No Depression?

Don't worry, be happy - at least it won't be a Great Depression:

No Depression This Time, Uncle Sam Has Got Our Back, by Laurence J. Kotlikoff and Perry Mehrling, Commentary, Washington Post: Global markets have not been reassured by the coordinated interest rate cuts of several central banks or by recent congressional action, but they should be. Our bet is that financial markets will return to normal in short order and that the U.S. economy will squeak by with a moderate recession. Recapitalizing the banks and working out mortgages will take time, but the financial system will not collapse -- the government won't let it.

The markets, of course, seem to be factoring in some probability of collapse. Why is this wrong?

For starters, the biggest subprime mortgage gamblers have already failed, been nationalized or been married off, shotgun-style, to banks run by grown-ups. Yes, lots of small shoes may still drop, but the Paulson "buy-up" bill, and, ultimately, the Fed's ability to print money, provides the Treasury and Federal Reserve all the tools they need. The media don't seem to have noticed, but Section 113 of the bill authorizes government capital infusions into the banking system as necessary... That means any bank with a viable business will not be allowed to fail simply because it is temporarily undercapitalized.

Second, Uncle Sam (a.k.a. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke) is doing precisely what's needed to avoid the mistakes of the 1930s. With credit markets drying up, he's turning on the faucet by recycling our panic dollars back into the financial market. ...

In the 1930s, nobody in the private sector could borrow, raise equity or sell insurance because everyone lost trust in everyone else. Uncle Sam stood on the sidelines and marveled at the chaos. But today Uncle Sam is saying, "Listen, if you ... are too scared to invest in each other or sell each other insurance, give us your money, and we'll do it for you. We'll pay you a sure return on the Treasuries and, if our investments and insurance sales do well, you'll benefit by paying lower taxes."

This may sound like socialism or state capitalism, but it's simply rearranging the financial furniture. As Americans have freaked out, Uncle Sam has stepped up. He'll continue doing so until we realize the sky is not falling. The $700 billion rescue... If all works out, Uncle Sam will make a killing. ...

Point three is clear: This financial chaos has ruined our sleep but left our physical and human capital unscathed. We have the same productive capacity today we had a year ago. And if our capital hasn't changed, we've suffered no overall capital loss.

This means that our accounting, which has focused on financial losses, is missing lots of offsetting financial gains. ... Asset buyers, whether they are young people ... or billionaires such as Warren Buffett..., can now acquire homes and stocks ... at a roughly one-third discount from a year ago. That's great for them, and lousy for the rest of us, but not a net economic tragedy.

The economic tragedy comes if we get hypnotized by the bad news, ignore the good news, fight about things we're already doing (e.g., having Uncle Sam buy and insure troubled assets)... We Americans have lots of moxie. What we need is a strong pep talk and absolute assurance that credit will continue to flow, that insurance policies will continue to be honored, and that Uncle Sam is willing and able to invest directly in the private economy on our behalf.

So after scaring us half to death, this would be a good time for our other uncles -- Hank and Ben -- to make clear that we're heading for a safe landing and that there is no way in hell they will let this economy go down the tubes.

Don't be happy, worry - it could be a Great Depression:

The credit crunch may cause another great depression, Nicholas Bloom, Vox EU: Back in June 2008 I wrote a piece for Vox EU predicting a mild recession in 2009. Over the last few weeks the situation has become far worse, and I believe even these pessimistic predictions were too optimistic. I now believe Europe and the US will sink into a severe recession next year, with GDP contracting by 3% in 2009 and unemployment rising by about 3 million in both Europe and the US. This would be the worst recession since 1974/75. In fact the current situations has so many parallels with the Great Depression of 1929-1932, when GDP fell by about 50% in the US and by about 25% in Europe, that even my updated predictions could again be over optimistic.

Uncertainty is higher then it’s been in 20 years

One of the most striking effects of the recent credit crunch is the huge surge in stock market volatility this has generated. The uncertainty over the extent of financial damage, the identities of the next banking casualty and the unpredictability of the policy response have all led to tremendous instability. As a result the implied volatility of the S&P100 – commonly known as the index of “financial fear” - has more increased almost six-fold since August 2007. In fact since the outbreak of the Credit Crunch it has jumped to levels even greater than those witnesses after the events of the 9/11 Terrorist attacks, the Gulf Wars, the Asian Crisis of 1997 and the Russian default of 1998 (see Figure 1).

But after these earlier shocks volatility spiked and then quickly fell back. For example, after 9/11 implied volatility dropped back to baseline levels within 2 months. In comparison the current levels of implied volatility have been building since August 2007 and are likely to remain stubbornly high.

But even these more moderate surges in uncertainty after these earlier shocks had very destructive effects. The average impact of the sixteen shocks I examined in prior research was to cut GDP by up to 2% in the following six-months. The current shock is both larger than these on average and also appears to be more persistent. If these earlier temporary spikes in uncertainty led to a 2% drop in GDP the impact of the current persistent spike in uncertainty is likely to be far worse.

The rise in uncertainty and banking collapse look like the Great Depression

For a broader historical comparison to the credit crunch we can also go back 70 years to the Great Depression. This was the last time that volatility was persistently high (Figure 2). Much like today, the Great Depression began with a stock-market crash and a melt-down of the financial system. Banks withdrew credit lines and the inter bank lending market froze-up. The Federal Reserve Board desperately scrambled to restore calm but without success. What followed were massive levels of stock-market volatility and a recession of unprecedented proportions.

From 1929 to 1933 GDP fell by 50% in the US and about 25% in Europe, a bigger drop then in every recession since World War II combined. On these numbers a recession not only looks almost inevitable, but its longer run effects start to become alarming.

So why is this banking collapse and rise in uncertainty likely to be so damaging for the economy? First, the lack of credit is strangling firm’s abilities to make investments, hire workers and start R&D projects. Since these typically take several months to initiate the full force of this will only be fully felt by the beginning of 2009. Second, for the lucky few firms with access to credit the heightened uncertainty will lead them to postpone making investment and hiring decisions. It is expensive to make a hiring or investment mistake, so if conditions are unpredictable the best course of action is often to wait. Of course if every firm in the economy waits then economic activity slows down. This directly cuts back on investment and employment, two of the main drivers of economic growth. But this also has knock-on effects in depressing productivity growth. Most productivity growth comes from creative destruction – productive firms expanding and unproductive firms shrinking. Of course if every firm in the economy pauses this creative destruction temporarily freezes – productive firms do not grow and unproductive firms do not contract. This leads to a stalling productivity growth.

And much like the Great Depression politicians may make this worse

Finally, on top of the survey in uncertainty and collapse in credit we also have the specter of a damaging political response. One of the major factors compounding the Great Depression was that politicians moved to hinder free trade and encourage anti-competitive practices. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by desperate US policymakers as a way of blocking imports to protect domestic jobs, but helped worsen the recession by freezing world trade. At the same time policymakers were encouraging firms to collude to keep prices up and encouraging workers to unionize to protect wages, exacerbating the situation by strangling free markets. The current backlash against capitalism could lead to a repeat, with politicians swinging towards the left away from free-markets. This happened after the Great Depression, it happened after the major recession of 1974/75 and I think it will happen again now. This will lock in the short-run economic damage from the current credit crunch into longer run systematic damage from anti-growth policies.

So the current situation is a perfect storm – a huge surge in uncertainty that is generating a rapid slow-down in activity, a collapse of banking preventing many of the few remaining firms and consumers that want to invest from doing so, and a shift in the political landscape locking in the damage through protectionism and anti-competitive policies.

An inconvenient recession

In fact the only upside of all this is the massive slow-down in economic growth will rapidly cut the growth rates of CO₂ emissions. Pollution is tightly linked to the level of economic activity, so that a few years of negative growth would lead to reductions in pollution levels not seen since the 1970s. It seems ironic that the greed of Wall Street may have inadvertently achieved what millions of well intentioned scientists, activists and politicians have failed to achieve – a slow down in global warming.

---

“The impact of uncertainty shocks”, National Bureau of Economic Research, working paper W13385.

Comments

[esb]

And of course the truth lies somewhere in between.

