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.
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.
Obama coddling bankers indeed
It was predicted in this space just two weeks ago: “Obama to coddle bankers.” Now we’ve got official confirmation of this from one of the prime coddle-ees: Citigroup. An analysis of the Treasury’s plan produced by two Citi analysts, Ryan O’Connell and Jerry Dorost, begins with this headline:
New Treasury Stress Test Guidelines Do Not Appear Onerous
and continues in this vein. The plan is “bank-friendly and investor-friendly.” The goal is to increase bank capital “while minimizing the amount and duration of any government’s direct ownership of common stock.”
The stress tests aren’t very stresssful, either: neither “onerous or draconian.” That is, the economic parameters for the “more adverse” scenario are not much worse than the consensus forecast for what the economy is likely to do over the next year. The baseline is for –2.0% GDP growth this year and +2.1% in 2010; an unemployment rate of 8.4% this year and 8.8% next; and another 18% decline in house prices. The “adverse” alternative is for –3.3% on GDP this year and +0.5% next year; unemployment of 8.9% in 2009 and 10.3% in 2010; and another 29% decline in house prices. To me, the baseline looks optimistic, and the adverse, slightly on the dark side of realistic.
And the gov will be very indulgent if banks look “stressed,” even by these friendly criteria. Banks will be given six months to raise private capital (good luck with that, guys!). If they fail, the Treasury will buy preferred stock, which can be converted into common at a 10% discount to the stock price on February 9. The choice of date looks to be no accident; as the Citi analysts comment, “This provision appears intended to reduce the potential dilution to equity holders, since banks’ stock prices were generally higher at that time.” (Using a lower price would give the government a bigger share at the expense of existing stockholders.) To take a nonrandom example, Citigroup’s stock closed at 3.95 on February 9; as this is posted, it’s 2.51, 36% lower. (Current quote).
To use the Japan vs. Sweden model that Obama himself used, this is a lot closer to Japan than Sweden. Anything but nationalization!
Radio commentary, Febuary 21, 2009
[WBAI is still fundraising, so this ran on KPFA only.]
Earlier this week, we learned that builders started construction on just 466,000 housing units in January (at a seasonally adjusted annual rate), and just 347,000 single-family houses. These are both down by more than 50% over the year, and at record lows by a considerable margin. And the earlier records—earlier than the recent collapse, that is—we set in the mid-1970s and early 1980s, when the U.S. population was 25–30% lower than it is now. The single-family figure is down by more than 80% from its 2006 peak (which, by the way, was an all-time peak). This is by far the worst decline in the U.S. housing market since the 1930s (and, as some clever bibliometrician pointed out recently the phrase “the worst since the Great Depression” has proliferated like crazy in the media over the last four or five months). We don’t have good enough stats from the 1930s to do meaningful comparisons, but my guess is that we’re not at that dismal level yet, though who knows what coming months will bring?
The only bright spot in the report was that permits to build new housing, single and multi-unit, were down somewhat less than actual starts were, which is what usually happens as the market approaches a bottom. But they’re still at horrendously low rates. I doubt the housing market will take off anytime soon, but historically, the U.S. business cycle has been led by housing, in both recessions and recoveries. So my guess is that we can only start hoping for an end to this miserable recession—and I’m very sick of it and can’t wait for it to end, I don’t know about you—when housing starts to turn.
Another straw to grasp at: the Economic Cycle Research Institute’s weekly leading index, which forecasts changes in the economy’s direction three to six months out, is now falling at only a 16% annual rate, compared with 20% just two months ago! The best interpretation of this that I can come up with is that while things are still deteriorating, they’re no longer deteriorating at an accelerating rate.
And then there’s the stimulus package, which should start kicking in pretty soon. For what it’s worth, the Congressional Budget Office estimates that without the stimpak, we’d lose 3.8 million jobs this year. With it, they estimate that we’ll lose somewhere between 1.5 and 3.0 million instead. Averaging their low and high estimates, which is probably the safe thing to do, we can estimate that it will save about 1.6 million jobs. The CBO also projects that things would have picked up in 2010 without the help of the stimulus (though we wouldn’t recover all the jobs lost until something like 2011). But with the stimpak we’ll gain almost a million more jobs next year than we would without it. Translating all those numbers into a simple sentence of English prose, you could say that while the job market is likely to stink through 2011, it will stink appreciably less because of th estimulus package. Let’s hope they’re right.
