect that any stabilization won’t be followed by a quick recovery, but instead a long, grinding period of flatness that will feel to most of us like a recession. This is, without a doubt, not just an ordinary business cycle, but instead a sign of a structural shift. The old neoliberal model of deregulation and debt-fueled consumption and speculation is dead beyond revival. It’s going to take a whole new economic model to get things going again, and I hope that that model has large green and social democratic components.
bear market: not over yet?
Oh, and some bad news for those of you who care about such things. I’ve just worked up some long-term analyses of the stock market, which compares prices to their long-term trends and to underlying corporate profits. On both measures, the market was overvalued by record dimensions at the peak of the dot.com mania in 2000. It’s come well off those highs—not surprising, considering that it’s down about 50% over the last year—but it’s still 30-40% above the levels it’s been at at the troughs of earlier bear markets. And while day-to-day movements in stock prices don’t matter much for those not in the market, big long-term moves do reflect and set an economic tone. Another big leg downward would suggest that any signs of economic stabilization were mere false positives, and there’d be more bloodletting on the way. I hope not, but that’s what the history says.
employment: another dive
And now a special update, added for the KPFA and podcast audiences. Friday morning brought the release of the U.S. employment report for Febraury from the Bureau of Labor Statistics, and it was another major stinker. You have to work really hard to find a single consoling detail hidden beneath the wretched headline numbers.
The monthly report is assembled from two separate surveys, one of employers and one of households. The highlights of each.
The employer survey reports a loss of 651,000 jobs last month, the third consecutive month of losses north of 600,000. (It would be four consecutive months had November’s loss been just 3,000 higher.) Goods production led the way down, with construction off 104,000 and manufacturing, 168,000. Within construction, it wasn’t just housing – losses in nonresidential construction actually exceeded the residential kind. And within manufacturing, it was just about everything; motor vehicles, which have been taking it on the chin, were off a mere 1,000. But it wasn’t just the goods-producing sector that got hammered; private services fell by 384,000. Retail, transportation, finance, leisure and hospitality, and professional and business services all took major hits. Even health care, which has been in a tireless expansion, added just 27,000 – a weak number for its own standards. Government added just 9,000 – which isn’t surprising, given the strain on public finances.
Since the recession began in December 2007, employment is off by almost 4 1/2 million, or 3.2%. That’s not a record-breaker—though it’s now slightly ahead of the losses of the early 1980s recession, it still has some work to do to catch up to the losses of the 1948-49 and 1957-58 downturns. But these are now well within hailing distance, even if the pace of job loss slows in the coming months.
The household survey looked about as bad as the survey of employers. The share of the adult population at work fell to its lowest level since 1985, meaning that what was once celebrated as the Great American Job Machine is badly broken. And the unemployment rate rose to 8.1%, its highest level since 1983. “Hidden” unemployment also rose, with those working part-time for economic reasons up 838,000 (and almost 4 million for the year). The broadest measure of unemployment, the U-6 rate, which includes unwilling part-timers and discouraged workers, rose 0.9 point to 14.8%. That’s probably a better real world measure than the headline indicator.
And the forward-looking indicators in this report, like temp and retail employment and the length of the workweek, are all pointing towards more weakness in the coming months. Let’s hope the stimulus money, which starts hitting the economy in a few weeks, helps put the brakes on this slide. Because otherwise, we’re in deep trouble.
Radio commentary, February 28, 2009
The economic news continues to be bad, quite bad. On Thursday we learned that the number of new applications for unemployment insurance rose a sharp 36,000, and the number of people continuing to received jobless benefits rose by 114,000, also a sharp rise. While neither figure is at record levels when taken as a percentage of the labor force—by those measures, things still aren’t as bad as they were in the recessions of the mid-1970s and early 1980s—they’ve nonetheless been rising steeply and relentlessly. That rise is now very close to breaking the 1974 record, meaning the job market is still deteriorating, and at what now looks like an accelerating rate.
That bleak picture of the job market was underscored earlier in the week with the release of the Conference Board’s monthly survey of consumer attitudes. Most of these mood surveys aren’t very useful; they reflect the headlines more than they shape them. But unlike the University of Michigan’s consumer sentiment survey, the Conference Board asks people about the state of the job market, and those responses are a good real-time measure of what’s going on. And by that measure, the labor market is a wreck. Just over 4% of respondents say that jobs are plentiful, which is pretty close to an all-time low since the series starts in 1978; 48% say they’re hard to get, which is close to an all-time high.