No depression. Ass-kicker recession. Tremendous entry points for those who arrived at the event with cash. Those who saved a couple of hundred thousand dollars will be able to write a check and own their residences without debt, with no relationship whatsoever with a bank, servicer or other entity. Life as it should be lived. From that point onward such individuals in effect become their own banks. "Greatest Generation" values. The values of my father and grandfather.

Those with larger accounts are gradually moving into solid equity positions as prices erode or entering risk fixed income postures at costs never to be seen again. Those who play the closed-end game (you know who you are) are in heaven.

Those with large egos are learning humility.

And, as always, the pigs are being slaughtered, as is condign.

"We're in the American dream business." What pathetic excrement. Frankly, I'm infinitely pleased to see those who responded to such a song cut to shreads, diced, and figuratively left in the reeds for the consumption of the lower forms.

And in the second quarter of 2009 the Obama Administration will gift abandoned residences to those who never had a seat at the American table, bringing an end to the decline and dignity to many who never had the opportunity to experience it.

[Noni Mausa]

Point three is clear: This financial chaos has ruined our sleep but left our physical and human capital unscathed. We have the same productive capacity today we had a year ago. And if our capital hasn't changed, we've suffered no overall capital loss.

Hmm. I made this very point elsewhere this week, and now seeing it here, I'm not happy about it.

Oh, I suppose it's true. The buildings and infrastructure are still there, and the skills and education and institutional memory of businesses and people are still there. Even people who have lost their jobs and homes still have the memory and habits of work and household.

But I guess what bugs me is the lack of ownership. The nation benefits from retaining "human capital", but what do the humans get out of it? Three close friends of mine have lost their jobs the last few days, and I know they have almost nothing in savings. Two are younger people, fighters, and are out job hunting, the third is a middle aged fellow who is spending a lot of time this week with his friends Captain Morgan and Jack Daniels.

It's as though the people have been successively sheared to the skin, but everything's okay because their wool will regrow in time, right?

Noni

[Tamas David-Barrett]

The trouble with the comparison to the Great Depression is that the economic system in which the recession occurs has changed entirely. Then, there was a national level government in place, which did not have the adequate tools, either in theory or in practice, to deal with the meltdown. Now, the 'system' is the global economy. Not only the theory or the tools are missing, but also the government-like entity on the level of the system.

It is as if the Great Depression would have been tackled on the state rather than the federal level in the US.

[James Kroeger]

It has never made any sense for non-Republican economists to expect that a Great Depression would surely occur if the banking sector were to completely collapse this time. The Number One lesson that the Great Depression of the 1930's taught us was that a dramatic increase in government spending can end any Depression almost overnight. We know this is true because that is precisely what happened once America started increasing govenment expenditures dramatically at the dawn of WWII [for America].

The bad news is that the Democratic Congress during FDR's first couple of terms never did increase federal spending enough to end the Depression promptly. Why didn't they? The answer is that the Republican opposition and the banking community complained loudly that 'inflating' the economy would be disastrous. It's too bad Congressional Democrats listened to them. Millions of people suffered for many years for no good reason.

This is one big reason why the private banking sector and Wall St. should be allowed to collapse utterly. Moral hazard would be restored and the vast majority of citizens living on Main St. would be able to enjoy an economic boom---true prosperity---at the same time that Wall St. is undergoing a wrenching shakeout.

Within a 6-12 months after a 'Global Financial Crash', the 'depression' would be over IF CONGRESS WERE TO SPEND ENOUGH MONEY on infrastructure/education/health care/etc. $1-$2 trillion ought to do it. If the economy is getting 'overheated', the spending initiatives could simply be spread out over a longer period of time.

What I don't understand is why Mark Thoma, Paul Krugman, et al., were not reassuring people that this is true?

[Ryberg]

Human capital and physical assets will remain but how we account for them is changing. During the last 10 years, financial engineers have leveraged great financial profits by increasing debt. Total debt to GDP ratios have never been so high, and the GDP figures are financially inflated. Bubble assets are correspondingly inflated in price. Now these inflated prices are starting to fall. Real estate, stocks and commodities are all falling in price. But the debt owed has not. So equity as defined by accountants gets wiped out. Literally. We are not suffering from a lack of credit, we are suffering from too much credit and too little real equity. We have many assets, just no controlling ownership in them. And control won't be restored until the creditors are wiped out. Since we owe much of this debt to ourselves, this means the process will be very painful.

[a]

I assume that the caption on the image of volatility is wrong. There *was* no implied volatility on the S&P500 back during the Great Depression, since there were no options on equity indices back then. Implied volatility is the volatility that one needs as input to get the prices one sees in calls and puts on the market; no market, no options, no implied volatility. I guess what is meant is "historical volatility". Or maybe I'm just missing something...

[a]

The reasoning behind the article explaining that there will be no GD is so awful that I begin to worry...

"We have the same productive capacity today we had a year ago."

Well unfortunately, that productive capacity wasn't sufficient to suppy American consumption from a year ago. So that's hardly reason to be cheery...

"In the 1930s, nobody in the private sector could borrow, raise equity or sell insurance because everyone lost trust in everyone else. "

Don't worry, be happy. I'm truly amazed at the number of people who think panics happen because of a lack of trust; if only people would start trusting (and loving) each other, then everything would be okay. Sorry, panics happen because imbalances are being corrected very quickly, imbalances which have been built up over the course of many years.

"This may sound like socialism or state capitalism, but it's simply rearranging the financial furniture. "

I think he means "deck chairs on the Titanic" rather than "financial furniture."

"For starters, the biggest subprime mortgage gamblers have already failed, been nationalized or been married off, shotgun-style, to banks run by grown-ups."

Yes, well the banks are all dependent on Uncle Sam, and Uncle Sam isn't being run by the grown-ups. So where does that leave us?

[Jas Jain]

--
So, we have very bad private bankers and very good public bankers (Fed & Treasury)? LOL!

Americans, including economists, are a bunch of dopes if they believe this sort of garbage. How many economists saw this coming? FWIW, I saw it coming years ago. Catastrophes are caused by bankers' mischief, according to Schumpeter.

Greater Depression was baked in the cake by private bankers with the help of the Fed and the USG. Americans are ruled by morally bankrupt people, both in private sector and in govt. America has a very bad econo-political system because of moral bankruptcy of the elite, including economists.

Jas

[Stephen Lins]

James Kroeger - Maybe Krugman, Thoma, et al. have looked at the overall financial condition of the US at this point (total private and public debt 350% of GDP) and are worrying whether the government's creditors will feel confident adding to that pile of debt in order finance your $1-2 trillion.

[Anon]

Is it perhaps safe to say that if this current occurrence of market turmoil does not lead to a depression, then we have effectively eliminated all incidences of depression within our system?

As an outsider looking in, the current banking shock seems far worse than the Depression. It seems that only the many govt. protections and actions have enabled us to keep the system functioning (unlike the 1930's). Without FDIC and huge injections of liquidity, all of our banks would have failed months ago.

Has govt. action eliminated the threat of Depression? And if so, what does this really mean for our markets?

[Robinia]

Hmm.

We have the same productive capacity today we had a year ago.

In much the same way that Houston had the same real estate base after it was realized that it overbuilt office building capacity that it had six months before that realization hit. The problem is that bubbles distort the allocation of productive capacity-- people have been trained to the wrong jobs, buildings have been built to the wrong purposes, etc.

The finance sector must shrink, because we have faced the truth that we can't scam one another into prosperity and high productivity. The process of incorporating this truth into the built environment, the workforce, and the markets can be greatly aided by government, lessening the painfullness of the correction.

Noni Mausa asks the right question above:
The nation benefits from retaining "human capital", but what do the humans get out of it?

Now would be an excellent time for the government to look at how to make it more possible for individuals to pursue the kind of work that they would get something out of.... How about a national health care system, and beefed-up small business loan programs, so that small-scale entrepreneurship could flower? Not for "growth oriented" businesses, but for mom and pop organic farms, bakeries, bodegas and home-insulating companies... more ownership, more Main St., more community-level investment, more personal investment at a more local level. And more rewarding work.

[Anonymous]

I think one sure fire way to avery a recession/depression would be to immediately privatize social security. The liquidity injection would be the shot in the arm that global securities markets need.