And as I’m writing this, I just learned that GM’s market capitalization—the value of all its stock outstanding—just dipped below $1 billion. (Latest: here.) GM, once the mightiest corporation in the world, whose fate was held to be consubstantial with the USA’s, is now worth about 1/60th as much as McDonalds, and not quite twice as much as the makers of Celestial Seasonings teas.
And finally, what about all these scandals? As if Bernie Madoff wasn’t enough, now there’s Allen Stanford—or Sir Allen, if you prefer, though the knighthood comes from Antigua and not from the queen, god save her. Stanford’s a veteran of the shady side. A few years ago, he claimed to be descended from Leland Stanford, the robber baron who founded the eponymous university. Stanford, the university, sued Stanford, the money manager, claiming trademark infringement.
His latest bout with the law, though, is a lot more serious—it’s looking like another multibillion dollar Ponzi scheme. (Oh, and it also looks like he facilitated capital flight out of Venezuela, though that’s not a crime in the eyes of the U.S. authorities.) This time it was allegedly high-paying certificates of deposit—an investment vehicle that’s not supposed to pay high returns, of course.
Before I launch into a rant about corruption and lax regulation, I want to ask a simple question: what are people thinking when they invest in something that’s too good to be true? CDs just don’t pay 15% returns. Hedge funds, like Bernie Madoff was supposed to be running, just don’t pay rock steady returns year after year. Sometimes it seems like people invest more energy in scrutinizing a dinner menu than they do in deciding where to park their money.
Ok, enough caveat emptor for now. Now I normally don’t get too worked up about corruption. I don’t like moralizing, and I prefer my critiques to be systemic rather than individualistic. It’s no accident, as the vulgar Marxists used to say, that among the biggest denouncers of corruption are hack apologists like Larry Kudlow; they love the Pig System, and think that high-profile malefactors should be punished for giving it a bad name. That’s not my style.
But…all this appears to be deeper than the word corruption alone suggest. It seems like the whole society has gone rotten. To some degree this is just the latest chapter in a long history of this sort of thing; this country was industrialized in the 19th century on watered stock and fraudulent bonds. Securities fraud is as American as apple pie and gun violence. And yes, this sort of thing is always exposed after a long bull market. During the speculative frenzy, critical faculties atrophy and fraudsters enjoy a target-rich environment. When the bust comes, all is revealed. Or, as Warren Buffett says, when the tide goes out, we learn who was swimming without trunks.
Ok, yes, all true. But there’s also some way in which three decades of neoliberalism, which have brought with them an intensified worship of money, have damaged people to the core. Margaret Thatcher said early in her reign that she didn’t aim just to change economic policy—she aimed to change our souls. And she did.
Apparently the SEC has known that something was fishy with Stanford for years. The same with Madoff before him. Yet they did nothing. Was this corruption? Bribery? Self-censorship? Complacency? Probably all of them. But this is a society badly in need of a renovation. In bad moments, I fear we’re too far gone.
Radio commentary, February 12, 2009
Quite a spectacle in Congress on Wednesday, wasn’t it? Watching the assembled CEOs of our biggest banks testifying really put all our pathologies on display. On one side of the table, the bankers looked like dim and evasive hacks—it was easy to see how they drove their vehicles into the ditch. But on the other side of the table, many of the Congresspeople looked like preening and devious hacks. Where were they while the bankers were driving the vehicles into the ditch? And what really do they presume to do about all this? Nationalize the banks? Ha. More on that delightful topic in a bit.