And housing figures also remain dismal. Sales of existing existing houses in January fell 7% from a year earlier—not a horrible number, nor was the actual level one for the record books. But close to half the sales were of “distressed” properties, meaning in foreclosure or close to it. That’s dragging down prices, which were down almost 14% from a year earlier, and 26% from their 2006 peak. At present rates, it would over 9 months to move all the houses currently for sale—and about a quarter of that inventory is distresed. Sales of new houses in January were down 48% from a year earlier, and adjusted for population, the rate of sale is at record lows. It would take over 13 months to clear out the unsold inventory at present sales rates, also an all-time record. And prices were down over 13% for the year—not an all-time record, but close to it.
The prevelance of records and near-records in the last couple of paragraphs suggests that we’re not really close to bottoming out yet. If we were approaching a bottom, you’d expect the rate of decline to be slowing (grasping at second derivatives, we are!), but it’s not. And the state of the job and housing markets are the most important aspects of that abstraction known as the economy to real people. Not that things are going all that well at the high abstract level of the financial markets, either.
About the only bit of encouraging news I can find is, as I’ve reported here a couple of times before, the Economic Cycles Research Institute’s weekly leading index, which forecasts changes in the economy three to six months out, is declining at a progressively slower rate, which suggests that there may be a bottom in sight. Underscore suggests and may. Finally, a comforting second derivative!
But I gotta say the news on the financial bailout is disappointing. The Obama administration is clearly going very easy on Wall Street. The much-hyped stress tests aren’t much of anything at all; as a Citigroup analysis put it on Thursday, the tests aren’t onerous and the overall plan looks very bank- and investor-friendly. They’re doing everything they can to avoid nationalizing these busted institutions, and even when they pump money in, as they did with Citigroup the other day, they do it with few obvious strings attached. We’ll know that we’re really in a new era when the administration’s approach becomes a lot less indulgent. Justice requires that, but so does economic recovery.
The outlines of the first draft of Obama’s first budget, though, are more encouraging. To start with, it’s an honest document, which brings the cost of war onto the budget, instead of being covered with the phony emergency resolutions that Bush preferred. Raising taxes on the very rich is a good move. It’s good to see some serious action on greenhouse gas emissions, though I’d much prefer a carbon tax to a cap-and-trade system.
(This is a rare instance where I come down on the side of economists on an issue. Economists argue that carbon taxes produce much more stable and predictable paths for energy prices over the long term, while cap-and-trade systems, which allow polluters to buy and sell their rights to foul the atmosphere, tend to produce a great deal of price volatility. Enviros usually prefer the caps, because they’re direct and mandatory. But the price volatility that such systems give rise to can make it very difficult to plan for the future. But this is a topic for many other shows. See also this article: Cooler Elites.)
The health care fund, $630 billion over the next decade, is a nice gesture, but it’s still not what we really need, which is a single-payer system. We’ll hear more on this from David Himmelstein in about 25 minutes, but single-payer is the only way you can get universal coverage and cost control, because you get the parasitical insurance companies out of the picture.
The deficit is going to be big, very big. It was strange to read on the World Socialist Web Site that these deficits are dangerous; their analysis sounded eerily like those of deficit hawks like Pete Peterson and the Concord Coalition. (Actually it’s more hawkish than this.) Either we have big deficits or everything goes down the drain. Of course if you want the economy to go down the drain, then you don’t like big deficits.
But after the emergency passes—assuming it does, that is—it’s time to get serious about soaking the rich to pay down some of the debt incurred in this vast rescue operation. I’ve long maintained that borrowing money from the rich, which is what deficit spending fundamentally does, is a very poor substitute for taxing them. Big deficits are an essential strategy for getting out of a crisis. But they’re not a good way to run an economy over the long term.
Putting all this together: the budget looks like bigger than baby steps in the right direction, the first serious signs at the fiscal level of a reversal of the priorities of the last 30 years. But only a beginning. And it has to get through Congress.
Oh, and we talk a lot about trillions of dollars. This is, when you stop to think about it, an almost unthinkable number. Here’s an approximation of a trillion. If you counted out a hundred dollar bill every second, it would take 317 years to reach a trillion.
LBO News from Doug Henwood 
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Posted on March 24, 2009 by Doug Henwood
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.
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