[hari]

I think the *optimistic* piece with uncle Paulson & Ben is more or less how Mark would have anticipated intervention by Fed/Treasury to obviate real meltdown - principally because he has morally argued for action to avoid breakdown of the financial system.

The second piece, however, is closer to Dr Doom and his prognosis more than a year ago. I happen to share this realistic version of not a mild recession but a serious one engulfing global finance. And the reason why it will engulf global finance is simply because globalization of international finance is far ahead of central banks and gov control. The contagion is spreading and neither uncle Ben & Paulson or Trichet can stop it at this stage - they don't really know how!

[ken melvin]

Maybe should wait for the autopsy. All about forensics, it is? Taking a bit long on the great one, but I'm sure they've about got it. Kotlikoff's and Mehrling's display of in depth has given me every confidence in their explanation of what isn't happening.

[Murph]

How to ruin an excellent and insightful analysis with a parting short of nonsense: "In fact the only upside of all this is the massive slow-down in economic growth will rapidly cut the growth rates of CO2 emissions. Pollution is tightly linked to the level of economic activity"

Yes, Nicholas, if we all move into mud huts and eat roots then CO2 emissions will be reduced. But it is not an "upside"...

Economic growth is the means by which CO2 emissions will ultimately be reined in. With growth comes innovation - clean coal technology, electric cars, research spending, carbon sequestration technologies, etc.

Without growth, the first thing to go will be Green R&D and spending, as it is "non-essential" to basic survival in a contracting environment.

Will the neighborhood coffee shop spend the extra $2 per gross for eco-friendly cups if they're concerned about just staying in business ?

[kharris]

The notion that "the truth lies somewhere in between" partakes of what is known as "the fallacy of the middle ground". Absent strong evidence that the two stated positions are wrong in different ways, the possibility exists that they are both wrong in the same way, that reality lies outside the two stated positions.

Kotlikoff and Mehrling are correct that government efforts have come far more quickly than during the Great Depression and are very large. That, however, falls short as an assurance that we cannot have a depression - whatever "depression" might mean. (In the absence of a definition, they can always claime to have been right through definition of terms after the fact.) Kotlikoff and Mehrling assume that we have the right policies and that some magnitude of intervention can prevent the outcome they label "depression". Policy makers during the early years of the Great Depression thought they were doing the right thing in liquidating everything. Turns out, they were wrong. Policy makers today face problems with their own special twists, and we already have evidence that they are making up solutions as they go, and that the solutions are not necessarily working. We need to understand that some outcomes cannot be avoided, no matter how hard we try, and that we lack the knowledge to know that the policies we have chosen are the right ones.

I, too, hope that really bad times can be avoided. Hope for a good outcome is no reason to allow our thinking to be clouded. We don't know that the policy efforts underway will prevent a really bad outcome. We don't know that, even if a really bad outcome in the near term is avoided, the policies being undertaken right now won't lead to a really bad outcome down the road. When Kotlikoff and Mehrling assert that "some probability of collapse" is wrong, they are wrong. They simply cannot know that to be true.

[anne]

"So after scaring us half to death, this would be a good time for our other uncles -- Hank and Ben -- to make clear that we're heading for a safe landing and that there is no way in hell they will let this economy go down the tubes."

Besides the creepy metaphorical imitation, which tells us how imitatively the writer * thinks, Laurence Kotlikoff has been threatening us with death by the magic sword of Social Security for years.

* Writers think

[James Kroeger]

James Kroeger - Maybe Krugman, Thoma, et al. have looked at the overall financial condition of the US at this point (total private and public debt 350% of GDP) and are worrying whether the government's creditors will feel confident adding to that pile of debt in order finance your $1-2 trillion.You mention a legitimate concern, but if Krugman, Thoma, et al. are concerned about this, then they must be ignoring a couple of considerations that should give them comfort.

If the government were to stop spending ANY taxpayer money on the financial sector (perhaps by invalidating their previous legislation), it would have a great deal more money to spend on Main St. (The Fed is another matter, since it does not buy things with taxpayer money)

The other option is to start taxing the hell out of the upper class to fund Congress' investments in the REAL economy to insulate Main St. from the effects of the shakeout. A 10% excise tax on stock market transactions would raise a lot of revenue. Pre-Reagan tax rates on the wealthiest income earners would provide a great deal more revenue. Treating capital gains income like any other type of taxable income would also help a great deal.

I'm sure these other considerations have just slipped their minds...

[paine]

a lame free market squawk

no confidence means no investment

corporate private invstment that is...

notice in this magical history tour
we get no mention of the macro/micro policy
1940-1944
when "left" "statist" measures
were at long last applied whole hog
and after a decade of near stagnation
the growth in
basic capacity was enormous

-------
looking at the results
of the nearly blind
well intended
33-38 policy discovery process
with its in hind sight
frustrating
zig zags culminating
in the nasty recesssion of 38 ...
ugh !!

but this simply mis directs the focus
away from the new deals great triumph
the policy of 1940
which if dirctly applied in 1933
would have "proven" ...errrrr many points

points
still in doubt today
needless to say

the class struggle
----being what it is ---
has seen to that
and
we may all rest assured
once "the state"
has cleaned up the corporate mess
this same corporate class
bristling with a rehab version
of their clss "science"
--no matter the facts between now and then----
will once again " demand"
we as a society take
the better path "forward" to "growth"
by going backwards
thru open unguided markets
to the bountiful florishing
of whole society fruits
only
free range borderless
corporate
private profiteering
can produce

yes given enough time
and a bit of "statist" success
the privateers will come 'round the mountain again

my solice
by the time of that long run
i'll be dead

for now its " our time "

[Bruce Wilder]

Key phrase: "Global markets have not been . . . but they should be."

Says more about the authors than the economy, but still the key piece of information in the article.

[Bruce Wilder]

JK: "The Fed is another matter, since it does not buy things with taxpayer money."

I guess it just prints its own, eh? Oh, wait . . .

[paine]

esb
i'm sure your old book justice
knows
in the event
its all about
the production system
not the private petty investor side

get the pick and spade flying again
seems more important now eh???

who cares about hard cash holders golden opportunity
to buy up existing structures and securities

hey there's gold free for the picking
in the teeth of dead soldiers too

[robertdfeinman]

I keep seeing parallels between now and the 1970's. I don't think we hear this much because most of those speaking out weren't around during that decade (or were too young to be taking notice) and that there has been little written about it in contrast to the 1930's.

The later contractions, in the 1990's and 2000, are well-remembered by those in the middle of their careers and so they try to draw their lessons from these.

Here's my case:
1. Losing a war bought with borrowed money.
2. Refusing to raise taxes to pay for it
3. A sharp rise in the cost of oil
4. A rise in civil unrest caused by the unpopularity of the war and poor economic conditions
5. A corrupt presidency (Nixon, Bush)
6. A liar for president (LBJ, Bush)
7. Ideologues in government

The result was stagflation and a stock market crash which took a decade to recover. Volcker's "bold" moves were designed to save the financial industry at the expense of the workers. This seems to be happening now, only those being thrown overboard are homeowners.

I see no sign that the steps being taken now will benefit the average family, rather than the special interests that deal with money. I also see no sign that the Fed will be able to control the future inflation which must occur as a consequence of printing so much new money.

See the posting today on the NY Times' new economic blog as an example of unsubstantiated optimism over inflation:
http://economix.blogs.nytimes.com/2008/10/08/dont-worry-about-inflation-accelerating

[paine]

bruce not sure i catch the sense
of your zing on jk's line
"The Fed is another matter,
since it does not buy things
with taxpayer money."
Tamas David-Barrett

no no
we had a global system in 1930 too

the keynes macro
allows a nation state to control its own ful employment destiny
without a need for export expansions or import contractions

the tools are among us chum

[paine]

"The Number One lesson that the Great Depression of the 1930's taught us was that a dramatic increase in government spending can end any Depression almost overnight. We know this is true because that is precisely what happened once America started increasing govenment expenditures dramatically at the dawn of WWII [for America]."

jk
sometimes after a little redaction
can be right on target

sorry jim i had not yet read other comments

[paine]

"If the economy is getting 'overheated', the spending initiatives could simply be spread out over a longer period of time "

over heated meaning nflation
no
mark up cap and trade
put in place cures this once and for all

over heated meaning shortages
ie
capacity bottle necks
well bottlenecks are
just opportunity calling
pour on the effort
build green machines like liberty ships

"What I don't understand is why Mark Thoma, Paul Krugman, et al., were not reassuring people that this is true?"

great great great point

ask mark ???