On Wednesday night, The Nation’s estimable Washington editor, Christopher Hayes (who is “married to…an attorney in the office of the White House counsel”), was on Keith Olbermann’s show, trying to parse the testimony. Hayes and Olbermann came to the conclusion that the bankers live in a bubble, are tone deaf, and have no sense of PR. While that’s true, I think the story is simpler than that. They just don’t care what the public thinks. The entire ethic of Wall Street can be boiled down to this: make as much money as possible as quickly as possible, and hang the consequences. Step on whomever and whatever you have to, just stuff your pockets, and move on.
Olbermann played an excerpt from a conference call featuring James Gorman, co-president of Morgan Stanley, describing how the firm planned to handle its merger with Smith Barney, the brokerage unit that the deeply troubled Citigroup is unloading. Here’s Gorman (edited by me) describing some big cash payments they’ll be distributing to Morgan Stanley and Smith Barney’s top brokers:
Some decisions we have made. Number one, there will be a retention award. Please do not call it a bonus. It is not a bonus. It is an award. And it recognizes the importance of keeping our team in place as we go through this integration. Decision number two. The award will be based on ’08 full-year production. I think I can hear you clapping from here in New York. You should be clapping because frankly that is a very generous and thoughtful decision that we have made…. ’09 is a very difficult year…we understand that. Clearly it would have been cheaper to do it off ’09, but we think it’s the right thing to do and we’ve made that decision.
The audio, by the way, was obtained by Sam Stein of the Huffington Post, who also got that wonderful clip of Home Depot founder Bernie Marcus railing against unions that I played the other week. Olbermann and Hayes attributed Gorman’s use of “retention award” to that same tone deafness. I think it’s cynicism. I think he was having fun, and it wouldn’t surprise me if his audience chuckled.
As I’ve been saying here, it looks like the Obama administration will do everything they can to avoid nationalizing the banks. In his interview with ABC News, Obama demonstrated that he understands quite well the differences between the Japanese and Swedish approaches. I wish I could play the audio, but ABC edited the interview heavily for broadcast, and most of this passage appears only in the transcript.
There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.
Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.
And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.
Now it’s admittedly refreshing to have a president who can talk like this after one who couldn’t. But how much of a departure from Bush’s political philosphy is this really? He admits that the Swedish approach worked better, but then explains that we just can’t do it that way here. It’s un-American, you see. And to make that argument, he mobilizes a lot of nonsense.
Yes, Sweden “had like five banks,” but our major, system-threatening problems come from not that many more institutions. The little guys can be taken care of the usual way, like forced mergers with aid from the FDIC or outright takeovers by the same. Which, by the way, is a kind of nationalization, and something entirely routine, even here in the super-special USA.
He really gets to the heart of it, though, when he gets to the “different cultures” claim. Sweden is a social democracy, and the U.S. isn’t. And so we just have to do things the American way. But our way of doing things is the problem. Several decades of letting financiers do their thing and then bailing them out when they got in trouble have finally put us in a serious crisis. Obama simply cannot get his mind around the fact that our whole economic model is in trouble. So the only way he can imagine getting out of that trouble is by applying the same medicine that got us into trouble. There’s something oddly Hegelian about this: “the hand which inflicts the wound is also the hand that heals it.” But Obama isn’t talking about moving to a higher level of consciousness. Quite the contrary: it looks more like he just wants to go back to the old way of doing things.
Let’s think about what needs to be done. The U.S. needs to consume less, borrow less, equalize the distribution of income so that those of modest means aren’t driven to manic borrowing from those with too much money to spare, and invest in things with a long-term economic and social payoff. A serious economic recovery package would embody that. And some of the original plan did that. But in order to get Republican votes, Obama et al added tax cuts, cut clean energy investment, reduced aid to state governments, and cut back on infrastructure spending.
Yes, of course Congressional realities dictated this in part. But these compromises were also a function of the fact that Obama et al didn’t really have a coherent story about what the stimpak was supposed to do. (Larry Summers once did, but he’s been less vocal on such topics since the inauguration.) But to make that argument—and there’s no doubt that Obama could make it effectively if he wanted to—he’d have to challenge a lot of prevailing economic wisdom. The conventional left-liberal explanation for this is weakness or timidity. But the margins of the last election and the approval ratings in the polls right now do not suggest political weakness. George W Bush came out of the 2004 election, which he won by a narrow margin, declaring himself in possession of a lot of political capital, and not shy about using it. No, it’s not really weakness or timidity. I think the Sweden vs. Japan quote from Obama shows that he’s really a market guy at heart, and has no interest in challenging the orthodoxy—and there’s no radical popular or intellectual movement to force him into doing it. And so the American economy will suffer the consequences of his received faith.