[paine]

"Since we owe much of this debt to ourselves, this means the process will be very painful"

we always look at society as a them and us
don't we ...even anne

time we looked at it as

a them and us class society

the creditor class vs the jobler class

which side izzz u on pard ????

[paine]

"a"
u be a bit smug here

the open condition of our economy
and our vast trade imbalance
only require a rapid as possible move toward balance
like war time conditions
rations might emerge
so what ?/
if we all sacrifice together
the nation's people crave a selfless crusade
full of personal sacrifice

to the macro battlements boys and girls !!!!!

time here in freedonia
for a full tilt move
---thru hyper employment---
toward green production
and balanced trade

[C.H. Smith]

These problems were predictable as they were inevitable. But no one had the courage to admit the error and commit to the painful change of course that was needed to avert disaster. Instead they chose to do what the system demanded which was to find whatever way possible to maintain the exponential expansion of debt as the real economy collapsed.

To peddle the idea that all we have to do is to get housing back in balance with incomes and there will be happy days again ignores the fact that the economic premise under which we operate is tragically flawed.

Fractional reserve lending is a fraud. Stated another way, lending against something you don't have and charging interest and fees is deceptive at its roots. The question I pose to my fellow Americans is, why, in a democratic republic do we allow this?

[Patricia Shannon]

http://www.msnbc.msn.com/id/27097780/

Iceland’s financial debacle escalates
Stock exchange trading suspended; largest bank seized

updated 2 hours, 56 minutes ago

REYKJAVIK, Iceland - Iceland suspended trading on its stock exchange for two days and took control of the country's largest bank — the third to be placed under its protective umbrella — on Thursday as it grappled with a banking crisis that is threatening to engulf the entire country.

The Nordic nation's government also used sweeping new emergency powers to create a new bank that will take over the bulk of the domestic operations of another one of its collapsed banks.

The country is struggling to get a grip on the collapse of its top-heavy banking system, a situation that Prime Minister Geir H. Haarde has warned is putting Iceland at risk of "national bankruptcy."

A stock market boom in the mid-1990s supported the rapid growth of Iceland's banking sector, which came to dwarf the rest of the economy and provided financing for deals that ranged across Europe and conquered swaths of the British economy, from fashion retailers to top soccer teams..

The strategy gave Iceland one of the world's highest per-capita incomes, but when liquidity markets dried up around the world, the banks struggled to refinance those heavy debts.

Of course, Iceland's troubles are obviously the result of the CRA and poor people ;)

[paine]

rob-eenia

"How about... beefed-up small business loan programs
so that small-scale entrepreneurship could flower..."

hmmm

" Not for "growth oriented" businesses"

yaaaaaaa ????

".... for mom and pop organic farms, bakeries, bodegas and home-insulating companies... "

a return to greater share of output
by self employed ????

question

is it lack of start up credit
sustaining credit etc etc
or non viability
even in prosperous times
that holds down the ma /pa firm count

"more ownership, more Main St., more community-level investment, more personal investment at a more local level"

sounds grand

but what about the failure rate ???

should we just keep fundin'" my new dream " ???

when does new dream that is next dream
hit the nyet wall

[Treat Savers Better]

Hard times may be ahead. The market certainly seems to think so. It looks like they did it to us again. Allowed far more leverage on loans than can ever be paid back, and then magnified the problem many fold by leaving interest rates too low for too long. Now savers are on strike the world over, and won't loan any more of their savings to private entities. It turns out that savers still don't like being ripped off after all these years.

To keep credit flowing reliably over time, loans must be paid back. Savers have to be given some respect.

[Organic George]

The toxic financial instruments are like STD's. Everyone who did business with a US financial institution has severe problems. Many of these derivatives are based on assumptions that the moon is full on the third Thursday of the odd years. In plain language they are worthless, and they are leverage at 40 to 1.

How anyone can say we will have a mild recession is beyond me. Take your macro models and put them in the same file that praised the development of the derivatives as US banking ingenuity.

I suppose those who wrote these articles are tenured and have no problem with their paychecks. In the real world nobody is cutting checks unless it need to keep their business moving.
It hard out there for business person.

[paine]

rf

inflation???

volcker then and gentle ben now
share nothing
except intervention to the max

the conditions
means motives aims are all opposite

putting a floor under deflating assets
vs
a roof on product price inflation

why the inflation warning ...now

is this a rather odd sample
of your small planet agenda ???

[kthomas]

This is all nonsense. Everyone knows now, thanks to the McCain/Palin campaign, that this entire financial collapse is because Sen Obama is black. That One is the cause of all our sorrows! LOL

[paine]

"they chose to do what the system demanded which was to find whatever way possible to maintain the exponential expansion of debt as the real economy collapsed. "
is this another way of saying

to maintain effective demand
as wages faulter
increase job class usury

needed collateral
mistake lot values were an artifact
of the policy
it was intended to support
and circular causation
once freed from its real economy mourings
has spiraling results
both up and down

[anne]

"The toxic financial instruments are like ----."

How about not using hurtful harmful obnoxious metaphors? That might even help with thinking clearly.

[Inflation Hedges]

L... I thought the Bob McTeer article you cited made a good point. We may not have high inflation as long as the rescue effort is funded by borrowing from overseas, instead of creating new money out of thin air. As long as foreigners are willing to lend the Treasury as much money as it needs for the bailout, inflation could very well be reasonably contained. At least as the CPI is currently calculated, as there is some question as to how well this tracks Joe Six Pack's actual living costs.

[Bruce Wilder]

Bloom: "One of the major factors compounding the Great Depression was that politicians moved to hinder free trade and encourage anti-competitive practices. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by desperate US policymakers as a way of blocking imports to protect domestic jobs, but helped worsen the recession by freezing world trade. At the same time policymakers were encouraging firms to collude to keep prices up and encouraging workers to unionize to protect wages, exacerbating the situation by strangling free markets. The current backlash against capitalism could lead to a repeat, with politicians swinging towards the left away from free-markets. This happened after the Great Depression, it happened after the major recession of 1974/75 and I think it will happen again now. This will lock in the short-run economic damage from the current credit crunch into longer run systematic damage from anti-growth policies."

Conservative cant is immune to events.

The economy did not recover in the 1940-42 in an orgy of free trade with Japan and Germany, combined with union-busting restraint of worker wages. In real life, WWII did not merely provide a political context for big-time spending, but, also, for massive forced savings by the middle class and a reduction in the income share of the wealthiest and most powerful Americans.

The U.S. needs a skilled politician, who can convince (formerly) middle-class Americans, who are cutting back their spending on gas and food, and losing their houses, that they should be saving 10% of the incomes. And, who can make that happen, by, say, cutting the compensation levels of Fortune 500 CEOs by a factor of, say, 20x, enacting usury laws, vigorously pursuing antitrust cases against Big Media, Big Pharma, Big Grocery, the Telephone Company and the Cable Company, Microsoft and Google and Apple, and seeing that Wal-Mart is unionized.

And, for all the experimentation of the 1930's, there was also a great deal of restructuring, that took real time. The big reforms of banking and finance did not occur until the late 1930's. Grand Coulee and Bonneville became public projects in the 1930's, after nearly 30 years of wrangling with advocates of private business. It took two years, after Grand Coulee was authorized as a WPA project, to get from "low dam" design to the "high dam" that was actually built, and finished in 1942.

I don't like to give the Austrians encouragement, but they are right about one thing: recessions and depressions are not always just technical errors in the macroeconomic equilibrium -- shocks that knock us off the ceiling of potential output in this best of all possible worlds. Sometimes, the underlying structure of the economy is misaligned. In the 1930's, huge geographical areas of the country lacked the electrical grid to participate in a 20th century economy. A huge part of the population was still on the farm, where they faced magnified risk from dysfunction commodity markets and where increasing productivity was paradoxically eliminating their ability to earn a living.

In the fantasy-land that most economists occupy most of the time, the huge farm population would have resulted in labor-intensive farming techniques reflecting the rural comparative advantage. In real life, farm prices, incomes and output had to be stabilized, and an enormous migration managed; at the same time, huge capital investments in farming had to be facilitated, to take advantage of the technological opportunities to increase productivity in agriculture. Creating roads and a rural electricity grid was a time-consuming pre-requisite to progress.

The U.S. is still an excessively conservative country. The kind of massive Keynesian expansion that the country needs, to change gears away from the model of Suburban American dream, to something that makes sense in anticipation of peak oil and global warming, is going to require a great deal of mental, political adjustment. Time-consuming infrastructure investment will have to take place to prepare the way to a new growth path. And, some very powerful, wealthy interests will have to yield or be destroyed. It all takes time, and continual political and economic pressure to accomplish those transformations.

Look how long it has taken to get Bernanke and Paulson, two (admittedly reactionary conservative) experts at the heart of crisis for over a year, to realize that the banks will have to re-capitalized by investing gov't money.

[paine]

"Now savers are on strike the world over"

savers ???

spare us the candy cane jargon

btw

the problem is not only the leverage
its the nature of the asset

boats can be bought on credit
and repo ed when the buyer fals behind

result a boat to resell
a boat with a fairly stable reproduction cost
that ultimately anchors the resale value
and thus any speculation
sure bad times send boats below replacement cost
on the resale market
but u can ride out the 5 year cycle and ...

but a house lot ???

a house lot caught in a bubble bust cycle
can lose present value serious present value for ...decades

[Bruce Wilder]

robertdfeinman's analogizing of the 1970's is, indeed, instructive.

In the 1970's, of course, Milton Friedman's hypnotic chants in favor of "free markets" had a great deal more purchase, because the full institutional superstructure created by FDR in the New Deal and WWII to support well-functioning markets was in place. The easy expansion of the 1950's and 1960's, within that framework had taken place, and the potential exhausted. Friedman could preach a doctrine, which rationalized a political economy of parasitism and eating the seed corn.

The U.S. in 1975 was faced with a choice about how it was going to cope, with having to import increasingly massive amounts of oil, to keep its cheap-oil economy running. We chose wrongly.

Now, we are at the logical end of the Friedmanite program. The structures of the New Deal economy have been gnawed away.

So, not only is the potential gone, but the structures are gone as well. And, the challenges of the coming era are novel.

[Organic George]

Annie

I cannot get anyone to live up to their contractual obligations and make payments on time. The same for my wife who does most of her business in the EU. Neither of us is in the financial services business.

This problem has spread to everyone, everywhere.

The STD metaphor is very accurate.

[paine]

"Sometimes, the underlying structure of the economy is misaligned"

no its always mis-aligned eh ??

hence the metabolism of progressive production systems
involves catabolic and anabolic action

yes catabolism

not just ever changing
relative speeds of anabolism

-------
as to big morphs
like converting a farm based america
into today's sprawling boob-urbian amerika
it was predicated
on limitless productive power

"In the 1930's, huge geographical areas of the country lacked the electrical grid to participate in a 20th century economy"

to bad it still doesn't

we built suburban today
on a new deal cheap enrgy paradigm

we made non urban living
massively viable

when land is not used to produce stuff
we oughta leave it be
plan to shrink us all into a few huge megaplex systems
based on density and public transit
would have been better
then this land swallowing low density
lot living
with its grass pets its luxury huts
and its long commute jobble-ing

only the certainty of an unshakeable plan
could have resulted in this hideous hodge podge
so ill prepared for your peaks bruce

long run aims specified
by unconcious assumptions
turned this into
an overt efficiency path calc

a plan
with the certainty of uncle's unfailing credit line

i prefered the fortress of democracy

[anne]

Organic George:

"I cannot get anyone to live up to their contractual obligations and make payments on time. The same for my wife who does most of her business in the EU. Neither of us is in the financial services business."

That is an important observation as such, and what I take as most important from here is countering a recession that is beyond avoiding. My preferred model is the Japanese effort to protect employment through the deflation.

I am quite worried about employment, which your experiences speak dangerously too.

[donna]

What's wrong with encouraging the Austrians? They're usually right. ;^)

Whoever combines the best of the Austrians with the best of the Chicago school is going to look like a frickin genius. My bet is on Roubini right now.

[anne]

Interestingly, I noticed that Mexican President Felipe Calderon had asked for an emergency infrastructure building plan, needed by Mexico beyond any financial crisis by acutely so now.

[Brown Eyes and Tall Boots]

Combined with record levels of bank failures and losses in equities, today we have historic levels of populist or libertarian excrement and defecation resulting from a lack of comprehension.

[Mike D]

Real GDP 'only' declined 25% in the Great Depression -- which should be quite scary enough. Bloom shouldn't need to cite the 50% nominal decline (twice!) for dramatic effect.

Furthermore, he really needs to go back and study his economic history. Most economic historians would agree

1) The recession that later turned into the Great Depression started in the summer of 1929, before the stock market crash, and partially in response to the Fed raising interest raises to pop the bubble.
2) Bank failures had been rising over the course of the 1920s, mostly due to small Mom-and-Pop rural 'unit' banks going under as their farm sector clientele struggled.
3) The role of the stock market crash in causing the 3 waves of bank collapses is secondary at most.

[Barkley Rosser]

anne,

While I have thought that you have overdone it, I have had at least some understanding of your unhappiness about things that people have said about certain candidates. But, getting upset over financial assets being described as "toxic"??? Please. This is sillier than even your most perfervid defenses of Sarah Palin.

[Organic George]

Annie

It is not employment, it's dread fear.

Everyone is hoarding cash.

Many business are now demanding cash prior to shipment of goods.

How do you guarantee employment for the self employed or the small business person? We cannot function without cash flow and the banks are pulling credit lines for business that have been around for 20+ years.

What econ model does this situation fit?

[anne]

The word toxic is unfortunate, but I surely did not complain about that term. Try, like, well like, even like, reading.

[says]

Brown Eyes and Tall Boots

Please explain what you comprehend.

[anne]

Organic George:

It is not employment, it's dread fear.

Everyone is hoarding cash.

Many business are now demanding cash prior to shipment of goods.

How do you guarantee employment for the self employed or the small business person? We cannot function without cash flow and the banks are pulling credit lines for business that have been around for 20+ years.

What econ model does this situation fit?

[The Swedish model fits; banking operations must be handled as needed by the Treasury taking interests in banks since there is no sense that as with Japan an agreement can be readily reached among prime banks to continue credit flows.

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?ref=business&pagewanted=print

September 23, 2008

Stopping a Financial Crisis, the Swedish Way
By CARTER DOUGHERTY]

[Friday of reckoning]

Organic George

One plausible link between banks, Lehman Brothers, and you is that tomorrow, CDSs based on Lehman Brothers will be settled. So alot of financial institutions will have to pay alot of money. So instead of loaning money to business, government, and people, financial institutions are sitting on all their money to prepare for a couple of possibilities. Either they have to fork over tons of money, or they will be owed money. But they might not get their money because whoever owes them money might go bankrupt or whatever. So instead of loaning money, banks are hoarding it to deal with tomorrows activities.

This is one way that crap, toxic securities are causing malfunction in the financial system. These CDSs are what the government should have already removed fromn the system with the 700 billion. Instead the Fed increases reserves. What a coincidence!

[paine]

and todays noetic gryllus award
goes to ....donna
for
"Whoever combines
the best of the Austrians
with
the best of the Chicago school
is going to look like a frickin genius"

[robertdfeinman]

I admit I don't understand the causes of inflation (but then there seems to be little agreement by the professionals either).

In my simple framing if you produce too much of something than it becomes a glut on the market and the cost to buy it goes down. It doesn't matter if its widgets or dollars. The Fed and the Treasury are now flooding the market with dollars. They are even creating fake money, probably to get around the current national debt limit which nobody wants to discuss until after the election.

If I tell you I will take rocks as collateral and give you real money in return then money will become worth as much as rocks. The assets that the Fed is exchanging for money are not worth what they are being valued at. We hear all sorts of justifications for this, that they have an "inherent" value, that they will have a true value at maturity, that they are undervalued because of a liquidity crisis, that they are undervalued because of a panic, and others yet to be dreamt up.