There’s an old story about Tony Blair (which I first heard from a commenter on this site), that great apostle of the Third Way. An old-style Labour MP is said to have complained to Blair about all the right-wing things he had to say to get elected. Blair’s response: “It’s much worse than that. I really believe it.” The same for Obama, I’m afraid. The combination of an economy stuck in the mud and an aroused populace could change that. But not yet.
Obama to coddle bankers
Emily Dickinson once advised: “Tell all the Truth but tell it slant.” Evidently the New York Times’ headline writers are taking advice from the enigmatic poet. The headline on the story on how the Obama administration will be going easy on banks and bankers getting bailout money blamed it all on the Treasury Secretary: “Geithner Said to Have Prevailed on the Bailout.” In internal administration battles, Geithner “successfully fought against” stricter rules on executive pay, and beat back the attempts to replace top maangement.
Of course, to say that Geithner won these battles is to say that Obama agreed with him. Once again, the embodiment of hope and change went with the status quo when he didn’t really have to. There would have been little political price to pay for putting the screws to the banksters.
And it looks like the Treasury and the Fed will pump up some $250-500 billion to help hedge funds buy bad assets – with the FDIC guaranteeing the buyers against losses.
At this point, the only thing that makes any sense is to nationalize the weakest banks, kick out management, wipe out the shareholders, clear the decks, and start over with a tightly regulated system. This isn’t even all that radical a position anymore – and it may be inevitable, if these sick and devious “public-private partnership” schemes don’t work out, which seems likely. There is a radical nationalization position – take the banks over and convert them to public institutions – but I know that’s completely out of the question with this gang. But they’re doing absolutely everything they can to avoid even an orthodox nationalization. This is looking more and more like Japan’s disastrous indulgence of their “zombie banks” in the 1990s than Sweden’s successful bailout, the model for the “nationalize them and clear the decks” approach. Instead of a few rough years, we’re likely to get a miserable decade.
They’ve botched the stimulus, and they’re botching the financial rescue. They’re worse than I expected, and I wasn’t expecting much in the first place (see: Obamamania, a febrile disease).
Rant on the TARP overhaul
Tomorrow will bring the unveiling of the Obama administration’s overhaul of the Henry “Hank” Paulson bank bailout, the Troubled Asset Relief Program (TARP). [Apply for funds here.] From the leaks emerging, it looks like a significant portion of the scheme will amount to this: the government will lend money to hedge funds and the like at subsidized rates to buy toxic assets from banks – and the gov will guarantee the investors against losses. Evidently, the administration thinks the toxic assets are being underpriced by the markets. If they’re right, the buyers will make money. If they’re wrong, then we all pay.
From the hedgies point of view, it’s all reward, no risk. Even if the rewards don’t materialize, what have the hedge funds lost? What the public gets out of this is impossible to specify, aside from the risk of massive losses.
I hope this isn’t really what will emerge. But if it is, the Obama administration will have broken new ground in awfulness. The same formula that brought us this mess, an indulgent government encouraging reckless operators playing with other people’s money, will be applied towards solving it. It makes no damned sense.
Well, maybe it does in the most cynical way. Hedge funders like Chicago’s Kenneth Griffin wrote Obama big checks during the campaign season. (For some details, see here and here.) Obama’s top economic advisor, Larry Summers, worked for a hedge fund (D.E. Shaw) after he got fired from Harvard. And no doubt Treasury Secretary Tim Geithner would like a multimillion dollar job on Wall Street after he leaves public service, just like Robert Rubin got at Citigroup after engineering the repeal of Glass-Steagall.
Can things really be this bad? We report; you decide.
LBO News from Doug Henwood 
6 Comments
Posted on March 13, 2009 by Doug Henwood
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.
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