This type of inflation is different than that caused by the costs of external products rising due to real conditions. During a drought water costs more, crops cost more and we get inflation in agriculture. The same is true in those areas affected by oil. There is nothing that can be done about this type of inflation. One either cuts back on consumption, finds substitutes or just spends less on other things.

This has nothing to do with my continual push for a sustainable economic system or a "post-capitalist" society as I've been calling it lately. Moving towards such a system would help prevent future crises, but this will take decades and will do nothing to fix the current collapse.

What all the bailout pundits don't wish to acknowledge is that a certain amount of "wealth" is going to vanish forever and no amount of bridge loans or recapitalization is going to bring it back. The issue is whether it is Paulson's $100 million holdings in Goldman Sachs that is going to take the hit or granny's IRA mutual fund.

As I said, Volcker took the money from the working class while this gang seems to be going after homeowners. If employment continues to drop at the current rate the working class will also be the victims this time too.

[calmo]

Brown eyes and tall boots,
Would those be hip-waders? Isn't the exercise here, an effort to scrape some of it off and put us on a little better footing than we get from the major media outlets?
We're counting on you to show us some of that higher ground...not just the whining.
Ok, shoot.

[calmo]

Brown eyes and tall boots,
Would those be hip-waders? Isn't the exercise here, an effort to scrape some of it off and put us on a little better footing than we get from the major media outlets?
We're counting on you to show us some of that higher ground...not just the whining.
Ok, shoot.

[calmo]

Brown eyes and tall boots,
Would those be hip-waders? Isn't the exercise here, an effort to scrape some of it off and put us on a little better footing than we get from the major media outlets?
We're counting on you to show us some of that higher ground...not just the whining.
Ok, shoot.

[M.I.S.H.]

The problem is not a failure to lend, the main problem is there simply is no pool of real savings to lend. Furthermore, given rampant overcapacity and rising unemployment, there is no reason to lend even if the funding was available.

Robbing taxpayers to the tune of $700 billion does not change the equation.

With that backdrop it's no wonder Bernanke's attempts to free up the credit markets are having the effect of pushing on a string. Should the Fed actually stimulate lending, more money will end up in money heaven as a consequence.

The credit markets are choking on credit, yet Bernanke is attempting to force more credit down everyone's throats. Logic dictates the solution cannot be the same as the problem.

Trapped in academic wonderland, such simple logic is far too complex for Bernanke to understand. Sadly, we are all forced to watch Bernanke flop about like a fish out of water attempting to solve a solvency problem with ridiculous liquidity schemes like the TAF, PDCF, TSLF, TARP, and the ABCPMMMFLF.

[paine]

calmo returns ....as triplets

[Organic George]

Friday

I am aware of the settlement issues.

I'm trying to understand how Annie's econ models would fit today's environment? Japan had an employment for life model, that has recently gone out the window, so I don;t know where she is coming from.

Nor do I understand how anyone can see the consumer carnage from being over burdened in debt, credit cards, HELO's and at the same time having their 401K's/retirement accounts decimated and see a strong recovery in the near future?

Where will it come from? Obama's New Green Deal will help stabilize employment at today's lower levels but does anyone think that consumers will return to their wild spending ways? There will be a considerable contraction in the retail sector for the forseeable future and that wiil create a drag on commercial real estate. Profits from the financial sector will not be anything to get excited about now that high leverage is off the table.

I'm just an econ junkie, but I have serious doubts about economist who think they have a handle on what the future will bring using old models

I will repeat what one of econ professors once told my class in the 70's, "When you see an economist on TV telling you things are not as bad as they seem, remember they have job security and you don't"

[DJC]

Unfortunately, the biggest debtors namely the Wall Street banks are also the institutions with the greatest political power in Washington DC. Lacking any political influence, savers and long term investors will be shortchanged with economic policies devised by debtors and speculators. For the past two decades, savers have been punished with negative real interest rates and heavy interest taxation. Is it any wonder that the US savings rate is negative, and debt levels are at record high levels. The US Economy doesn't need even higher levels of debt advocated by the Federal Reserve.

[anne]

http://www.nytimes.com/2008/10/09/business/economy/10fed.html?hp&pagewanted=print

October 9, 2008

Administration Is Considering Cash Injections Into Banks
By EDMUND L. ANDREWS and MARK LANDLER

The Treasury Department is considering taking ownership stakes in many United States banks, the White House said Thursday.

[anne]

http://krugman.blogs.nytimes.com/2008/10/09/doing-the-right-thing/

October 9, 2008

Doing the Right Thing?
By Paul Krugman

A tentative cheer: Paulson may have been dragged kicking and screaming into doing the right thing * to rescue the financial system:

"Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

"Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones."

Let's give thanks to Chris Dodd, ** who insisted on the provision that makes this possible — and to Gordon Brown, *** for showing the way.

* http://www.nytimes.com/2008/10/09/business/economy/09econ.html

** http://krugman.blogs.nytimes.com/2008/09/22/daddy-doesnt-know-best/

*** http://krugman.blogs.nytimes.com/2008/10/08/to-do-not-to-do/

[dd]

calmo, is that really you? Where have you been? Good to read your prose again...need more.

[dd]

A dose of triple calmo is most refreshing

[paine]

rf
creating money is costless
storing it is also costless
money becomes a source of economic activity only when it
buys something
right now despite increases in money stock
buying stuff with it is off its mid sason form

"The problem is not a failure to lend, the main problem is there simply is no pool of real savings to lend."
complete gibberish

" ...given rampant overcapacity and rising unemployment, there is no reason to lend even if the funding was available."
reason to lend or reason to borrow

don't confuse secondary market activity
that is only at a remove related to the production system
and loans to the production system to keep ts payment flow going

over capacity deters production of added capacity
thus it deters borrowing by production firms to expand capacity

over capacity doesn't signifigantly reduce
the physical plants' collateral value
ie the owning firm's
credit worthiness
say to borrow
to cover unfore seen
inventory and receivables build ups

if the idle capacity is
capable of producing profitable
output at likely market prices.....
given adequate demand levels

[Organic George]

Annie,

Yea, Krugman and CR was all over that earlier this morning

[paine]

"I'm just an econ junkie"

you bin seein the wrong candy man pal

[Organic George]

Paine

Well is it somewhat more relevant than scrap-booking

[Cynthia]

Bruce (Wilder),

What you are essentially saying, assuming I'm reading you right, is that New Dealers were kind enough to build us a safety net at the bottom of the cliff just in case a few freaks from Friedman's world come along and push us off the cliff.

But because Friedmanites are such psychopaths, they dismantled the safety net prior to pushing us off the cliff.

So when we hit the bottom, about the only thing we can look forward to becoming is a big splat on the ground!

[robertdfeinman]

Paine:
There are two ways to look at finance.
1. The balance sheet is everything
2. The cash flow is everything

Right now the banks are in a bind because their balance sheets are negative. This, of course, would mean nothing if people had enough confidence that they were willing to leave their money in the banks. That's what the Japanese government did in the 1990's. The told the banks they could ignore their negative net worth. It prevented this type of panic, but led to a decade of underinvestment.

Having failed to persuade investors that your "costless" bailouts to the banks were good enough the Fed and treasury are now moving into the cash flow business. I don't know the exact mechanism, but it seems if a firm needs to keep meeting its daily obligations through commercial paper the gov't will supply the funds. I'm not sure what happens to the money market funds in this case.

We see the same bifurcated vision with Social Security. If you ignore the balance sheet then SS is running a surplus and will for decades to come. If you are Greenspan and want to privatize it, you claim the sky is falling and get the gov't to raise the withholding tax and then use this to "balance" the accounts, meanwhile diverting the real cash into funding the various wars being run at a deficit.

I heard a talk between Alice Rivlin and Nouriel Roubini the other day and Rivlin sure sounds like she doesn't understand the differences. She still talks like an accountant.

Balance sheets are only important if the gov't says they are. Without actual cash flow one has to revert to scrip, barter or stop trading.

Even if asked, I refuse to take over the job at the Treasury.

[Brown Eyes and Tall Boots]

Purported pundits pontificate poetic premises perfunctorily.

Libelous libertarians lament linguistic litanies laboriously.

The majority propose problems and solutions, clear and concise, which are of great interest.

[Brown Eyes and Tall Boots]

“Would those be hip-waders?”

Chest variety, please sir

“A dose of triple calmo is most refreshing”

Welcomed aerations

[Lafayette]

Eating cake

JK: This is one big reason why the private banking sector and Wall St. should be allowed to collapse utterly. Moral hazard would be restored and the vast majority of citizens living on Main St. would be able to enjoy an economic boom---true prosperity---at the same time that Wall St. is undergoing a wrenching shakeout.

This comment posits the theory that the hurt is selective. Utter failure of Wall Street will hurt only the Golden Boys who brought about this mess, won't it?

Well it won’t. Like it or not, an economy so thoroughly dependent upon credit cannot survive long without a finance community to keep the Credit Mechanism turning. Wall Street hurts -- Main Street hurts. The letter is simply an extension of the former.

Wall Street needs a complete overhaul. The rapacious greed for lucre that led us into the pits of an economic recession must never, ever be a hallmark of American finance. This is just the latest in a long, long list of similarly disastrous calamities -- the last being the dot.com boom and bust just seven years ago. Enough is enough.

And, the word written on the Wall is that a collective effort is necessary to assure that with new rules, the Finance profiteers will not be allowed to run amok. By collective is not only meant the US, but the global finance community as a whole since capitalism knows no boundaries nowadays.

The upcoming G20 should show the way. And, for the first time in a lonnnnggg time the US will be given a dressing down that will consist of (1) That its keepers should never have allowed the sub-prime mess to happen and (2) Self-regulation by rapacious morons is a sure recipe for global disaster.

The regulatory powers globally must be singing from the same hymn sheet, meaning a new international treaty codifying banking regulatory powers. It is therefore possible that Uncle Sam will prove to be the most reluctant to accept such regulation, though he needs it the most. (Paulson will pressure negotiators to obtain the lightest treatment possible on regulatory responibilities, because he is more a pyromaniac than a fire brigade chief.)

So, what will happen? It will be foisted upon the US. The deal will be "No more T-note purchases if you don't buy-in to the New Order of Finance". And, Lord knows, Uncle Sam will need a mountain of debt to spend his way back to well-being.

For once, Uncle Sam cannot have his cake AND eat it.

[Organic George]

Annie,

I know the comments section is messed up with replies coming before the questions.

I think you stated you supported the Japanese model for employment but failed to address how that is relevant to the current situation in the US.

[Lafayette]

Post scriptum

What is the G-20?

It is an unrelated economic forum of 20 countries, formed in 1999 (G8 + Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, Turkey + current European Union presiding country meaning France)

Look at the make-up. Saudi Arabia and China, the two largest debtors of the US. That is, the two countries that hold the most in US Treasury-note debt. These are the two countries to whom Uncle Sam will go hat-in-hand for the funds necessary to spend his way out of misery.

(Barack had better start brushing up on his Chinese. ;^)

[Trig Palin]

How about not using hurtful harmful obnoxious metaphors?

How about not being such a prude?

[Anonymous]

they should be saving 10% of the incomes. And, who can make that happen, by, say, cutting the compensation levels of Fortune 500 CEOs by a factor of, say, 20x, enacting usury laws, vigorously pursuing antitrust cases against Big Media, Big Pharma, Big Grocery, the Telephone Company and the Cable Company, Microsoft and Google and Apple, and seeing that Wal-Mart is unionized.

How about just offering a positive interest rate? That hasn't been done since the early 80's.

[anne]

Organic George:

I think you stated you supported the Japanese model for employment but failed to address how that is relevant to the current situation in the US.

The Japanese deflation built gradually from 1989, while the central bank found no reason to limit and was really pleased with early declines in asset prices, but by 1994 general growth was becoming a problem, general deflation was evident and central bank interest rate changes were of too limited effect. There had been enough asset price deflation that bank viability was an issue and with that the possibility of general liquidity problems. Central bankers met with executives of the prime banks (city banks) and organized mutual liquidity support among the banks so that liquidity flows would continue. The mutual support was all that was necessary so far as the issue of liquidity.

What that meant of course was that banks were supporting each other, when analysts continually preferred failure as a necessary system re-structuring shock. I think otherwise, while Paul Krugman simply wanted the general economy protected but complained about monetary policy from the beginning.

[BJ Feng]

So far the Austrians have been right, the FED cannot stop the deleveraging process, and Bernanke transported back to the Great Depression would have been just as powerless despite all the new tricks he would use. Mish, who just posted, wrote several articles on his blog, one of the best econ blogs around, explaining why the FED's actions would fail. This is the feared Japanese liquidity trap, you can make all the credit in the world available to banks, but you can't force them to lend. You can't force someone to take risk in a risk-adverse environment. There are institutions that are insolvent, no one in their right minds would lend to an insolvent firm. The problem is that no one is sure which firms are insolvent, the TARP's mission is to clear things up so that we can tell which firms are solvent. But even then, solvent firms can become insolvent. And even solvent firms can go under, especially if they depend on short term borrowed funds. That's why even GE had to raise more equity to reduce its dependence on commercial paper and short term borrowing.

The FED cannot make risk-adverse investors take on risk, it can only remove the risk by guaranteeing everything. Short of doing that, pumping out more credit, more money, won't have an effect because investors will just place that new money in safe places like US Treasuries. That's why T-bill yields turned negative for a short time recently. That's right, lenders PAID money for the privilege of loaning the government their funds. Riskier institutions like you and me still can't get loans, the new money the FED makes available can't reach us because we could default, that kind of risk can't be taken away without the FED stepping in and guaranteeing our debt.

Of course there is a limit to even FED and Treasury guarantees. After a certain point, the credit worthiness of the sovereign becomes questionable as with Iceland. Iceland's government took the step of guaranteeing all their banks' obligations, and all the customer deposits of their citizens, it's clear the government doesn't have enough money to do that. The entire country is facing financial ruin, default protection on Iceland's government bonds are at distressed levels, like what we saw with Bear before they collapsed and Lehman too.

From what I understand,

"Strong credit growth is reflected in debt ratios. Total debt as a percentage of GDP has ballooned to 350% of GDP (a figure which might make even the US quiver), driven by corporate and household sectors. External debt now accounts for in excess of 80% of total debt. Much of it is likely to be denominated in foreign currencies as Icelandic corporations have expanded aggressively across Northern Europe."

Iceland is screwed, there is absolutely no way out for them, that's what happens when you borrow in foreign currency, no matter how much more domestic currency they issue, they can't produce more Euros or Dollars. They're going to suffer the same fate as Argentina and Thailand who had the exact same problems.

Good thing that what happened to Iceland can't happen to the US, at least not in the same manner. All of our debt is denominated in dollars, we cannot have a foreign currency debt crisis like Iceland.

[anne]

Allowing Lehman Brothers to fail was an important strategic mistake in terms of encouraging mutual bank support, while Lehman was abandoned by Treasury. Also, the Japanese government was clear from the beginning on protecting the general economy through any domestic spending level necessary much to the criticism of analysts save for Krugman. There was always going to be small business support in Japan.

[BJ Feng]

Anne, you make it seem like Japan was successful when their economy has stagnated for more than 20 nears now. The continued employment was part of their social structure, it was unacceptable for firms to lay off large numbers of workers because of the implicit social contract. Workers were expected to work long hours and sacrifice for the firm without additional pay, in return they were given lifetime employment. That contract is slowing being unwound, but the Central bank had NOTHING to do with it.

[Organic George]

Annie,

What does that explanation have to do with employment?

As I said I'm just an econ junkie, so please be patient with me.

Thanks

[BJ Feng]

And that domestic spending had just about NO EFFECT on the economy. All they did was screw their future, Japan has one of the highest debt/GDP ratios in the entire developed world! Their debt is nearly 100% of GDP, for all the fuss made about the US debt, we're only at 67%.

Japan's reckless spending proves my point. A whole lot of useless and wasteful government spending was instituted. All they did was destroy their future. Once the Japanese economy becomes healthy again, interest rates will rise to above the current 1.8% or so, and they will have to start paying a substantial amount of interest. And for what? What did they get out of this government spending? Like the Great Depression, that government spending did nothing in the grand scope of things, Japan still is waiting for a recovery. The Nikkei just dropped below 10,000! Absolutely shocking. Back in 1989, it stood above 30,000. (Stock market prices are only one of many important indicators, I'm not suggesting they should be the only or even most important indicator of a nation's economic health).

[kthomas]

"So far the Austrians have been right, the FED cannot stop the deleveraging process..."

I love it. You get a big star, amigo.

[dude]

What is the tipping point of a depression in the US?
What is the tipping point of a depression internationally?

My sense is that if Ford or GM goes under, that will be the tipping point in the US. Under other circumstances (e.g., see Chyrsler) there would be a buyer waiting in the wings before things got that far along. Today, I don't believe Ford or GM will have that, not from the EU-zone, China, nor from Tata-land.

If a country goes into default, depending on who/how/when, that could be the tipping point internationally for a highly prolonged contraction.

[BJ Feng]

Anne, the FED and Treasury did encourage other banks to step in and buy Lehman. Even give it support by the way of loans and new equity investments. Everyone refused! Our structure does not allow the government to force someone to invest in a failing firm, Japan's economic and social structures are different. They can force banks to buy failed institutions for a clear loss. That has benefits and consequences. Japanese firms often do not do what is in the best interests of shareholders, they have entrenched management who often make bad investments. Dividend yields are lower than in other developed markets, and Japanese companies have some of the lowest return on equity figures in the developed world. They don't allocate capital very efficiently. Recently several US hedge funds tried to take over and remove management from firms they had significant investments in. They were repelled thanks to poison pill provisions that were upheld by the legal system. Yes there are benefits from the Japanese model, but there are negatives too.

[don]

Stephen Lins
I agree. We are starting this episode with a huge debt burden already in place.
I have great respect for Larry, and he is not one to ignore problems (see his excellent work on the entitlement overhang, which I have cited in previous posts here), a sentence in his present article gave me pause - Uncle Sam make money from its purchases of distressed debt? It is very reasonable to suppose that the mortgage losses will climb significantly, because it is very reasonable to suppose that housing prices have substantially further to fall. More likely, Uncle Sam will take a bath on the debt purchases.

The depression came with competitive devaluations to "export" unemployment. Right now, Asia is engaging in this behavior big time. Japan, too. the carry trade can only exist, because participants feel protected from really strong yen appreciation (say, to 80 yen to the dollar, where it belongs) by implied threat of intervention. So, places like Ohio and Michigan suffer, along with wages of U.S. workers in general, but no one seems to remark on the phenomenon. We have a strong aversion to "trade protectionism," but the current Asian currency policies are distortions as massive as tariffs from 20% to 50%.

[paine]

rf

"Balance sheets are only important
if the gov't says they are"

i agree entirely with your notion
illiquidity is obvious
enough cash ain't forth coming
to meet todays payments
but insolvency ...????

well corporate zombies
can be brought back to life
if uncle has a mind to it

he can re equitize em
fit em out with a sparklingly fresh and vigorous
balance sheet
and then send em out into the market place
to seek their own fortune

or uncle can merely keep em zombies
keep em flowing along indefinitely
by piping enough cash thru em
to meet their obligations
and /or insuring their debt or .....

anyway its a nasty business

can it be said enough
socialized losses
and privatized gains
hopefully make for a restless electorate

-----------
laff track fatalism

"... Like it or not, an economy so thoroughly dependent upon credit cannot survive long without a finance community to keep the Credit Mechanism turning. Wall Street hurts -- Main Street hurts. The letter is simply an extension of the former."

not so
there is no need for a all street

don't confuse our actual credit system
which history has delivered us unto
with the only
or worse
the best
of all possible credit systems

we need a protestant reformation here
where we cal apon uncle
to dispense
with thse babylonian intermediary institutions
and
loan funds directly to the real economy

[paine]

Anonymous

your positive real interest rate is an alpine hob-goblin

you took the wrong turn back there some where
so now instead of joining in ....

you got miles to go before you sleep my friend

[anne]

While Japanese from my experience prefer to find gray when there is blue, I and other Japanese were struck in the 1990s and are still struck by how well Japan fared in what was often called a Depression beyond Japan. Even the gray finding Japanese never dreamed they were depressed, and save for a slowing of growth that was deceptive because of the general extended deflation the Japanese were well housed, dressed well, schooled children well, traveled well, worked, always worked, and remained as technology mad as can be. Can anyone think of a more stylish country than Japan?

The government was committed to sustain employment in Japan, and spent and spent to do just that and did just that. Among the critical reasons the financial sector was always protected, when the sector was considered backward in technology, was jobs.

[BJ Feng]

Dude, unfortunately you might be right. Ford and GM are important because they are the nation's largest health care providers outside of government. They are health care management companies, they make cars on the side, but their real task is to provide health care and pensions to hundreds of thousands of people. They did also dabble in the finance business, loaning out money to buy cars, but that's been curtailed.

GM's plan is to attempt to borrow enough to last until 2010/2011. They are betting everything on their new line of cars that will come out then. If those models fail, then the company is done, everything depends on the performance of those new cars. GM's market capitalization is now lower than it was in 1929! GM's stock prices haven't been this low since the 1950's! This is their final shot, either they hit the bullseye or the company is finished.

If Americans truly want to help other Americans, they will buy GM's new cars regardless of how terrible they are. They should be fuel efficient hybrid or similar models. Time for leftists to step up to the plate, I expect them to carry the heavy load, they're the ones who proclaim that we should have a new social contract that recognizes the importance of domestic manufacturing. Well the time is coming when they'll have to put their money where their mouth is. Given past behavior, I'm not at all optimistic that the left will follow up their big talk with action. The reality is that it is very painful to spend money on an inferior car, ideology is great as long as it's costless.

In all honesty I really do hope GM will unveil a great new line in 2010 that will make me want to buy because they are better than their competitors, not out of sympathy or loyalty. That's a long shot though, the reason GM and Ford are so heavily invested in SUVs is because Toyota and Honda dominate the small car market. It's very difficult to go head to head with those two in their strongest segment. GM and Ford weren't stupid in avoiding eco-friendly, good mileage cars, they just couldn't compete with Toyota and Honda in that sector. But they were strong in SUVs and big gas-using power/muscle cars like the Corvette and Mustang. It doesn't look good for GM or Ford, only Americans deciding to buy GM and Ford cars no matter what can change the situation.

[anne]

Robert Rubin was asked, when I was present, whether a Japanese city bank might fail during the deflation, and the answer was simply that the Japanese would not allow such a failure. I thought the answer, perfectly reassuring and correct. Treasury could have, should have rescued Lehman.

[anne]

"Ford and GM are important because they are the nation's largest health care providers outside of government."

This is not true, if I understand correctly, and I rather thank I do, the company unions are the health care providers.

[Callahan]

See what "free trade" has brought upon us?

We've outsourced too many jobs, leaving us unable to support the fine super rich aRICHtrocrats in the area of Wall Street, and other such poluted and greed-e-fied hell holes.

Aw.

[paine]

fengula strives for laff's seat on the stock exchange

" there are benefits from the Japanese model, but there are negatives too."

the tide comes in
and the tide goes out

--------------------

"...the FED cannot stop the deleveraging process..."

( sanitized declaration )

i suspect
u assume the fed needs to work thru our existing
private banks
to save the real economy from chaos

and if the fed can't prevent private banks'
credit contraction
chaos for the rest of us
is the reward for our credit potlatch

if uncle but brushed past these rubber geese
and .....

[Patrick]

donna

Chicago & Vienna are nice places to visit in the spring, but once winter comes the frozen corpses are a little hard to take.

[paine]

"All they did was screw their future, Japan has one of the highest debt/GDP ratios in the entire developed world"

the only burden is what you as a specific tax payer
pay today in taxes to service the public debt
tomorrow the burden may be distributed among the taxpayers differently
the present debt may be restructured so
theburden of carrying
the bulk of the public debt
falls on the bond holding class itself
effectively
they as a class might pay their own interest payments
thru a special tax on their wealth